Working

Paper

Manufacturing Policy Project

P.O. Box 422

Sperryville, VA 22740

A Great Wall of Patents

China and American Inventors -- Selected

Consequences of Proposed U.S. Patent

“Reforms”

Prepared For

U.S.-China Economic and Security

Review Commission

By

Pat Choate

Manufacturing Policy Project

Washington, Virginia

November 7, 2005
2

About the Author

Pat Choate is Director of the Manufacturing Policy Project.

Previously, he previously has been Commissioner of Economic and

Community Development for the State of Tennessee, Chief

Economist for the Oklahoma Department of Industrial Development,

Regional Administrator and Director of Research for the U.S.

Department of Commerce’s Economic Development Administration

and Vice President of Public Policy at TRW, Inc. He is the author of

several books on regional and national development including

America in Ruins: the Decaying Infrastructure, The High-Flex

Society, Agents of Influence and Thinking Strategically. His latest

book is a study of intellectual property in the global economy -- Hot

Property: The Stealing of Ideas in an Age of Globalization.

About the Manufacturing Policy Project

MPP is a nonprofit, nonpartisan research organization that undertakes

public policy-related studies. The MPP reports, books and related

materials examine issues central to the continuing development of the

U.S. economy.

The U.S.-China Economic and Security Review Commission

contracted this as an independent working paper. It represents the

view of the author and should not be considered as endorsed by the

Commission or any individual Commissioner.
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A Great Wall of Patents __________________________________________

Summary

Pirates, counterfeiters and competitors from nations with weak intellectual

property protections are taking technologies from unprotected patent applications

that the U.S. Patent and Trademark Office (USPTO) is required to post on the

Internet.

Japan’s Patent Office, which does the same type of postings, finds that their

applications are being examined 17,000 times daily from China and 50,000 times

daily from Korea.

Current proposals for patent “reform” would weaken protections for U.S. patent

holders and extend the time periods required for patent examinations.

Claims of a patent “litigation crisis” are without merit. The per capita number of

lawsuits per patents issued has been declining since 1990. The likelihood that a

patent will be involved in a trial is 1/2,000th of one percent. Each year, fewer

than 100 patent lawsuits will result in a trial. Of the 3,075 patent lawsuits filed in

2004, federal court data reveals that litigants will settle almost 97 percent before

reaching a trial.

Three real patent crises do exist. (1) Foreign pirates and counterfeiters,

particularly from China, are costing U.S. intellectual property owners roughly $50

billion per year. The USTR claims that it cannot get sufficient evidence to file

intellectual property cases at the WTO, largely because U.S. victims are fearful of

reprisals. (2) Patent pendency rates are nearing the 30-month level and

increasing. Today, the USPTO has a warehoused backlog of more than 500,000

patent applications. The fastest way for the U.S. to introduce newer and better

technologies is hire more patent examiners and by that speed the patent

examination process. (3) The 18-month rule is allowing the hemorrhaging of

proprietary U.S. technology (military and commercial) to global pirates,

counterfeiters and competitors. A principal beneficiary of this is China.

Traditionally, large U.S. corporations have attempted to weaken patent

protections for individual inventors, small companies and academics.

Historically, these large entity patent holders have been unaffected by shortening

patent terms and weakening patent protections. With the advent of advanced

technology competition from China and others, both large and small entity U.S.

IP holders are harmed by any weakening of U.S. patent protections.

________________________________
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A Trip to China

Beginning in April 2005, the Yomiuri Shimbun, one of Japan’s major

national newspapers, published a 21-part series on the major

economic problems in the China-Japan relationship.1 The series

recounted a July 2004 trip by Yoichi Gotani, Director of Japan’s

External Trade Organization’s Intellectual Property Rights Beijing

Office, to the executive offices of the Haier Group, the largest

consumer-electronics maker in China.

The head of the Haier’s intellectual property unit told an amazed

Gotani, “Using several dozen computers, we’ve searched for patent

applications submitted to patent offices in Japan, the United States

and European countries to obtain useful information to develop our

products. Thanks to that, our company spends only a small amount of

money on research.”

Upon his return to Tokyo, Gotani told officials in Japan’s Patent

Office what he had learned, and they began to monitor the number of

times that Internet users from China and Korea looked at applications

then under consideration in the Japan Patent Office. The count for

China was 17,000 hits a day. More than 55,000 inquiries daily came

from Korea.

As to legality, the Chinese business executive told Gotani that since

most of the U.S., Japanese and European inventors “don’t usually

apply for patents in China, there’s nothing illegally wrong in us using

them.”

Using that same logic, Chinese pirates and counterfeiters are now

defending themselves with a new technique called “A Great Wall of

Patents.”2 The process is simple. Chinese counterfeiters are filing for

patents in China for the products they are copying. Most often, they

make their applications using drawings and descriptions they take

from the patent offices Internet sites in the U.S., Europe and Japan.

The International Herald Tribune reports that these Chinese patents

are often modifications of the original.
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With Chinese patent in hand, the counterfeiter or pirate is then

prepared to contest foreign claims of infringement in the Chinese

courts. China’s legal appeals are so time-consuming that the infringer

can operate for years without worry of an injunction, decision or

penalty.

As the use of Great Wall of Patent technique spreads in China, some

of the more audacious counterfeiters are suing foreigners for

violations of their Chinese patent, including suing those who created

the innovation in the first place and own the intellectual property

rights elsewhere.

An Unanticipated Consequence

Gotani’s experience with the Chinese mining of foreign patent

applications is an eye-opening example that intellectual property rules

are a technically complex area in which the smallest changes of law or

regulation can create tidal wave effects on innovation and innovators.

The fact that Chinese companies have the ability to copy paperwork

from patent applications of other nations with such ease and on such a

massive scale is an unintended consequence of one such change.

In the global trade negotiations (1986-1994) that resulted in the

creation of the World Trade Organization (WTO), the major industrial

nations formed a new global agreement on patents, copyrights,

trademarks and trade secrets called the Trade-Related Aspects of

Intellectual Property Rights (TRIPS). As part of that pact, all WTO

member nations agreed to publish the contents of patent applications

18 months after the inventor filed for protection. The U.S., Japan and

Europe make those applications available to the world via the Internet.

Congress requires the U.S. Patent and Trademark Office (USPTO) to

publish a patent application on the Internet 18 months point from its

filing, even when no patent has been issued. Publication of the details

of an application while under review is a radical departure from

practices used by the Patent Office in the prior two centuries of

operations. Then, the USPTO had a strict responsibility to protect the

secrets of an inventor’s patent application.
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The 18-month rule is particularly pernicious because the USPTO now

takes an average of 27.6 months – the pendency rate – to review a

patent application.3 Technical patents require even more time. For

communications and computer-related inventions, for instance, the

examination and processing take an average of more than 40 months.

In the period between the 18-month point and the time the USPTO

makes a decision, anyone on the Internet can inspect the details of the

patent application while the inventor does not yet have the protection

of a patent.

This time gap creates a special opportunity for Chinese counterfeiters

to use the Great Wall technique. In the United States, a patent goes to

the first person to invent. In China, as with all other nations, the

patent office issues the patent to the first person to file an application.

The burden of proving that the Chinese patent seeker stole the idea

can take years and cost hundreds of thousands of dollars in legal fees.

If the Chinese patent holder makes a few modifications in the

application, that burden is even more difficult.

The volume of U.S.-owned technological secrets made available to

the world under the auspices of the WTO’s 18-month rule is

enormous. In 2001, the first year of such patent publications, the U.S.

Patent and Trademark Office put 25,000 patent applications on the

Internet. In 2002, the number was 169,000, and in 2004 it was

248,000.4

There is an exception to the 18-month rule. In the battle over

legislation to implement TRIPS in the United States (1999), Congress

enacted a provision that gives inventors a choice: If they promise not

to seek a patent outside of the United States, the USPTO will keep the

details of their patent application under the strictest secrecy until its

examiners have granted or denied a patent. If the Patent Office denies

a patent grant, it will still maintain the confidentiality of the

application and the inventor can then use the innovation as a trade

secret. Approximately ten percent of all U.S. patent applicants use

this exception.

The other ninety percent take a major risk – if the USPTO does not

grant them a patent, they are unable, as in the past, to protect their
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innovation as a trade secret. The risk associated with such publication

of patent information is high because the USPTO denies patents to

almost one-third of all applications.5 In other words, the 18-month

rule forces the USPTO to reveal tens of thousands of potential trade

secrets each year, which the rest of the world can use royalty-free.

One consequence of this enforced sharing of details is that many

inventors now refuse to file for a patent. Rather, they are keeping

their innovations as trade secrets. This, of course, defeats the basic

purpose of a patent, which is a “golden covenant” between society and

creative people that says, “Share the details of this innovation and

society will give you the exclusive right to its use for a set number of

years.”

Few innovators with a major creation are willing to limit their patent

protections to just the United States. Also, a growing number of

inventors refuse to apply for a patent which will prematurely reveal

the details of their inventions to a world filled with counterfeiters and

pirates. The long-term result, if the present situation continues, will

be less sharing of knowledge, the very purpose for which society

grants patents.

The principal champions of the 18-month publication rule were the

governments of Europe and Japan and the transnational corporations

of those nations and the United States. Their reason is simple: big

businesses in Japan and Europe work closely with their governments,

often forming legal technology cartels. While such cartels are

generally illegal in the United States, they often exist. The most basic

threat to the cartels’ anticompetitive practices is not from legal

authorities but from some lone inventor, academic researcher or small

company that might entirely revolutionize a field with a new invention

that the cartels cannot thwart – the process of creative destruction.

Judge Howard Markey, the first Chief Judge of the Federal Circuit,

the court that hears patent appeals, wrote of this:

Many giant corporations have no need of a patent system. They

may obtain patents, but only as a defense against some little

machine shop operator who might otherwise invent and patent

something the public would demand, and the big corporation
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would have to negotiate for, instead of adding the item to its

product line. Many large corporations should be glad to

compete on size, nationwide service, high volume, strong

finance and prompt delivery. They can kill off smaller

competitors on any of these bases, unless the small competitor

has a patent on a product somebody wants to buy.

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As Markey suggests, patents are vital to independent inventors, small

companies and academics. If legal protections are strong, these

“small entities” can defend themselves in the federal courts against

predation by larger, richer competitors. Strong legal patent

protections also allow these entrepreneurs to raise money on their

patents. Some eventually become worldwide competitors. Dell,

Apple, Oracle and Microsoft are a handful of many such recent

examples of this process at work.

To reduce the threat from “small entities,” the “larger entities”

regularly propose a host of changes in patent law designed to weaken

U.S. patents – changes they and their surrogates represent as

“reforms.” The 18-month rule is one of those “reforms.” The big

entities, with much help from the Japanese and European

governments, pushed the idea into law as a way to get an early peek at

the innovations of the small entities.

To sell the 18-month rule to Congress, advocates raised from the dead

an old “problem” that the new regulation would supposedly solve.

They argued that some inventors were deliberately delaying the Patent

Office’s examinations, thereby keeping their patent applications

“submerged” until a corporation did something that violated one of

the patent’s claims, at which time the inventor would “surface” the

patent. Japanese patent officials invented a clever name for this --

“submarine patents” – a tag that implied unscrupulous inventors were

lying in wait to launch a sneak attack. The solution proposed by the

larger entities to stop independent inventors from victimizing

unsuspecting corporations with “submarine patents” was the early

publication of all U.S. patent applications.

In the mid-1990s, the Commissioner of Patents testified before

Congress that between 1971 and 1993 the USPTO could classify only

627 patent applications out of 2.3 million as submarine patents. At
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least a third of those patents were U.S. government military secrets,

leaving only about 400 that came from the private sector.7 To deal

with those and prevent the creation of more, the Patent Office in the

late 1970s established a tracking system to prevent submarine patents,

and the USPTO has not issued one since then.

Nonetheless, the big entity advocates pushed the 18-month rule into

law in 1999. What these corporations did not consider was the rise of

China, India, Korea and other developing nations as technological

superpowers. Ironically, the disclosure system they advocated as a

means of getting an early peak at the inventions of the small entities

also made their own most precious secrets available to the pirates,

counterfeiters and competitors in China, India and other developing

countries, where secrecy is the only protection against IP theft.

Those developing powers are as interested in the emerging technology

of the large entities as they are the small ones. Moreover, the large

entities are as powerless against the governments of China and India

as the small entities are when pitted in opposition to them. Thus, the

18-month rule is proving to be of incalculable value to China and

India at the expense of both large and small entity inventors in the

United States, Japan and Europe.

Kenji Hidaka, Director of Japan’s Patent Planning Strategy, said of

the 18-month rule, “Japan’s precious technologies, about which

inventors normally don’t want to disclose the details publicly, have

been leaked through a system that is supposed to protect their

intellectual assets.” As a result, he concludes that the intellectual

rights that constitute Japan’s national power are now widely under

threat. The same leakage represents no less a menace to the United

States and nations in Europe.

“Situational” Patent Rights

The U.S. Constitution provides that “Congress shall have the power to

promote the progress of science and useful arts by securing for limited

times to authors and inventors the exclusive right to their respective

writings and discoveries.” The hope is that by giving the author or

inventor a property right for a limited time, while also making public
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the creation’s most intimate details, the general state of knowledge

will be advanced.

The elegance of this Constitutional provision is in the flexibility it

gives Congress to adjust U.S. intellectual property laws to meet new

and changing circumstances. The intrinsic danger is that the “rights”

the provision confers are undefined, a task left to Congress, which

thereby renders them less than absolute, both for creators and

consumers. Instead, those rights are “situational” in nature, varying

over time as Congress may decide.

Inherent in such a system of politically-set rights are three everevolving Congressional obligations:

The first is to determine which types of innovations merit a patent,

under what conditions and for what period. Over the past two

centuries, Congress has repeatedly expanded the list of such creations

for which the USPTO may issue a patent and the duration of the

protection.

The second is to ensure that changes in the patent laws and regulations

equitably affect small and large entity inventors. Like a force of

nature such as gravity, big entities seem to always try to gain

advantage by urging Congress to weaken the patent protection of

small entities.

The third obligation is to secure protection for U.S. intellectual

property owners in other nations. Patent laws are set country by

country. Stealing the creations of others as a means of national

development has a long and unsavory history that continues into the

present. In such circumstances, American IP owners must ultimately

depend for their protection on the U.S. government.

Ultimately, the patent protections offered under the U.S. Constitution

are the foundation of America’s technological greatness. They have

provided sufficient protections and incentives for a long enough

period to allow creative people to take patented concepts, raise

monies, enter production and create entire industries. The process has

worked because the intellectual property owner had a constitutional

right of private action against infringers and the means of defending
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that right in the federal courts.

The patent systems and rights of Japan and Europe are much less

rigorous than those of the United States. Not surprisingly, those

governments advocate a harmonizing of systems, which to them

means reducing U.S. standards to theirs, not the reverse.

Harmonization of the three systems may be desirable. The question

for Congress is whether to harmonize the U.S. patent system down to

the standards of other nations or urge them to raise theirs’ up to those

of the United States.

Having a more harmonized system is desirable, but not if it weakens

U.S. inventors’ patent rights.

A False Crisis

Over each of the past three decades, large entity patent holders have

mounted major political campaigns in Washington to change U.S.

patent protections. These efforts’ distinguishing characteristic is that

they try to strengthen protections of IP holders in the developing

nations and weaken them in the United States. The political and

economic logic is simple: the large entities benefit from having

stronger IP rights in other nations, where such rights are weak. They

benefit by cutting the protections for small entity competitors in the

U.S., where such rights are strong.

In the 1990s, the “reform” effort focused on “submarine” patents, a

non-existent problem that was never-the-less “resolved” by requiring

the USPTO to publish patent applications under the 18-month rule.

Today, the large entity patent holders and their representatives are

attempting to replicate the success of that campaign with two new

crisis claims.

The first claim is that the U.S. is in a “patent litigation” emergency –

that is, a flood of lawsuits with little or no merit is threatening the

innovation process.
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In fact, publicly available data reveals the U.S. does not have a patent

litigation crisis. Indeed, the data makes clear that the threat of

lawsuits for most inventors is actually diminishing.

The real litigation threat is to a handful of large corporations whose

business models rely on the aggressive, unapproved and

uncompensated use of the patented works of others. The owners of

that intellectual property are suing these large companies and winning

large awards. In appeal, the courts are upholding these awards as

valid. Now, a handful of these large entity patent holders have banded

together and are trying to achieve through legislation what they cannot

get in the courts – easier access to the IP of others, at a lesser cost and

with fewer penalties.

Federal judicial caseload statistics for patent lawsuits and USPTO

data on patent applications and patents issued reveal:

• An inventor is less likely to be involved in a patent suit today

than in the past. As Table 1 reveals, the number of patent

lawsuits filed per the number of patent applications filed has

been on a downward slope since 1990. (Table 1)

• Likewise, the number of patent lawsuits filed per the number of

patents granted by the USPTO has also declined even greater –

almost 13 percent between 1988 and 2004. (Table 1)

• Only 5/10,000 of one percent of patents issued is challenged in

a patent trial.8

• In 2004, more 28 percent of patent lawsuits settled with no

court action required.9

• In 2004, more than 53 percent of patent lawsuits settled before

pretrial.10

• In 2004, more than 14 percent of patent lawsuits settled during

or after pretrial.11

• In 2004, only 96 patent cases went to trial, which represents

only 3.5 percent of all patent cases filed that year12.
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Put into context, the number of patent lawsuits that went to trial

during the period 2001 to 2004 rose from 76 cases to 96. (Table 2)

In sum, fewer than 100 patent trials a year is not a patent litigation

crisis – particularly in a nation that issues almost 200,000 patents

annually and where litigants settle almost all patent lawsuits before

trial.

A second “crisis” being promoted by advocates of patent law change

is that the USPTO is issuing patents of deteriorating quality. In its

2004 report, A Patent System for the 21st Century, the National

Academy of Sciences examined that issue and reported that despite

many such claims of poor quality patents, “Nevertheless, the claim

that quality has deteriorated in a broad and systematic way has not

been empirically tested.”13

A reliable way to measure patent quality is to review how patents

fared when challengers contested their validity in a neutral forum. To

reduce the cost of litigation, the USPTO allows third parties to

challenge patents under an ex parte or inter partes procedure.

The ex parte route, created in 1980, allows a third party to submit

materials to the USPTO for the USTPO to consider in a

reexamination. The challenger cannot otherwise participate in the

process. The idea is that once the USPTO sees that it has made a

mistake, its examiners are honest and competent enough to correct it.

The USPTO reports that third parties challenged only 441 patents in

2004 through ex parte reexaminations.14 Moreover, the USPTO

reports that 166 of those were by patent holders seeking a correction

or change in claims. The history of this process is that roughly six out

of ten times the USPTO reexamination affirms the validity or partial

validity of the patent.

The inter partes route, created in 1999 and liberalized in 2002, goes

much further. It allows the challenger to participate in the

reexamination process, gives them the right to appeal decisions to the

U.S. Circuit Court of Appeals for the Federal Circuit and, if they win

to participate in the patent owner’s appeal to that Court.
14

Currently, if the third party is unsuccessful in the inter partes

examination and subsequent Court appeal, they are forever prohibited

from later asserting in any civil action or subsequent inter partes

reexaminations the invalidity of the challenged patent claim.15 As to

inter partes reexaminations, challengers filed only 27 requests for

such reviews in 2004.16

Seemingly, most challengers prefer having their case heard by a jury

or judge as opposed to trained patent examiners.

The low number of ex parte and inter partes challenges, the declining

number of lawsuits filed per number of patents issued and the fact that

only a tiny handful of patent lawsuits go to trial, strongly suggest the

USPTO is issuing patents that can stand a vigorous, well-financed

challenge in the crucible of an adversarial proceeding.

A variant of the quality claim is that the USPTO is issuing patents for

absurd creations. The Internet has several sites where examples of

such “goofy” patents are displayed, including an umbrella for dogs, a

headband that includes “deer ears,” horse diapers, a fish bath, a

motorized ice cream cone and a smokers hat, among dozens of others.

Most often, these are vanity patents. Few will lead to the commercial

success of other seemingly “goofy” creations such as the Hoola-Hoop,

the Slinky, Frisbee or the propeller hat. Few, if any, of these patent

holders will ever use these patents to mount a lawsuit against large

entity patent holders. Moreover, Microsoft, IBM or Oracle is unlikely

to ever be in the business of producing horse diapers or deer ears.

Yet, the applicants for these patents pay their fees and are as entitled

to their vanity patents as Edison was to his more substantial creations.

Again, as with the submarine patent “crisis” of the 1990s, today’s

litigation and quality “crises” are merely the political and public

relations cover stories for the attempts by other governments and large

entity patent holders to alter the U.S. patent system in ways that will

favor their interests at the expense of independent inventors and other

smaller entities.

And once again, these attempts warrant my repeating that these efforts

are short-sighted because the Chinese and other developing nations
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benefit greatly from cheapened U.S. IP protections, regardless of

whether the intellectual property owner is a large or a small entity

holder.

Current “Reform” Proposals

The Patent Office divides patent seekers into two groups for purposes

of assessing fees. The “small entities” group consists of individual

inventors, companies with fewer than 500 employees and academic

innovators.17 They get a reduced patent fee. Large entities (501

people or more) pay higher fees. All these patent fees are devoted to

financing the operation of the USPTO.

Because of the data collected on the differentiated fees, the USPTO

knows much about those who apply for and get patents. A most

significant piece of information is that 45 percent of patents go to the

small entities, with the large entities comprising the balance.

Contrary to repeated assertions, the individual inventor, the innovative

academic and small businesses remain major contributors to

America’s technological advance. To hamper their creativity and

entrepreneurship risks retarding U.S. technological progress.

Not surprisingly, most proposals for patent “reforms” come from the

large entities, the trade associations they finance and the public policy

organizations they lead and support.

These “reform” proposals have three basic characteristics – (1) they

seek to cut the patent term; (2) they seek to give the world a look at a

patent application before the USPTO grants patent protections; and

(3) they seek to weaken the legal remedies and damage awards now

available to small entity patent holders.

The most historic cut in the patent term came in 1994 when Congress

adopted WTO implementing language and set the U.S. patent term at

20 years. Historically, the United States gave inventors a patent term

of 17 years from the date the USPTO issued the patent, regardless of

how many years the USPTO took for its examination. Now, however,

if the USPTO consumes, say seven years in the examination process
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before it issues a patent, the inventor only gets an effective patent

term of 13 years (20–7 = 13).

When Congress enacted the North American Free Trade

Agreement (NAFTA) in 1993, it changed the U.S. patent term to

twenty years from the date of filing or 17 years, whichever period is

longer. The minimum patent term set by TRIPS as part of the World

Trade Organization treaty is 20 years from filing, but any nation can

set a higher term as the U.S. did in the NAFTA treaty. In 1994,

however, the large entity advocates persuaded Congress to drop the

NAFTA formula and adopt the TRIPS minimum – twenty years from

filing. The difference between the period set under the NAFTA

agreement and under the TRIPS minimum, coupled with rising

pendency rates at the USPTO, has created a significant loss of

protections for American inventors.

As the NAFTA/WTO experience suggests, large entities want a global

harmonization of patent laws and regulations. Since most of these

corporations operate in the U.S., Japan and Europe, they want a patent

issued in Europe or Japan to be honored in the United States and visaversa. This will permit jurisdiction shopping.

To make everything equal, the large entities are urging the U.S. to

adopt patent procedures now used in Europe and Japan. The fact that

such actions will weaken certain U.S. protections is of far less

consequence to them than it is to the small entities for which

individual patents are a life and death matter.

High up on the list of proposed changes to U.S. law is one to alter the

two-century long procedure used in the United States from awarding

the patent to the first-to-invent to awarding it to the first-to-file – the

person who gets to the Patent Office fastest. Every nation but the

United States uses the first-to file-rule. The U.S. also has the world’s

strongest patent protections.

While the first-to-file approach simplifies decisions for Patent

officials, it creates other problems. With such procedures, a Chinese

counterfeiter can take a patent application off the Internet, slightly

modify it, be the first to arrive at China’s Patent Office (or that of

many other nations) and get the patent on the creation.
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If the U.S. adopts such a change, the inevitable result will be a

premature rush to the USPTO with applications of far less quality than

are now submitted. Equally inevitably, the number of U.S. lawsuits

will increase as will the workload of Patent Examiners. The result

will be more uncertainty, more lawsuits, a greater workload at the

Patent Office and longer periods before the USPTO issues or denies a

patent.

Another proposal is that the United States take on through legislation

an administrative procedure, modeled on that of Europe, that will

allow the challenge of issued patents by anyone in the nine months

following its issuance. The patent owner would have six months to

respond and administrative judges, operating out of the USPTO,

would render a decision. This new court would permit discovery as

well as the use of witnesses in a quasi-trial.

Present mechanisms, however, already allow reexamination of

patents. The ex parte and inter partes procedures, as described earlier

in this paper, offer cost-effective alternatives to lawsuits. What the

advocates of this new judicial procedure are striving for is a way to

litigate outside of the U.S. federal court system with all its established

rules and precedents, while preserving their right of appeal to the U.S.

Court of Federal Appeals if they lose. If adopted, this will result in

more rather than less litigation and higher rather than lower legal

costs.

Large entity advocates are also urging elimination of the publication

exemption provided applicants whose patent is limited to the United

States. If adopted, the USPTO would be required to publish all patent

applications at the 18-month point after submission.

The large entities also particularly want to tighten, or eliminate

altogether, standards used by U.S. federal courts to measure “willful

infringement.” Under existing rules, claimants can collect treble

damages if the infringer did so willfully. Today, numerous major

corporations knowingly use the patented technology of others,

particularly small entities, figuring that if caught they can either

prolong court proceedings, bankrupt the IP owner or make a

settlement that would cost less than licensing the technology in the
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first place. Treble damages for such willful infringement can yield

painfully high damage awards and as such be a great deterrent to such

aggressive business practices – the very reason that Congress created

such a provision in the first place.

The Real Patent Crisis

While the “litigation” and “quality” crises are false, the United States

does have a patent emergency. It has three dimensions:

First, foreign pirates and counterfeiters are flagrantly stealing the

creations of U.S. IP holders. The cost to U.S. IP holders exceeds $250

billion annually. China is the worst offender, though not the only one.

Under the provisions of the World Trade Organization, the United

States has the right to bring a case against China for failing to provide

adequate IP protections. The authority to bring such cases resides

with the Office of the United States Trade Representative (USTR).

However, that Office has not brought a single IP case before the WTO

since 2000, preferring to use diplomacy instead. During this time, the

level of foreign pirating and counterfeiting has risen sharply.

Recently, Congress has earmarked funds to fund a WTO IP case

against China. The Office of the USTR has examined the issue and

reports that it cannot bring a case because of insufficient evidence.

Apparently, U.S. businesses are afraid of retaliation if they supply

such information to the U.S. government.

Fortunately, sufficient evidence exists that China and other nations are

not meeting their treaty obligations under the WTO to provide IPR

protections for foreign holders. Congress can ask other agencies to

collect this evidence and organize it into a suit the USTR can win at

the WTO. I recommend that Congress do so.

Second, the time to process U.S. patent applications is lengthening

each year, reflecting inadequate staffing. A decade ago, the pendency

rate was 18 months. In 2000, it was 25 months. In 2004, it was 27.6

months. A rate of 30 months is likely in 2006.
19

Because of these ever-lengthening exam times, a massive backlog of

unexamined patent applications, stored in warehouses, is mounting.

The backlog exceeded 500,000 applications at the beginning of 2005

and is likely to be close to 600,000 by January 2006. In an era of fast

paced global change and intense technological competition, America

needs the best of these technologies in the marketplace sooner rather

than later.

Today, the lack of patent examiners – enough adequate to the

challenge of cutting the pendency rate to a year or less -- is a major

choke point on U.S. technological development. The cost of even

doubling the number of existing examiners (Approximately $1.5

billion annually) is insignificant in the context of eliminating a

backlog of 500,000 applications and then reducing by two years or

more the wait before the USPTO can patent new technologies. The

existing costs of delay are enormous.

Third, the 18-month rule is allowing foreign pirates and

counterfeiters, often with the assistance of their governments, to steal

the creations of American IP owners. Today, more than a quarter

million U.S. patent applications are up on the Net for anyone’s

examination. A number of actions seem appropriate, but most

important Congress should legislatively eliminate the 18-month rule

as soon as possible.

In the interim, the USPTO can take a number of useful intermediate

steps. A high-priority action is for the USPTO to monitor its web

servers and ascertain who is scrutinizing which U.S. patent

applications. USPTO should publish this data on its site, updated

daily. Simultaneously, the USPTO should inform patent applicants by

e-mail who has examined their patent request.

Finally, as advocated by Ronald J. Riley, President of the Professional

Inventors Association, nations that are identified as sources of flagrant

piracy and counterfeiting in the USTR’s annual Special 301 reports

should be denied Internet access to U.S. patent applications until such

nations reform their ways.
20

Conclusion

With the emergence of China, India and other developing nations as

technology-seekers, the U.S. Congress must consider how any

proposed changes in U.S. patent or other intellectual property laws

might be used by pirates and counterfeiters in those nations to steal

innovations owned by Americans. Many patent “reforms” now under

consideration will harm the U.S. technological position. The 1999

changes in patent law have already resulted in shorter patent terms for

U.S. inventors and given foreign competitors, pirates and

counterfeiters a bonanza of proprietary information.

The USPTO should be required to hold in absolute secrecy the details

within a patent application until it issues a patent. Equally important,

the USPTO should be obligated, as in the past, to protect the secrets

contained in patent applications that it denies, allowing those

applicants to use their creations as trade secrets.
21

Notes

___________________

 1 Yomiuri Shimbun, “Japan’s System of Registering IP Obsolete,” Reported in

Sinchew.com, July 6, 2005.

2 International Herald Tribune, “Pirates file patents to beat the system: The new Chinese

counterfeit game,” reported by Brad Spurgeon, November 15, 2004.

3 Performance and Accountability Report: Fiscal Year 2004, USPTO, Table 4, p. 119.

4

 Ibid, Table 1, p. 116.

5

 Ibid.

6

“Some Patent Problems --Philosophical, Philological, and Procedural 80 F. R. D. 203,

p. 210

7 Hot Property, Pat Choate; Knopf, 2005.

8

 Calculated from data contained in Federal Judicial Caseload Statistics, 2004, Table

C-4 and Performance and Accountability Report: Fiscal Year 2004, Table 1, p. 116.

9

 Calculated from data contained in Federal Judicial Caseload Statistics, 2004, Table

C-4.

10

 Ibid.

11

 Ibid.

12

 Ibid.

13 A Patent System for the 21st Century, National Research Council of the National

Academies, p. 48.

14 Performance and Accountability Report: Fiscal Year 2004, USPTO, Table 13, p.

129.

15 Report to Congress on Inter Partes Reexamination, USPTO, December 20, 2004.

16

 Ibid.

17

 Patent Rules, USPTO.

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