To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission FEDERAL TRADE COMMISSION October 2003

1. FEDERAL TRADE COMMISSION
To Promote Innovation:
The Proper Balance of
Competition and Patent Law and Policy
A Report by the Federal Trade Commission
October 2003

2. FEDERAL TRADE COMMISSION
TIMOTHY J. MURIS Chairman
MOZELLE W. THOMPSON Commissioner
ORSON SWINDLE Commissioner
THOMAS B. LEARY Commissioner
PAMELA JONES HARBOUR Commissioner
Susan A. Creighton Director, Bureau of Competition
J. Howard Beales III Director, Bureau of Consumer Protection
Luke Froeb Director, Bureau of Economics
William E. Kovacic General Counsel
Anna H. Davis Director, Office of Congressional Relations
Rosemarie A. Straight Executive Director
Report Contributors
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
Inquiries concerning this report should be directed to:
Susan S. DeSanti, Deputy General Counsel for Policy Studies, Office of the General Counsel
(202) 326-3190 or sdesanti@ftc.gov

3. Acknowledgments:
The Commission wishes to note the expertise and time contributed by Hearings participants.
For all of their contributions, the Commission conveys its thanks.
The Commission thanks the Antitrust Division of the Department of Justice and the Patent
and Trademark Office for participating in many of the panels at, and for recommending many of
the participants in, the Hearings.
The Commission thanks the Competition Policy Center and the Berkeley Center for Law and
Technology at the University of California at Berkeley for providing facilities to allow some of
the Hearings to be held on the West Coast.
Cover:
Clip art on cover obtained under license from Microsoft Corporation.
Patents: Front Cover
Patent No. 549,160 - Selden Road Engine
Patent No. 4,779, 268 - Frame Decoding for Digital Signal Transmission
Patents: Back Cover
Patent No. 4,302,281 - Method for Producing Pulp
Patent No. 4,805,654 - Sun Shield for Automobiles

4. TO PROMOTE INNOVATION:
THE PROPER BALANCE OF COMPETITION
AND PATENT LAW AND POLICY
EXECUTIVE SUMMARY
Innovation benefits consumers the FTC and the Antitrust Division of the
through the development of new and Department of Justice (DOJ) (forthcoming),
improved goods, services, and processes. will discuss and make recommendations for
An economy’s capacity for invention and antitrust to maintain a proper balance with
innovation helps drive its economic growth the patent system.
and the degree to which standards of living
increase.1 Technological breakthroughs Competition and Patent Law and
such as automobiles, airplanes, the personal Policy Promote Innovation and
computer, the Internet, television, Benefit the Public.
telephones, and modern pharmaceuticals
illustrate the power of innovation to increase
Competition through free enterprise
prosperity and improve the quality of our
and open markets is the organizing principle
lives.
for most of the U.S. economy. Competition
among firms generally works best to achieve
Competition and patents stand out
optimum prices, quantity, and quality of
among the federal policies that influence
goods and services for consumers. Antitrust
innovation. Both competition and patent
law, codified in the Sherman Act, the FTC
policy can foster innovation, but each
Act, and other statutes, seeks “to maximize
requires a proper balance with the other to
consumer welfare by encouraging firms to
do so. Errors or systematic biases in how
behave competitively.”3
one policy’s rules are interpreted and applied
can harm the other policy’s effectiveness.
Competition can stimulate
This report by the Federal Trade
innovation. Competition among firms can
Commission (FTC) discusses and makes
spur the invention of new or better products
recommendations for the patent system to
or more efficient processes. Firms may race
maintain a proper balance with competition
to be the first to market an innovative
law and policy.2 A second joint report, by
technology. Companies may invent lower-
cost manufacturing processes, thereby
1
increasing their profits and enhancing their
Federal Reserve Board Vice Chairman Roger ability to compete. Competition can prompt
W. Ferguson, Jr., Patent Policy in a Broader Context,
Remarks at 2003 Financial Markets Conference of the firms to identify consumers’ unmet needs
Federal Reserve Bank of Atlanta (April 5, 2003), at and develop new products or services to
http://www.federalreserve.gov/boarddocs/speeches/2003/20
030407/default.htm.
2 3
The Federal Trade Commission issues reports I PHILLIP E. AREEDA & HERBERT HOVENKAMP,
pursuant to Section 6(f) of the Federal Trade Commission ANTITRUST LAW : AN ANALYSIS OF ANTITRUST PRINCIPLES
Act, 15 U.S.C. § 46(f). AND THEIR APPLICATION ¶100a at 4 (2000).
1

5. satisfy them. and technical information is part of the
consideration that the inventor gives the
Patent policy also can stimulate public.6
innovation. The U.S. Constitution
authorizes Congress “[t]o promote the Competition and Patents Must Work
Progress of Science and useful Arts, by Together in the Proper Balance.
securing for limited Times to . . . Inventors
the exclusive Right to their respective . . . Competition and patents are not
Discoveries.”4 To obtain a patent, an inherently in conflict. Patent and antitrust
invention (that is, a product, process, law “are actually complementary, as both
machine, or composition of matter) must be are aimed at encouraging innovation,
novel, nonobvious, and useful. Moreover, a industry, and competition.”7 Patent law
patentee must clearly disclose the invention. plays an important role in the property rights
A patent confers a right to exclude others regime essential to a well-functioning
from making, using, or selling in the United competitive economy. For example, firms
States the invention claimed by the patent may compete to obtain the property rights
for twenty years from the date of filing the that patents convey. Patents do not
patent application. necessarily confer monopoly power on their
holders,8 and most business conduct with
This property right can enable firms respect to patents does not unreasonably
to increase their expected profits from restrain or serve to monopolize markets.
investments in research and development, Even when a patent does confer monopoly
thus fostering innovation that would not power, that alone does not create an antitrust
occur but for the prospect of a patent. violation. Antitrust law recognizes that a
Because the patent system requires public patent’s creation of monopoly power can be
disclosure, it can promote a dissemination of
scientific and technical information that
would not occur but for the prospect of a placing in their hands a means through the use of which
patent. their wants may be supplied.” 1 WILLIAM ROBINSON, THE
LAW OF PATENTS FOR USEFUL INVENTIONS § 22 at 305
(1890), cited in ROBERT P. MERGES & JOHN F. DUFFY ,
Like competition policy, patent PATENT LAW AND POLICY: CASES AND MATERIALS 361 (3d
policy serves to benefit the public. “The ed. 2002).
basic quid pro quo contemplated by the 6
See James E. Rogan, Prepared Remarks of
Constitution and the Congress for granting a James E. Rogan, Under Secretary of Commerce for
patent monopoly is the benefit derived by Intellectual Property and Director of the United States
the public from an invention with substantial Patent and Trademark Office (2/6/02) 2, at
http://www.ftc.gov/opp/intellect/rogan.htm.
utility.”5 The public disclosure of scientific
7
Atari Games Corp. v. Nintendo of Am., 897
F.2d 1572, 1576 (Fed. Cir.1990).
4
U.S. CONST. art. I, § 8. Other sections of this
constitutional provision authorize copyright law. 8
ROBERT L. HARMON, PATENTS AND THE
FEDERAL CIRCUIT § 1.4(b) at 21 (5th ed. 2001) (“Patent
5
Brenner v. Manson, 383 U.S. 519, 534-35 rights are not legal monopolies in the antitrust sense of the
(1966). The consideration an inventor gives in return for a word. Not every patent is a monopoly, and not every
patent “is the benefit which he confers upon the public by patent confers market power.”).
2

6. necessary to achieve a greater gain for competition that might have developed
consumers. based on the obvious technology. See Box
1. Conversely, competition policy can
Analogously, the Supreme
Court has recognized the
importance of competition to the Bo x 1. An Inv alid Pa tent on an Obv ious Inven tion Can H arm
9 Com petition .
patent system. “[F]ree
competition” is “the baseline” on In 1895, George Selden obtained a U.S. patent with a claim so broad
which “the patent system’s that “it literally encompasse[d] most automobiles ever made.” Yet
incentive to creative effort the basic invention covered by that claim – putting a gasoline engine
10
depends.” By limiting the on a chassis to make a car – was so obvious that many p eop le
worldwide thought of it independently as soon as the most primitive
duration of a patent, “[t]he Patent gasoline engines were developed. The association that licensed the
Clause itself reflects a balance Selden patent collected hundreds of thousands of dollars in royalties
between the need to encourage – raising costs and reducing the output of automobiles – before
innovation and the avoidance of Henry Fo rd and others cha llenged the patent, and the patent claim
monopolies which stifle was judicially narrowed in 1 911 . See M ERGES & D UFFY , P A T EN T
L A W A N D P OLICY : C A S ES A N D M ATERIALS at 644-46.
competition without any
concomitant advance in the
‘Progress of Science and useful
Arts.’”11 The patentability requirements for undermine the innovation that the patent
novelty and nonobviousness “are grounded system promotes if overzealous antitrust
in the notion that concepts within the public enforcement restricts the procompetitive use
grasp, or those so obvious that they readily of a valid patent. See Box 2.
could be, are the tools of creation available
to all.”12 The FTC/DOJ Hearings Examined
the Balance of Competition and
A failure to strike the appropriate Patent Law and Policy.
balance between competition and patent law
and policy can harm innovation. For To examine the current balance of
example, if patent law were to allow patents competition and patent law and policy, the
on “obvious” inventions, it could thwart FTC and the DOJ held Hearings from
February through November 2002. The
Hearings took place over 24 days, and
9
See Bonito Boats, Inc. v. Thunder Craft Boats, involved more than 300 panelists, including
Inc., 489 U.S. 141, 146 (1989) (federal patent laws embody business representatives from large and
“a careful balance between the need to promote innovation small firms, and the independent inventor
and the recognition that imitation and refinement through
imitation are both necessary to invention itself and the very community; leading patent and antitrust
lifeblood of a competitive economy.”). organizations; leading antitrust and patent
practitioners; and leading scholars in
10
Id. at 156.
11
Id. at 146.
12
Id. at 156.
3

7. Bo x 2. Overzealous Antitrust Enforcement Can
Commission’s conclusions about and
Underm ine the Innovation that Patents Promo te. recommendations for the patent system.
In the 1970's, antitrust enforcers viewed CONCLUSIONS AND
grantbacks (e.g., when a licensee has improved
patented technology, it “grants back” to the RECOMMENDATIONS
original patentee access to the improvement) as
automatically illegal. Mo re recently, antitrust I. Although Most of the Patent
enforcers recognize that “[g]rantbacks can have
procompetitive effects,” for example, by System Works Well, Some
encouraging a patentee to license its patent in the Modifications Are Needed to
first place, thereb y enab ling the licensee’s
improvement. Antitrust enforcers now evalua te
Maintain A Proper Balance
likely pro com petitive and anticompetitive effects of Competition and Patent
of grantbacks. Past antitrust rules may have Law and Policy.
deterred some p rocom petitive grantbacks,
however, thus deterring some innovations using
paten ted technolo gy. See U.S. Department of The patent system does, for the most
Justice and Federal T rade C omm ission, Antitrust part, achieve a proper balance with
Guidelines for the Licensing of Intellectual competition policy. The statutory standards
Pro perty § 5.6 (A pr. 6, 1 995 ), reprinted in 4 Trade
of patentability appear largely compatible
Reg. Rep. (CCH) ¶ 13,132, available at
http://www.usdoj.gov/atr/public/guidelines/ipguide with competition; properly interpreted, they
.htm. tend to award patents only when necessary
to provide incentives for inventions, their
commercial development, or their
disclosure. Congress has enacted new
economics and antitrust and patent law.13 In statutes that protect competition by, among
addition, the FTC received about 100 written other things, facilitating disclosures of
submissions. Business representatives were patent applications. The Court of Appeals
mostly from high-tech industries: for the Federal Circuit, the sole court for
pharmaceuticals, biotechnology, computer most patent law appeals, has brought
hardware and software, and the Internet.14 stability and increased predictability to
This report discusses Hearings testimony various elements of patent law. This has
and independent research, and explains the reduced legal uncertainty and facilitated
business planning. The Patent and
13 Trademark Office (PTO) has implemented
The Commission thanks the DOJ and the
Patent and Trademark Office for participating in many of
initiatives to deal with new types of patents
the panels at the Hearings and for recommending many of and has released a Strategic Plan for the 21st
the participants in the Hearings. For providing facilities to Century to improve patent quality (i.e.,
allow some of the Hearings to be held on the West Coast,
the Commission thanks the Competition Policy Center and reduce errors) and streamline procedures.15
the Berkeley Center for Law and Technology at the Hearings participants found much to praise
University of California at Berkeley. in the current patent system.
The Commission wishes to note the expertise and
time contributed by Hearings participants. For all of their
contributions, the Commission conveys its thanks. 15
See United States Patent and Trademark
Office, The 21st Century Strategic Plan, at
14
See Appendices A and B. www.uspto.gov/web/offices/com/strat21/index.htm.
4

8. A. Questionable Patents Can Deter or
Nonetheless, many participants in Raise the Costs of Innovation.
and observers of the patent system expressed
significant concerns that, in some ways, the One firm’s questionable patent may
patent system is out of balance with lead its competitor to forgo R&D in the
competition policy. Poor patent quality and areas that the patent improperly covers. For
legal standards and procedures that example, firms in the biotech industry
inadvertently may have anticompetitive reported that they avoid infringing
effects can cause unwarranted market power questionable patents and therefore will
and can unjustifiably increase costs. Such refrain from entering or continuing with a
effects can hamper competition that particular field of research that such patents
otherwise would stimulate innovation.
This report makes several Bo x 3. Bloc king Patents
recommendations for the legal standards,
procedures, and institutions of the patent The patents of others can block a patentee ’s ability
system to address such concerns. to exploit its own invention. For example:
“[S]uppose that Admiral Motors obtains a patent on an
II. Questionable Patents Are a internal combustion engine for use in automobiles. Later,
Significant Competitive Betty Beta purchases an automobile marketed by Admiral
Mo tors that embodies the patented invention. B eta
Concern and Can Harm experiments with her new car and develops a dramatica lly
Innovation. improved fuel injector useable only in the patented
Admiral Mo tors engine. Even if Beta patents her
improved fuel injector, she cannot practice that
A poor quality or questionable technology without infringing A lpha’s b asic pa tent. . . .
patent is one that is likely invalid or Unless one of the parties licenses the other, Beta must
contains claims that are likely overly wait until Admiral Mo tors’ patent expires before
broad. Hearings participants raised practicing her own patented improvement invention.”
concerns about the number of ROGER E. SCHECHTE R & JO H N R. T H O M AS,
I NTELLECTUAL P ROPERTY : T HE L A W OF C OPYRIGHTS ,
questionable patents issued.16 Such P ATENTS A N D TR A D EMARKS § 20.1.1 at 462 (20 03). If
patents can block competition, see Box 3, the blocking patent is invalid or overbroad, then no
and harm innovation in several ways. public benefits exist to justify its effects on follow-on
innovation.
appear to cover.17 Such effects deter market
entry and follow-on innovation by
16
For example, software firms raised concerns
17
about patents that they believed should not have been See, e.g., FTC/DOJ Hearings on Competition
granted, because the inventions were obvious based on and Intellectual Property Law and Policy in the
preceding work in the area. While praising patents as the Knowledge-Based Economy, David J. Earp Testimony Feb.
basis for their industry, biotech firms also raised concerns 26, 2002, at pages 290-91, 238 (hereinafter, citations to
that some overbroad patents may discourage further transcripts of these Hearings state the speaker’s last name,
innovation in some biotech areas. See generally Chs. 2 and the date of testimony, and relevant page(s)); Blackburn
3. 2/26 at 296; Caulfield 3/19 at 161.
5

9. competitors and increase the potential for In some industries, such as computer
the holder of a questionable patent to hardware and software, firms can require
suppress competition. access to dozens, hundreds, or even
thousands of patents to produce just one
If a competitor chooses to pursue commercial product. One industry
R&D in the area improperly covered by the representative from a computer hardware
questionable patent without a license to that firm reported that more than “90,000 patents
patent, it risks expensive and time- generally related to microprocessors are held
consuming litigation with the patent holder. by more than 10,000 parties.”19 Many of
If the competitor chooses to negotiate a these patents overlap, with each patent
license to and pay royalties on the blocking several others. This tends to create
questionable patent, the costs of follow-on a “patent thicket” – that is, a “dense web of
innovation and commercial development overlapping intellectual property rights that
increase due to unjustified royalties. a company must hack its way through in
order to actually commercialize new
Another option is to find a legal technology.”20
means to invalidate the patent. PTO
procedures allow only very limited Much of this thicket of overlapping
participation by third parties, however. A patent rights results from the nature of the
lawsuit in federal court may not be an technology; computer hardware and
alternative, because a competitor may not software contain an incredibly large number
sue to challenge patent validity unless the of incremental innovations. Moreover, as
patent holder has threatened the competitor more and more patents issue on incremental
with litigation. If the competitor is not on inventions, firms seek more and more
the verge of marketing an infringing patents to have enough bargaining chips to
product, the patent holder may have no obtain access to others’ overlapping
reason to threaten litigation. In these patents.21 One panelist asserted that the time
circumstances, as one biotech representative and money his software company spends on
complained, “there are these bad patents that creating and filing these so-called defensive
sit out there and you can’t touch them.”18 If patents, which “have no . . . innovative value
litigation does take place, it typically costs in and of themselves,” could have been
millions of dollars and takes years to better spent on developing new
resolve. This wastes resources.
B. In Industries with Incremental 19
Detkin 2/28 at 667-68.
Innovation, Questionable Patents
Can Increase “Defensive 20
Carl Shapiro, Navigating the Patent Thicket:
Patenting” and Licensing Cross Licenses, Patent Pools, and Standard-Setting, in 1
Complications. INNOVATION POLICY AND THE ECONOMY 119, 120 (Adam
Jaffe et al. eds., 2001).
21
The forthcoming FTC/DOJ joint report will
discuss the proper antitrust evaluation of licensing
18
Blackburn 2/26 at 295-96. techniques used in such situations.
6

10. technologies.22 economic significance, “it is much cheaper
for society to make detailed [patent] validity
Questionable patents contribute to determinations in those few cases [in which
the patent thicket. In the context of a patent patents are challenged] than to invest
thicket, questionable patents can introduce additional resources examining patents that
new kinds of licensing difficulties, such as will never be heard from again.”24
royalties stacked one on top of another, and Accordingly, the FTC’s recommendations
can increase uncertainty about the patent focus first on procedures and presumptions
landscape, thus complicating business used in challenging questionable patents,
planning. Questionable patents in patent because such challenges are more likely to
thickets can frustrate competition by current involve patents of competitive significance.
manufacturers as well as potential entrants.
Because a manufacturer needs a license to Recommendation 1:
all of the patents that cover its product, firms
can use questionable patents to extract high As the PTO Recommends, Enact
royalties or to threaten litigation.23 For Legislation to Create A New
example, a questionable patent that claims a Administrative Procedure to Allow
single routine in a software program may be Post-Grant Review of and
asserted to hold up production of the entire Opposition to Patents.
software program. This process can deter
follow-on innovation and unjustifiably raise The PTO discusses patent
costs to businesses and, ultimately, to applications only with the patent applicant.
consumers. Until recently, third parties could only bring
certain relevant documents to the attention
C. Recommendations to Improve of, and, in limited circumstances, file a
Patent Quality and Minimize written protest with, an examiner or to
Anticompetitive Costs of the request the PTO Director to reexamine a
Patent System. patent. To address this situation, Congress
passed legislation to establish limited
One recent article argues procedures that allow third parties to
persuasively that because most patent participate in patent reexaminations. Recent
applications involve claims of little amendments have improved those
procedures, but they still contain important
restrictions and disincentives for their use.
22
Greenhall 2/27 at 377, 420. Once a questionable patent has issued, the
most effective way to challenge it is through
23
“Large and small companies are increasingly litigation. Litigation generally is extremely
being subjected to litigation (or its threat) on the basis of
questionable patents.” United States Patent and
Trademark Office Fee Modernization Act of 2003:
Hearing Before the Subcomm. on Courts, the Internet, and
Intellectual Property of the House Comm. on the Judiciary,
108th Cong. 2 (2003) (Statement of Michael K. Kirk,
Executive Director, American Intellectual Property Law
Association), available at
24
http://www.aipla.org/html/Legislative/108/testimony/FeeLe Mark A. Lemley, Rational Ignorance at the
g.htm. Patent Office, 95 NW. L. REV. 1495, 1497 (2001).
7

11. costly and lengthy,25 and is not an option should preside over the proceeding, which
unless the patent owner has threatened the should allow cross-examination and
potential challenger with patent carefully circumscribed discovery, and
infringement litigation. which should be subject to a time limit and
the use of appropriate sanctions authority.
The existing procedures attempt to Limitations should be established to protect
balance two perspectives. On the one hand, against undue delay in requesting post-grant
third parties in the same field as a patent review and against harassment through
applicant may have the best information and multiple petitions for review. The
expertise with which to assist in the authorizing legislation should include a
evaluation of a patent application, and delegation of authority permitting the PTO’s
therefore might be useful participants in the conclusions of law to receive deference from
process of deciding whether to grant a the appellate court. Finally, as is the case
patent. On the other hand, the limited with settlements of patent interferences,
involvement of third parties in the issuance settlement agreements resolving post-grant
and reexamination of patents reflects proceedings should be filed with the PTO
genuine concern to protect patent applicants and, upon request, made available to other
from harassment by competitors. This government agencies.
remains an important goal. To continue to
protect against the possibility of competitors Recommendation 2:
harrassing patent applicants, any new
procedure should be available only after a Enact Legislation to Specify that
patent issues. Challenges to the Validity of a
Patent Are To Be Determined
Because existing means for Based on a “Preponderance of the
challenging questionable patents are Evidence.”
inadequate, we recommend an
administrative procedure for post-grant An issued patent is presumed valid.
review and opposition that allows for Courts require a firm that challenges a patent
meaningful challenges to patent validity to prove its invalidity by “clear and
short of federal court litigation. To be convincing evidence.” This standard
meaningful, the post-grant review should be appears unjustified. A plethora of
allowed to address important patentability presumptions and procedures tip the scales
issues.26 The review petitioner should be in favor of the ultimate issuance of a patent,
required to make a suitable threshold once an application is filed. In addition, as
showing. An administrative patent judge many have noted, the PTO is underfunded,
and PTO patent examiners all too often do
not have sufficient time to evaluate patent
25
A biotechnology case, for example, can cost
applications fully. These circumstances
between five and seven million dollars and take two or suggest that an overly strong presumption of
three years to litigate. See Ch. 3. a patent’s validity is inappropriate. Rather,
26
courts should require only a “preponderance
At a minimum, patent challengers should be of the evidence” to rebut the presumption of
able to raise issues of novelty, nonobviousness, written
description, enablement, and utility. validity.
8

12. The PTO works under a number of facts, the PTO does not have facilities with
disadvantages that can impede its ability to which to test the accuracy or reliability of
reduce the issuance of questionable patents. such information.
Perhaps most important, the courts have
interpreted the patent statute to require the Moreover, presumptions in PTO
PTO to grant a patent application unless the rules tend to favor the issuance of a patent.
PTO can establish that the claimed invention For example, “[i]f the examiner does not
does not meet one or more of the produce a prima facie case [of obviousness],
patentability criteria. Once an application is the applicant is under no obligation to
filed, the claimed invention is effectively submit evidence of nonobviousness.”29
presumed to warrant a patent unless the PTO Similarly, “[o]ffice personnel . . . must treat
can prove otherwise. as true a statement of fact made by an
applicant in relation to [the asserted
The PTO’s procedures to evaluate usefulness of the invention], unless
patent applications seem inadequate to countervailing evidence can be provided that
handle this burden. The patent prosecution shows that one of ordinary skill in the art
process involves only the applicant and the would have a legitimate basis to doubt the
PTO. A patent examiner conducts searches credibility of such a statement.”30 Likewise,
of the relevant prior art,27 a focal point of the “[t]here is a strong presumption that an
examination process, with only the adequate written description of the claimed
applicant’s submissions for assistance. The invention is present when the application is
patent applicant has a duty of candor to the filed.”31
PTO, but that duty does not require an
applicant to search for prior art beyond that The PTO’s resources also appear
about which the applicant already knows.28 inadequate to allow efficient and accurate
If the patent applicant makes assertions or screening of questionable patent
files documentary evidence regarding certain applications. Patent applications have
doubled in the last twelve years and are
increasing at about 10% per year.32 With
27 yearly applications approximating 300,000,
“Prior art” consists of materials – often
patents and publications, although affidavits and testimony
also may present prior art – that reflect one or more of the
29
features or elements of the claimed invention. An MPEP § 2142.
invention is “obvious” if it does not represent a sufficient
step beyond the prior art. 30
United States Patent and Trademark Office,
Utility Examination Guidelines, 66 Fed. Reg. 1092, 1098-
28
The PTO’s Manual of Patent Examining 99 (2001).
Procedure (MPEP) states that the agency “does not
investigate” duty of disclosure issues and “does not . . . 31
United States Patent and Trademark Office,
reject” applications on that basis. See United States Patent
Guidelines for Examination of Patent Applications under
and Trademark Office, Manual of Patent Examining
the 35 U.S.C. 112 ¶ 1, “Written Description” Requirement,
Procedure § 2010 (8th edition 2001) (explaining that such
66 Fed. Reg. 1099, 1105 (2001).
PTO determinations “would significantly add to the
expense and time involved in obtaining a patent with little
32
or no benefit to the patent owner or any other parties with Lerner 2/20 at 157; James Langenfeld,
an interest”), available at Innovation, Competition, and Intellectual Property:
http://www.uspto.gov/web/offices/pac/mpep/mpep.htm Providing an Economic Framework (2/20/02) (slides) at 6,
(hereinafter MPEP). at http://www.ftc.gov/opp/intellect/langenfeld.pdf.
9

13. they arrive at the rate of about 1,000 each grant of a patent application, combined with
working day.33 A corps of some 3,000 the limited resources available to the PTO,
examiners must deal with the flood of counsel against requiring “clear and
filings.34 Hearings participants estimated convincing evidence” to overturn that
that patent examiners have from 8 to 25 presumption. We believe the “clear and
hours to read and understand each convincing evidence” burden can undermine
application, search for prior art, evaluate the ability of the court system to weed out
patentability, communicate with the questionable patents,36 and therefore we
applicant, work out necessary revisions, and recommend that legislation be enacted to
reach and write up conclusions. Many found amend the burden to a “preponderance of the
these time constraints troubling.35 Hearings evidence.”
participants unanimously held the view that
the PTO does not receive sufficient funding Recommendation 3:
for its responsibilities.
Tighten Certain Legal Standards
Finally, the PTO grants patents based Used to Evaluate Whether A
only on the “preponderance of the Patent Is “Obvious.”
evidence.” This standard applies in the
context of an underlying presumption that Patent law precludes patenting if the
the patent should be granted unless the PTO differences between the claimed invention
can prove otherwise. It does not seem and the prior art37 are such that “the subject
sensible to treat an issued patent as though it matter as a whole would have been obvious
had met some higher standard of at the time the invention was made to a
patentability. person having ordinary skill in the art.”38
“Nonobviousness asks whether a
Defenders of the application of the development is a significant enough
“clear and convincing” evidence standard technical advance to merit the award of a
urged that a finding of patent validity by a patent.”39 A proper application of this
neutral government agency using a statutory requirement is crucial to prevent
knowledgeable examiner justifies placing a the issuance of questionable patents,
heavy burden on those who challenge a including trivial patents and patents on
patent’s validity. We disagree. inventions essentially already in the public
Presumptions and procedures that favor the domain. The courts have developed a
variety of tests to evaluate the obviousness
of a claimed invention. Two in particular –
33
Chambers 2/8 (Patent Law for Antitrust
Lawyers) at 86 (hereinafter 2/8 (Patent Session)).
36
34 See T.S. Ellis 7/11 at 119-20.
Chambers 2/8 (Patent Session) at 84.
37
35 See supra note 25.
See, e.g., Dickinson 2/6 at 64-65 (“Patent
examiners need more time to examine.”); Kirschner 2/26 at 38
35 U.S.C. § 103.
242-43 (time available “clearly inadequate” for a
meaningful examination of a biotech patent application);
39
Kesan 4/10 at 100 (time constraints do not allow adequate See MERGES & DUFFY , PATENT LAW AND
search for software prior art). POLICY: CASES AND MATERIALS at 644.
10

14. the “commercial success test” and “the sufficiently searching inquiry when they
suggestion test” – require more thoughtful conclude that commercial success
application to weed out obvious patents. demonstrates a claimed invention is not
obvious. Under current standards, if the
a. In applying the “commercial patent holder shows that the claimed
success” test, 1) evaluate on a case- features of the patent are coextensive with
by-case basis whether commercial those of a successful product, then it is
success is a valid indicator that the presumed that the invention – rather than
claimed invention is not obvious, other factors – caused the commercial
and 2) place the burden on the success. The burden shifts to the challenger
patent holder to prove the claimed to present evidence to rebut that
invention caused the commercial presumption.40
success.
This test fails to ask, first, whether
The Supreme Court has advised that, factors other than the invention may have
in some circumstances, courts may consider caused the commercial success. By contrast,
the commercial success of a claimed the PTO properly requires that commercial
invention to indicate that it was not obvious. success be “directly derived from the
For example, in some cases early in the invention claimed” and not the result of
twentieth century, courts found the “business events extraneous to the merits of
commercial success of an invention that the claimed invention.”41 Second, the
satisfied a long-felt need that had resisted judicial standard too easily shifts the burden
the efforts of others to solve the problem to the challenger. The patent holder is the
tended to show the claimed invention was best source of information on what has
not obvious. caused the commercial success of its product
and should be required to show that, in fact,
Commercial success can result from the claimed invention caused the
many factors, however, some of which have commercial success.
nothing to do with the claimed invention.
For example, marketing, advertising, or an b. In applying the “suggestion” test,
incumbent’s unique advantages may cause assume an ability to combine or
commercial success. An undue reliance on modify prior art references that is
commercial success to show nonobviousness consistent with the creativity and
can raise a number of competitive concerns. problem-solving skills that in fact
Commercially successful inventions may be are characteristic of those having
more likely than others to occur even ordinary skill in the art.
without the prospect of a patent. Patents on
commercially successful products are more If the prior art already would have
likely to confer market power than those on suggested the claimed invention, then the
less successful products.
40
Certain patent experts and other See HARMON, PATENTS AND THE FEDERAL
CIRCUIT at 169-70.
Hearings participants expressed concern that
courts and juries sometimes fail to use a 41
MPEP § 716.03(b).
11

15. claimed invention is obvious. If not, then It is important to protect against the
the claimed invention is not obvious. The issuance of obvious patents that may confer
“suggestion test” thus asks a helpful market power and unjustifiably raise costs.
question – that is, to what extent would the Requiring concrete suggestions beyond
prior art “have suggested to one of ordinary those actually needed by a person with
skill in the art that this process should be ordinary skill in the art,45 and failing to give
carried out and would have a reasonable weight to suggestions implicit from the art
likelihood of success.”42 The Federal Circuit as a whole and from the nature of the
justifiably has sought to protect inventors problem to be solved, is likely to result in
from findings of obviousness based purely patents on obvious inventions and is likely
on hindsight. “Good ideas may well appear to be unnecessarily detrimental to
‘obvious’ after they have been disclosed, competition. The Federal Circuit’s most
despite having been previously recent articulations of the suggestion test
unrecognized.”43 The Federal Circuit also seem to signal greater appreciation of these
has sought to ensure that the PTO provides issues and would better facilitate
an administrative record susceptible to implementation of the test in ways sensitive
judicial review. to competitive concerns.
Hearings participants expressed Recommendation 4:
concern, however, with some recent
applications of the suggestion test. To show Provide Adequate Funding for the
that a claimed invention is obvious, some PTO.
cases seem to require the PTO to point to
particular items of prior art that concretely Participants in the Hearings
suggest how to combine all of the features of unanimously expressed the view that the
a claimed invention. Such an application of PTO lacks the funding necessary to address
the suggestion test may have found that the issues of patent quality. Presidential patent
claimed invention of the Selden patent – that review committees have long advocated
is, putting a gasoline engine on a carriage – more funding for the PTO to allow it to
was not obvious, because there was no improve patent quality. 46 As recently as
document that suggested that combination. 2002, the Patent Public Advisory Committee
The invention likely was obvious, however; stated that the PTO “faces a crisis in funding
“[e]verybody seemed to know that if you got
a new engine of any kind, you would put it
45
on a carriage.”44 Cf. Barr 10/30 at 53-54 (arguing that current
obviousness standards fail to reflect the skill of his
company’s engineers, who “every day” independently
invent things that have been deemed nonobvious).
42
Brown and Williamson Tobacco Corp. v.
46
Philip Morris, 229 F.3d 1120, 1124 (Fed. Cir. 2000) E.g., THE ADVISORY COMMISSION ON PATENT
(emphasis added). LAW REFORM, REPORT TO THE SECRETARY OF COMMERCE
(Aug. 1992), available at
43 http://world.std.com/obi/USG/Patents/overview; REPORT
Arkie Lures, Inc. v. Gene Larew Tackle, Inc.,
OF THE INDUSTRIAL SUBCOMM. FOR PATENT AND
119 F.3d 953, 956 (Fed. Cir. 1997).
INFORMATION POLICY OF THE ADVISORY COMM. ON
INDUSTRIAL INNOVATION, REPORT ON PATENT POLICY
44
Duffy 7/10 at 132-33. (1979).
12

16. that will seriously impact . . . the quality of . examiner requests them. These statements
. . issued patents.”47 The FTC strongly could materially enhance examiners’ ability
recommends that the PTO receive funds to provide quality patent examinations by
sufficient to enable it to ensure quality drawing more fully on the patent applicant’s
patent review. knowledge base to identify the most relevant
portions of prior art references.
Recommendation 5:
b. Encourage the use of examiner
Modify Certain PTO Rules and inquiries under Rule 105 to obtain
Implement Portions of the PTO’s more complete information, and
21st Century Strategic Plan. reformulate Rule 105 to permit
reasonable follow-up.
a. Amend PTO regulations to require
that, upon the request of the PTO Rule 105 permits examiners to
examiner, applicants submit request “such information as may be
statements of relevance regarding reasonably necessary to properly examine or
their prior art references. treat the matter [under examination].”50 The
Commission recommends that the PTO
Some Hearings participants asserted make a concentrated effort to use examiner
that, far from holding back information, inquiries more often and more extensively.
patent applicants tend to provide an As one panelist emphasized, “to get better
examiner with numerous prior art citations, quality and shrink the amount of work,”
resulting in lots of “information,” but little there is a need to seek more knowledge in
“knowledge.”48 The 2002 version of the the possession of applicants, who typically
PTO’s 21st Century Strategic Plan proposed “know more about the technology than the
requiring applicants that cited more than 20 examiner does, and [know] where you might
prior art references to provide statements to find something that might be relevant.”51 To
explain the relevance of references, but the be fully effective, however, Rule 105 should
PTO has now withdrawn that proposal.49 be amended so that applicants who reply that
The FTC’s proposal is more modest than the they do not know the answer to the
PTO’s original proposal; it would require examiner’s inquiry, or that the necessary
relevance statements only when the information “is not readily available to the
party or parties from which it was
requested” are not accepted as a complete
47
PATENT PUBLIC ADVISORY COMMITTEE,
reply,52 as they are now, but rather are
ANNUAL REPORT 6 (Nov. 29, 2002), available at treated as responses on which the examiner
http://www.uspto.gov/web/offices/com/advisory/acrobat/pp may follow up.
acannual12-05-02.pdf.
48
E.g., Kesan 10/25 at 60-61.
50
37 C.F.R. § 1.105.
49
United States Patent and Trademark Office
21st Century Strategic Plan, Mandatory Information 51
Kushan 4/11 at 89.
Disclosure Statements (IDS), P-09 at 3 (June 3, 2002). See
The 21st Century Strategic Plan, available at
52
www.uspto.gov/web/offices/com/strat21/index.htm. See 37 C.F.R. § 1.105.
13

17. c. Implement the PTO’s Recommendation 6:
recommendation in its 21 st Century
Strategic Plan that it expand its Consider Possible Harm to
“second-pair-of-eyes” review to Competition – Along with Other
selected areas. Possible Benefits and Costs –
Before Extending the Scope of
Second-pair-of-eyes review allows Patentable Subject Matter.
the PTO quickly to flag issues that need
further attention by the examiner or the Section 101 of the Patent Act states,
examiner’s supervisor. The PTO first used “Whoever invents or discovers any new and
this method to improve the quality of useful process, machine, manufacture, or
business method patents, and it received composition of matter, or any new and
good reviews from participants in the patent useful improvement thereof, may obtain a
system. The Commission believes that patent.”54 Despite this broad mandate,
expanding this program to fields with courts have long held certain types of
substantial economic importance, such as inventions unpatentable. Traditional
semiconductors, software, and common law exceptions include phenomena
biotechnology, as well as other new of nature, abstract intellectual concepts,
technologies as they emerge, could help to mental steps, mathematical algorithms with
boost patent quality in areas where it will no substantial practical application, printed
make the most difference. matter, and, for many years, business
methods.
d. Continue to implement the
recognition that the PTO “forges a Over the past twenty-five years,
balance between the public’s however, the scope of patentable subject
interest in intellectual property and matter has expanded significantly. For
each customer’s interest in his/her example, the Supreme Court, through two
patent and trademark.”53 landmark decisions in 1980, held that both
man-made, living organisms and computer
The PTO functions as a steward of software constitute patentable subject matter
the public interest, not as a servant of patent pursuant to Section 101. In 1999, the
applicants. The PTO must protect the public Federal Circuit ruled that business methods
against the issuance of invalid patents that can be patented. Some Hearings participants
add unnecessary costs and may confer claimed that patents on computer software
market power, just as it should issue valid and business methods are not necessary to
patents to encourage invention, disclosure, spur the invention, commercial
and commercial development. development, or public disclosure of
53
United States Patent and Trademark Office,
FY2002 Corporate Plan 28 (2001) (describing role of PTO
Under Secretary and Director), at
http://www.uspto.gov/web/offices/com/corpplan/fy2002/in
54
dex.html. 35 U.S.C. § 101.
14

18. software or business methods.55 Others In addition to questionable patents,
disagreed. Some Hearings participants other portions of the patent system raise
contended that software and business competitive concerns. This section briefly
method patents can raise significant describes each issue and the Commission’s
competitive concerns and deter innovation, recommendation(s) to address it.
especially because so much of the
innovation in those fields builds Recommendation 7:
incrementally on preceding work. This may
raise the potential for thickets of patents to Enact Legislation to Require
hinder, rather than accelerate, innovation Publication of All Patent
and commercial development. Applications 18 Months After
Filing.
The constitutional intention that
patents “promote the Progress of Science Until relatively recently, patents were
and useful Arts” should be taken into published only when issued; patent
account in interpreting the scope of applications were not published. During the
patentable subject matter under Section 101. time that would pass between the filing of a
Decisionmakers should ask whether granting patent application and the issuance of a
patents on certain subject matter in fact will patent, an applicant’s competitor could have
promote such progress or instead will hinder invested substantially in designing and
competition that can effectively spur developing a product and bringing it to
innovation. Such consideration is consistent market, only to learn, once the patent finally
with the historical interpretation of issued, that it was infringing a rival’s patent
patentable subject matter, which implicitly and owed significant royalties. This
recognizes that granting patent protection to scenario disrupts business planning, and can
certain things, such as phenomena of nature reduce incentives to innovate and discourage
and abstract intellectual concepts, would not competition.
advance the progress of science and the
useful arts. For future issues, it will be A relatively new statute requires that
highly desirable to consider possible harms most patent applications – all except those
to competition that spurs innovation – as filed only in the United States – be
well as other possible benefits and costs – published 18 months after filing. Patent
before extending the scope of patentable applicants are protected from copying of
subject matter. their inventions by statutory royalty rights, if
the patent ultimately issues. This new
III. Other Patent Laws and procedure appears to have increased
Procedures Also Raise business certainty and promoted rational
planning, as well as reduced the problem of
Competitive Concerns. unanticipated “submarine patents” used to
hold up competitors for unanticipated
royalties. For these reasons, Hearings
55
See generally Ch. 3. See also Robert M. participants advocated expanding the 18-
Hunt, You Can Patent That? Are Patents on Computer month publication requirement to include
Programs and Business Methods Good for the Economy?,
Q1 BUSINESS REVIEW 5, 14 (2001).
patents filed only domestically, because such
15

19. patents may well have competitive proposed remedy for the opportunistic
significance. Protection from copying broadening of claims should also protect
similar to that already available for other such legitimate uses. Creating intervening
published applications should be extended to or prior use rights would most directly
those filing domestic patent applications as achieve this balance; it would cure potential
well, and any necessary protections for competitive problems without interfering
independent inventors also should be with legitimate needs for continuations.
considered in terms of their likely costs and Such rights should shelter inventors and
benefits. users that infringe a patent only because of
claim amendments following a continuation
Recommendation 8: or other similar application,56 provided that
the sheltered products or processes are
Enact Legislation to Create developed or used (or the subject of
Intervening or Prior User Rights substantial preparation for use) before the
to Protect Parties from amended claims are published.
Infringement Allegations That
Rely on Certain Patent Claims Recommendation 9:
First Introduced in a Continuing
or Other Similar Application. Enact Legislation to Require, As a
Predicate for Liability for Willful
After publication of its patent Infringement, Either Actual,
application, an applicant may continue to Written Notice of Infringement
amend its claims. Through this claim from the Patentee, or Deliberate
amendment process, a patent that states Copying of the Patentee’s
broader claims than those published at 18 Invention, Knowing It to Be
months can still emerge. If the applicant Patented.
uses procedures such as continuing
applications to extend the period of patent A court may award up to three times
prosecution, the potential for the amount of damages for a defendant’s
anticompetitive hold up increases. Indeed, willful infringement of a patent – that is, the
several panelists asserted that some defendant knew about and infringed the
applicants keep continuing applications patent without a reasonable basis for doing
pending for extended periods, monitor so. Some Hearings participants explained
developments in the relevant market, and that they do not read their competitors’
then modify their claims to ensnare patents out of concern for such potential
competitors’ products after those treble damage liability. Failure to read
competitors have sunk significant costs in competitors’ patents can jeopardize plans for
their products. Patent reform efforts have a noninfringing business or research
long focused on how to remedy strategy, encourage wasteful duplication of
opportunistic broadening of claims to effort, delay follow-on innovation that could
capture competitors’ products.
Legitimate reasons exist to amend 56
See infra Ch. 4(II)(C)(1) for a description of
claims and use continuing applications. Any the types of filings that should be covered.
16

20. derive from patent disclosures, and consideration and incorporation of economic
discourage the development of competition. insights in their decisionmaking.
It is troubling that some businesses IV. The FTC Will Pursue Steps
refrain from reading their competitors’ to Increase Communication
patents because they fear the imposition of
between Antitrust Agencies
treble damages for willful infringement.
Nonetheless, infringers must not be allowed and Patent Institutions.
to profit from knowingly and deliberately
using another’s patented invention due to a Many Hearings participants
low likelihood that the patent holder can expressed concern that the patent and
afford to bring suit or obtain substantial competition communities appear to exist in
damages. The FTC’s recommendation separate worlds, interacting infrequently at
would permit firms to read patents for their best. Patent practitioners and scholars
disclosure value and to survey the patent further expressed concern that patent
landscape to assess potential infringement institutions do not always fully understand
issues, yet retain a viable willfulness or accommodate economic learning or
doctrine that protects both wronged competition concerns. Increased interaction
patentees and competition. appears desirable to foster better
understanding and communication between
Recommendation 10: the patent and competition communities.
Expand Consideration of The FTC wishes to do its part to
Economic Learning and improve communication between the
Competition Policy Concerns in competition and patent communities.
Patent Law Decisionmaking. Accordingly, the FTC will pursue the steps
listed below.
The Supreme Court has made clear
in several decisions that there is room for A. The FTC Will Increase its
policy-oriented interpretation of the patent Competition Advocacy Role
laws.57 Indeed, to find the proper balance through Filing Amicus Briefs in
between patent and competition law, such Appropriate Circumstances.
policy-oriented interpretations are essential.
Over the past twenty-five years, the The Commission will renew its
incorporation of economic thinking into commitment to the filing of amicus briefs in
antitrust has provided significant insights important patent cases that can affect
that have substantially improved the competition, as well as in cases at the
development of antitrust law and intersection of patent and antitrust law.
competition policy. The Federal Circuit and When such cases have high stakes for the
the PTO may also benefit from much greater 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.
57
See, e.g., supra notes 10-12; Graham v. John
Deere Co., 383 U.S. 1 (1966).
17

21. B. In Appropriate Circumstances, the V. Conclusion
FTC Will Ask the PTO Director to
Reexamine Questionable Patents Both patents and competition make
that Raise Competitive Concerns. significant contributions to innovation,
consumer welfare, and our nation’s
A collective action problem may prosperity. We recognize the importance of
frustrate business challenges to questionable the patent system; the recommendations in
patents. Instead of challenging a patent’s this Report are designed to increase the
validity, many firms may simply license it, likelihood that the valid patents are issued
because no single firm has the incentive to and upheld. There is broad consensus on the
finance an expensive legal challenge that significant role that these patents can play to
would benefit all of the affected firms, not spur innovation and to encourage the
just the challenger. An enforcement agency, disclosure and commercial development of
however, can consider the cost of a inventions.
questionable patent to an entire industry and
to consumers and can solve this coordination The importance of competition as a
problem. In appropriately narrow spur to innovation also should be
circumstances, the FTC will do so. recognized. More patents in more industries
and with greater breadth are not always the
C. The FTC Will Encourage best ways to maximize consumer welfare. A
Increased Communication questionable patent can raise costs and
between Patent Institutions and prevent competition and innovation that
the Antitrust Agencies. otherwise would benefit consumers. The
FTC looks forward to working closely with
One means of improving interagency the PTO and other patent organizations to
communication would be the establishment increase communication and include all
of a Liaison Panel between the FTC and the parties in discussion and implementation of
DOJ’s Antitrust Division (collectively, the the FTC’s recommendations.
Antitrust Agencies) and the PTO. Such a
panel could function as a practical, policy-
oriented group designed to permit the
exchange of views on important issues as
they arise. Another means would be to
establish an Office of Competition
Advocacy within the PTO. Such an office
could, when appropriate, advise PTO
policymakers about the likely competitive
impact and economic consequences of
policy decisions. A final means would be to
request that Congress amend the
membership categories of the Patent Public
Advisory Committee (“P-PAC”) to include
competition experts and economists.
18

22. TABLE OF CONTENTS
EXECUTIVE SUMMARY
CHAPTER 1 INTRODUCTION AND BACKGROUND
I. THE RELATIONSHIP OF COMPETITION AND PATENT LAW AND POLICY
A. Each Policy Reflects Fundamental Assumptions about How Best to Organize
an Economy and Encourage Innovation
B. Competition and Patent Policy Both Promote Consumer Welfare Over Time,
and Competition and Patent Policy Generally Work Well Together
C. Tension Can Arise Between Competition and Patent Law and Policy in Certain
Limited Circumstances
II. VIEWS ON HOW BEST TO BALANCE COMPETITION AND PATENTS TO
ACHIEVE CONSUMER WELFARE HAVE VARIED WIDELY OVER TIME
A. For Much of the Twentieth Century, Patent and Antitrust Law Have Traded
Ascendency with Each Other
B. 1980-1990: Congress and the Courts Strengthen Patents, and Antitrust
Incorporates an Updated Economic Framework
III. COMPETITION AND PATENT POLICY CONTINUE TO SEEK A PROPER
BALANCE, AND GROWTH OF THE KNOWLEDGE-BASED ECONOMY ADDS
NEW CHALLENGES
A. Antitrust and Patent Policy Have Worked to Achieve Better Balance
B. The Growth of the Knowledge-Based Economy Creates Ongoing Controversy
and Challenges Competition and Patent Policy to Continue Seeking a Better
Balance
IV. THE HEARINGS EXAMINED THE CURRENT BALANCE OF COMPETITION
AND PATENT LAW AND POLICY IN FOSTERING INNOVATION
A. The Hearings Did Not Address Certain Fundamental Questions or Issues
with International Ramifications

23. B. The Hearings Examined the Appropriate Balance of Competition and Patent
Law and Policy from a Competition and Economic Perspective
C. Organization of the Report
CHAPTER 2 THE ROLE OF COMPETITION AND THE PATENT SYSTEM IN
SPURRING INNOVATION
Introduction
I. PATENTS’ EFFECTS ON STAND-ALONE INNOVATION
A. Patents Can Spur Stand-Alone Innovation
B. Costs Of, and Limits To, Patents’ Power to Spur Stand-Alone Innovation
II. COMPETITION’S EFFECTS ON INITIAL AND FOLLOW-ON INNOVATION
A. Competition Can Spur Innovation, Whether Initial or Follow-On
B. Costs Of, and Limits To, Competition’s Power to Spur Innovation
III. PATENTS’ EFFECTS ON FOLLOW-ON INNOVATION
A. The Roles of Managed and Independent Follow-On Innovation
B. Follow-On Innovation in the Face of a Single Blocking, Initial Patent
C. Follow-On Innovation in the Face of Multiple Existing Patents
Conclusion
CHAPTER 3 BUSINESS TESTIMONY: CURRENT INNOVATION
LANDSCAPE IN SELECTED INDUSTRIES
I. SUMMARY
II. THE PHARMACEUTICAL INDUSTRY
A. Introduction
B. Industry Description
C. The Role of Patents in Spurring Pharmaceutical Innovation

24. D. The Role of Competition in Spurring Pharmaceutical Innovation
E. The FTC’s Pharmaceutical Industry Enforcement Actions and Generic Drug Study
F. Conclusion
III. THE BIOTECHNOLOGY INDUSTRY
A. Introduction
B. Industry Description
C. The Role of Competition in Spurring Biotechnology Innovation
D. The Implications of Patent Protection for Innovation
E. Licensing Practices for Biotechnology Research Tools
F. Conclusion
IV. THE COMPUTER HARDWARE INDUSTRIES, INCLUDING
SEMICONDUCTORS
A. Introduction
B. Industry Description
C. The Role of Competition in Spurring Computer Hardware Innovation
D. Alternative Means of Fostering Innovation
E. The Implications of Patent Protection for Innovation
F. Tools to Navigate the Patent Thicket
G. Conclusion
V. THE SOFTWARE AND INTERNET INDUSTRIES
A. Introduction
B. Industry Description
C. The Role of Competition in Spurring Software and Internet Innovation
D. Alternative Means of Fostering Innovation

25. E. The Implications of Patent Protection for Innovation
F. Licensing Strategies to Navigate the Patent Thicket
G. Conclusion
CHAPTER 4 COMPETITION PERSPECTIVES ON SUBSTANTIVE
STANDARDS OF PATENTABILITY
I. STATUTORY STANDARDS OF PATENTABILITY
II. THE INTERPRETATION AND APPLICATION OF THE STANDARDS OF
PATENTABILITY
A. The Interpretation and Application of the Nonobviousness Requirement
B. Enablement, Written Description, and Best Mode
C. Other Doctrines that Affect Patent Breadth
D. Utility and Research Issues
E. Business Method Patents: An Illustration of Transition Issues
III. CONCLUSION
CHAPTER 5 COMPETITION PERSPECTIVES ON HOW PROCEDURES AND
PRESUMPTIONS AFFECT PATENT QUALITY
I. IMPACT ON COMPETITION
II. PATENT EXAMINATION
A. Data on Overall Performance
B. Ex Parte Nature
C. Analysis
III. REEXAMINATION, OPPOSITION, AND REVIEW
A. Current Procedures
B. Proposals for Reform

26. C. Analysis
IV. PATENT LITIGATION
A. General Trends
B. Presumption of Validity/Clear and Convincing Evidence
Recommendation
C. Willfulness/Treble Damages
Recommendation
V. CONCLUSION
CHAPTER 6 COMPETITION AND PATENT POLICY CAN AND SHOULD
WORK TOGETHER
Introduction
I. ANTITRUST AND PATENT LAW AND POLICY
A. Antitrust Law and Policy Can and Should Take Patent Policy into Account to
Promote Consumer Welfare Over Time
B. Patent Law and Policy Can and Should Take Competition Policy into Account
to Promote Consumer Welfare Over Time
II. THE FEDERAL CIRCUIT: GOALS, JURISDICTION, CHOICE OF LAW, AND
CASE LAW TRENDS
A. The Federal Circuit and its Intended Effect on the Law
B. Jurisdiction and Choice of Law Issues at the Federal Circuit
C. Trends in the Law of the Federal Circuit
III. INSTITUTIONAL CONSIDERATIONS FOR THE ANTITRUST ENFORCEMENT
AGENCIES AND THE PTO
A. Recommendations Relating to the PTO
B. The FTC Will Pursue Steps to Increase Communication Between Antitrust
Agencies and Patent Institutions

27. APPENDIX A CONTRIBUTORS TO FTC/DOJ HEARINGS
APPENDIX B PUBLIC COMMENTS
APPENDIX C GLOSSARY OF PATENT TERMS
APPENDIX D SELECTED FEDERAL STATUTES

28. CHAPTER 1 INTRODUCTION AND BACKGROUND
I. THE RELATIONSHIP OF COMPETITION AND PATENT LAW AND POLICY . . . . 3
A. Each Policy Reflects Fundamental Assumptions about How Best to
Organize an Economy and Encourage Innovation . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Competition Policy and Antitrust Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Patent Policy and Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B. Competition and Patent Policy Both Promote Consumer Welfare Over Time,
and Competition and Patent Policy Generally Work Well Together. . . . . . . . . . . 7
C. Tension Can Arise Between Competition and Patent Law and Policy in
Certain Limited Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Grant of a Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
a. Is the Patent Warranted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
b. Does the Grant of the Patent Confer Market Power on the
Patentholder or Unnecessarily Increase Transaction Costs? . . . . 11
2. Business Conduct with Respect to a Patent. . . . . . . . . . . . . . . . . . . . . . . 12
a. Is Antitrust Enforcement Warranted? . . . . . . . . . . . . . . . . . . . . . 13
b. Does Antitrust Enforcement Undermine the Incentives
Created by the Patent System? . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Enhancing Consumer Welfare Requires a Proper Balance of
Competition and Patent Law and Policy . . . . . . . . . . . . . . . . . . . . . . . . . 14
II. VIEWS ON HOW BEST TO BALANCE COMPETITION AND PATENTS TO
ACHIEVE CONSUMER WELFARE HAVE VARIED WIDELY OVER TIME. . . . . . 14
A. For Much of the Twentieth Century, Patent and Antitrust Law Have Traded
Ascendency with Each Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1. 1890-1930: Patents Receive Little Antitrust Scrutiny . . . . . . . . . . . . . . 15
2. 1930-1980: Antitrust Is Generally Ascendant. . . . . . . . . . . . . . . . . . . . . 15
B. 1980-1990: Congress and the Courts Strengthen Patents, and Antitrust
Incorporates an Updated Economic Framework. . . . . . . . . . . . . . . . . . . . . . . . . . 18
1. Congress and the Courts Strengthen Patents . . . . . . . . . . . . . . . . . . . . . . 18
a. Congress Creates the Court of Appeals for the
Federal Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
b. The Supreme Court Interprets Patentable Subject
Matter Broadly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2. Antitrust Incorporates an Updated Economic Framework. . . . . . . . . . . . 22

29. III. COMPETITION AND PATENT POLICY CONTINUE TO SEEK A PROPER
BALANCE, AND GROWTH OF THE KNOWLEDGE-BASED ECONOMY ADDS
NEW CHALLENGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
A. Antitrust and Patent Policy Have Worked to Achieve Better Balance . . . . . . . . 23
1. Antitrust Policy Has Continued to Implement New Economic
Learning in Addressing the Intersection of Antitrust and Patents. . . . . . 23
2. Patent Policy Has Implemented Certain Reforms and Rules that
Can Lessen Anticompetitive Conduct and Increase Competition . . . . . . 26
a. Congress Enacted the American Inventors Protection
Act of 1999 (AIPA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
b. The Federal Circuit Has Increased Business Certainty and Has
Noted Competition Concerns in Certain Contexts . . . . . . . . . . . 28
c. The PTO Has Implemented Certain Reforms that Can Aid
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
B. The Growth of the Knowledge-Based Economy Creates Ongoing Controversy
and Challenges Competition and Patent Policy to Continue Seeking a Better
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1. Follow-On Innovation, Product Commercialization, and Patent
Proliferation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2. Procedures that Third Parties Can Use to Challenge Questionable
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3. Patent Prosecutions and Examinations within the PTO . . . . . . . . . . . . . . 33
4. Patent Quality and Patentable Subject Matter. . . . . . . . . . . . . . . . . . . . . . 35
IV. THE HEARINGS EXAMINED THE CURRENT BALANCE OF COMPETITION
AND PATENT LAW AND POLICY IN FOSTERING INNOVATION. . . . . . . . . . . . . 35
A. The Hearings Did Not Address Certain Fundamental Questions or Issues
with International Ramifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
B. The Hearings Examined the Appropriate Balance of Competition and Patent
Law and Policy from a Competition and Economic Perspective . . . . . . . . . . . . . 36
1. The Legal System Should Provide Efficient Incentives for All Types of
Innovation, Including Both Single-Stage and Follow-On Innovation . . . 36
2. Safeguard the Patent System’s Disclosure Function . . . . . . . . . . . . . . . . 37
3. The Patent System Should Avoid Creating or Upholding Unwarranted
Patents that Confer Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4. The Patent System Should Rely on Substantive Standards and Procedures
that Minimize the Sum of Error and Process Costs and the Detrimental
Effects of Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
C. Organization of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38