Q&A: Microsoft Calls for Reforms to the U.S. Patent System

WASHINGTON, D.C., March 10, 2005 — As U.S. thought leaders and legal scholars gather today to consider patent reform at the American Enterprise Institute for Public Policy Research, Microsoft General Counsel Brad Smith proposes a series of reforms aimed at improving critical issues in the current U.S. patent system.

Smith, the keynote speaker in a panel discussion today, has outlined reform proposals designed to ensure patent quality, curb excessive litigation, promote harmonization of international patent systems and increase accessibility — changes he says would benefit companies and inventors, advance technological progress worldwide and boost the global economy. The AEI is one of America’s largest and most respected think tanks.

Brad Smith, Senior Vice President, General Counsel and Corporate Secretary, Microsoft Corporation

To learn more about Microsoft’s perspective on the U.S. patent system, the company’s reform proposals and their possible impacts on the system and the technology industry as a whole, PressPass spoke with Smith, who is also senior vice president and corporate secretary of Microsoft and the author of many articles on intellectual property issues in professional journals.

PressPass: Why is Microsoft calling for changes to the patent system?

Smith: We believe that rapid globalization of world markets and the accelerating pace of technological change are giving rise to a new generation of patent issues that merit attention from a broad cross-section of the technology community, the legal profession and the public at large. Although the roots of our patent system are strong, its long-term health is threatened unless we take this opportunity to reform it.

Microsoft tends to look at these issues from both sides of the intellectual property (IP) fence. On one side, we spend more than US$7 billion per year on research and development, making us one of the nation’s largest R & D investors and one of the largest holders of IP rights. In 2004 alone, we filed more than 3,000 patent applications at the U.S. Patent and Trademark Office (PTO). On the other side, our popular products and strong balance sheet make us among the largest targets of patent litigation in the country. We typically spend close to US$100 million annually to defend against an average of 35 – 40 patent lawsuits simultaneously.

As a result of this experience on both sides of the fence, we believe we have gained some insight into how a properly functioning patent system needs to strike a balance that serves innovation, economic growth and consumer welfare. As active participants in the system, we are vividly aware of the system’s strengths — for example, patents make it possible for inventors to share innovations with competitors instead of locking them away as trade secrets — but also of the system’s weaknesses.

PressPass: What key issues is Microsoft targeting for reform?

Smith: We believe that reform is most likely to create meaningful, lasting improvements in the system if it focuses on four fundamental issues:

  • Ensuring high patent quality amidst increasing patent quantity

  • Curbing excessive litigation and litigation abuse

  • Promoting international harmonization of patent law

  • Increasing accessibility for individual inventors and small companies around the world

The issue of quality of U.S. patents is linked to the issue of quantity. The combination of globalization and the rapid pace of innovation in new technologies has created an enormous increase in the quantity of patent applications. The PTO has witnessed a tripling of patent applications since the 1980s, with more than 350,000 applications now filed each year. This dramatic increase has strained the resources of the PTO and imposed unreasonable demands on the PTO examiners. We believe the onus for ensuring patent quality is not the PTO’s alone, but instead should be borne by those companies like Microsoft that are both customers of the PTO and dependent on an effective patent system.

Regarding the issue of excessive litigation, recent estimates show that the number of patent lawsuits filed annually in the United States has risen from under 1,000 in the early 1980s to over 2,500 today. It is too easy for a holder of a weak patent to look to a lawsuit as the ultimate lottery ticket. This situation is exacerbated by the availability of triple damages and injunctive relief — court action to compel a party to do or refrain from doing a specified act that can have the effect of bringing someone’s business to a halt until a dispute is resolved. As a result, the American system, which has historically encouraged innovation so effectively, can be used too easily to stifle the innovation of others through litigation. If we don’t act quickly to put the system right, we risk undermining the technological advances that patent laws are designed to encourage in the first place.

Regarding international harmonization of patent laws, the globalizing economy is making the world’s patent protections less accessible to new inventors, especially small start-up firms and individual inventors. This is due in part to the fact that each of the 182 member nations in the World Intellectual Property Organization (WIPO) has its own patent regime. These regimes are similar in most important ways, but they differ in the specific “nuts and bolts” of how good patent systems should work. We believe international commercial laws — including patent laws — often benefit from harmonization. Lack of harmonization builds inefficiency into the global economy. We’re not suggesting that the world line up to adopt the American system chapter and verse. We are well aware that harmonizing our laws with those of our trading partners will require some changes to our own system.

Finally, increasing accessibility to the system for individual inventors and small companies is critical to removing obstacles to innovation. Under the current system, one needs an army of lawyers to patent an invention throughout the world. For smaller companies and individual innovators who can’t afford to comply with the complexities of dozens of disparate national systems, this can present an insurmountable problem. The world today simply cannot afford to discourage important advances in knowledge and understanding by maintaining an impenetrable network of discordant patent regimes. We urgently need to reward innovation, not stymie it.

PressPass: Why are these calls for changes coming from Microsoft at this time?

Smith: A central tenet of our thinking at Microsoft is that broad discussion and periodic reform are a natural, important and healthy part of our patent system. Historically, this need for discussion and potential change peaks during periods of rapid technological innovation and social change, such as we are experiencing now. Just as these changes are generating new discussion in other legal fields, such as privacy, contract, and competition law, it is natural that they are raising new questions and challenges for IP rules as well.

We believe that important patent reforms are needed, largely because the combination of technological change and a globalizing economy are putting new strains on the U.S. patent system — strains that are creating new and significant problems for innovators and consumers alike. Unless addressed promptly, these problems will undermine confidence in the patent system and weaken the role it needs to play in creating jobs and stimulating economic growth. Because such a large share of global research and development is done in the United States, and because so much of the world’s economy depends on it, we believe we have a special obligation, as an American company, to try to help correct anything about the U.S. system that we believe is problematic.

PressPass: What specific proposals are you advocating to reform the U.S. patent system?

Smith: The first step is for the United States to get its own house in order. With this in mind, Microsoft is proposing specific reforms that, in our view, would go a long way toward addressing many of the current problems with the system. These proposals fit under the four basic themes mentioned above.

1. Ensuring patent quality amidst increasing patent quantity:

  • To address patent quality, a top priority must be to ensure that the PTO has the resources it needs to give every patent application the deliberate, expert review it deserves. Congress recently approved an increase in patent user fees — a move that should enable the PTO to provide consistently high-quality examinations. But for many years Congress has diverted a significant portion of user fees to other government uses. We believe this practice should stop. Microsoft strongly supports Congress’s move toward eliminating this practice, but urges that steps be taken to put a permanent end to all fee diversion from the PTO. This, more than any other proposal, offers the best hope for addressing patent quality.

  • Second, we need to ensure that interested parties have sufficient opportunities to alert the PTO about questionable patents within the PTO review process itself. Under current law, parties typically can only raise concerns after patent issuance by filing a reexamination request or a lawsuit — an obvious disincentive, given the costs of patent litigation. One proposal that has been suggested is to allow third parties to submit information regarding “prior art” to patent examiners during the patent examination process itself, rather than only after a patent has been issued. “Prior art” is a legal term used to refer to the processes, devices and modes of achieving the end of an alleged invention that were known before and at the date of the invention. Generally, if “prior art” exists, it invalidates a subsequently issued patent. This is an interesting proposal, because it effectively harnesses private-sector resources and incentives to promote the public’s interest in improving patent quality.

  • Another proposal is to establish a post-grant patent-opposition procedure, which would allow third parties to challenge patents administratively, rather than through litigation. Such a procedure already exists in the European system and could help weed out questionable patents before they become the subject of costly and time-consuming litigation. Of course, with this procedure, as with the prior art procedure, safeguards will be needed to ensure it is not used as a “nuisance” tactic to delay the issuance of valid patents.

  • Finally, business method patents have received much attention in the last few years and are often called out as a leading candidate for strengthened review. Business method patents protect processes, generally implemented by computers, that are involved in operating a business or that define a product or service provided by a business. We commend the PTO for having already taken steps to improve its review of such patents through its second tier review process and internal training efforts that have significantly reduced the number of business method patent issuances. Microsoft supports further progress in this area to ensure that patents are not awarded for “obvious” well-known business practices.

2. Curbing excessive litigation and litigation abuse:

  • One big step toward eliminating the abuse of lawsuits would come from the creation of a special court that would consolidate and hear all patent cases at the federal district level. This, combined with clearer standards, would improve the consistency and predictability of patent litigation. Many critical evidentiary issues are decided at the trial level. An expert court could benefit litigants on both sides of the courtroom and would make the litigation process substantially less expensive for all involved — large companies, small companies and individual inventors alike.

  • Second, we urgently need to reform the standard for “willful” infringement. Currently, if a party is found to have “willfully” infringed on someone’s patent, they can be subject to triple damages. The current situation forces companies large and small to devote considerable resources to obtain opinions of counsel for no purpose other than developing a defense to threatened litigation. While large companies like Microsoft can afford this expense, the burden placed on smaller companies is onerous. Moreover, the current law creates an incentive for inventors not to review patents at all — a result that is directly contradictory to the patent system’s core goal of promoting the broad dissemination and understanding of new inventions. A more reasonable standard, in our view, would be to limit “willfulness” determinations to truly egregious behavior.

  • Third, the standard for obtaining injunctions should be returned to its roots as an equitable remedy. This means that a litigant should be required to establish irreparable harm that cannot be compensated by monetary damages before a court takes the far-reaching step of enjoining a product. Reforming this standard would serve the dual goals of encouraging patent owners to commercially develop or license their innovations, and of ensuring that injunctions are not used simply as a litigation tactic, which is basically the reality today.

3. Promoting international harmonization of patent law:

  • International harmonization requires both increased collaboration among patent offices and legal reform. Regarding the former, both Congress and U.S. industry should support the PTO’s ongoing efforts to strengthen cooperation and information sharing among national and regional patent offices. For instance, the PTO has been urging cooperation toward building international consensus among patent offices on what constitutes “prior art.” While this may sound like a fairly modest, esoteric undertaking, it would, if successful, substantially increase predictability for inventors and promote consistency of outcomes across jurisdictions. A parallel goal should be to create opportunities for mutual recognition of patent office reviews, at least among the big three patent offices — the PTO, the European Patent Office and the Japanese Patent Office.

  • Regarding legal reform, the United States is the only country in the world that applies a “first-to-invent” standard for awarding patents. Under a first-to-invent system, the first actual inventor is given priority even though that inventor may file his patent after the filing date of another applicant claiming the same invention. Every other country applies a “first-to-file” standard, meaning that the first person to file a patent application on an invention is given priority. A growing number of U.S. stakeholders — including the National Association of Manufacturers, the Intellectual Property Owners Association and the American Intellectual Property Law Association — have recently come out in support of the United States moving towards a first-to-file system. Doing so would not only earn us goodwill internationally, but would also make the U.S. system substantially clearer, simpler and more predictable.

  • We believe the United States should also follow the practice of our major trading partners in requiring the publication of all patents 18 months after filing. U.S. patent law already requires 18-month publication where the invention is also the subject of a foreign patent application. As a result, a significant percentage of U.S. patent applications are already published 18 months after filing. Applying this requirement to all U.S. patents would not only promote uniformity and international harmonization, but would help avoid duplication of effort by later inventors and discourage “submarine” patents — namely, patent claims that become known only after later inventors have invested in commercializing the technology at issue.

4. Increasing accessibility for individual inventors and small companies around the world:

  • In addition to removing obstacles inherent with many disparate systems, we also need to deal with the cost burden of obtaining patents for individual inventors and small businesses. To that end, we are proposing a “zero-filing-fee system” for those inventors that qualify for small entity filing status under PTO regulations to better encourage these inventors to obtain their patents. Several nations, including the United States, already address this concern by reducing patent filing fees for such applicants. However, we believe that more should be done to relieve this cost burden. Instituting such a reform in the United States would promote the ability of a range of small entities — including certain small businesses, non-profits, universities and independent inventors — to file a patent application at no cost and to avoid PTO fees until it became clear whether or not the patent would be granted. The proposal would reduce “barriers to entry” to the patent system for these sometimes resource-constrained inventors.

PressPass: Will these suggested changes only benefit Microsoft?

Smith: The U.S. patent system is a powerful engine for economic growth that, on the whole, has worked extremely well for centuries. It has benefited the technology industry as a whole — including Microsoft — in numerous ways. The current U.S. incentive system is as productive as any in the world. In 2004, the PTO approved patents for 187,000 new inventions, from inventors working across the country and around the world. It approved nearly that many the year before as well. Currently, about 1.9 million inventions are under active patent in the United States. By any objective measure, the U.S. patent system has been an extraordinary success for our economy and our citizens. It has engendered more breakthroughs in technology, and has contributed more to the material progress of mankind than any intellectual property system in human history.

But as the world has changed, the patent system needs to change with it, to continually strike the right balance between the value of technological innovation versus the costs of market exclusivity. Finding that balance requires tough choices. We believe that the key to balancing these competing interests wisely is to steer a middle course for reform that promotes innovation and specifically takes steps to improve accessibility and lower costs for individual inventors and small companies. We need to create a 21st-century patent system that is right for the information age and the expanding global economy.

PressPass: How will changes to the U.S. patent system impact the global economy?

Smith: According to the PTO, only four of the top 10 recipients of U.S. patents in 2004 are based in the United States. In the 1990s, it was not uncommon for two or even one U.S. firm to make the PTO’s top 10 list. These figures show not only that inventors everywhere recognize the value of patents, but also that they rely on the U.S. patent system to protect their innovations in this, the largest market in the world. The figures also demonstrate that we live in a truly global economy — at least as far as technology innovation is concerned. National patent systems cannot possibly succeed in promoting innovation and consumer welfare if they fail to take account of this fact.

The inconsistencies between the U.S. system and the E.U. system, for example, make it complicated, difficult and expensive for inventors to be protected in both places. According to the Office of the U.S. Trade Representative, the bilateral trade and investment relationship between the E.U. and the U.S. alone is valued at more than US$1.5 trillion. The changes we suggest, if implemented, would make it simpler and cheaper for inventors to get patents, which in turn will have an impact on a lot of international businesses.

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