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Lrflg#5Arv>i1"o A£>A(±, K»##^@kATmg»g#t'kOx 4a, sf$8 S8SJ fib cd A A !±EjtLrHEtoAaife*$i6, e^SSitroSjlCinjitrciXE'M-^t-S L L SrgMi: LS LA. SaftISS# 00-01 m Iff < M0;£A h i Hif 21 1ftS5®xX- x□ > at 7®SiJS • ffiAeBfg LT, ft*¥frffia®ft«?>®«lH8MfteWli?S. ##MT##ft# %®i*se. s 6ict$ffi$Es-5:x5ttto$$®B(ieAt#ii5nT®$f. 2001 ¥ 4 flA-btt. 3$iLffRftAEES«E-^E%Flf7)7 t4sai*TF®iK»l; t)HfB®E%StiSIW?>*Stoe%tiMA UTte«)L$T, Stltjto^oH# to»W%»i*®4=T, i|5El>^iflC$fc7)t5E%M%$SM7-5£:Sn, E*##ft#e A# • SHf-Stt* ftE?EJ$$e4Auti¥ik® ARHSSiftT® $¥ = f fl)*l3®@% is a t; o * if-s fc * c a. a w w e ft ® s ¥tit 13 ¥ 3 fl iffflffiAB*EMtft«JgSSB£ Aft & li A A O #3# ' 1### EE# y 9 — • totoifltii «S ® IE arosmta^sm • %# Martin J. Adelman Professor of Law and Director, Intellectual Property Law Program, George Washington University La School. Sonia Baldia S.J.D., Dinwoodey Center for Intellectual Property Studies, George Washington University Law School. Q. Todd Dickinson Former Under Secretary of Commerce for Intellectual Property & Director of the U.S. Patent and Trademark Office. Sachi Hatakenaka Doctoral Candidate, Massachusetts Institute of Technology. Roland L. Hjorth Dean, University of Washington, School of Law. Huan-Yi Lin S.J.D. Candidate, George Washington University Law School. Niels Reimers Director Emeritus, Stanford University Office of Technology Licensing. Andrea G. Reister Counsel, Covington & Burling. Toshiko Takenaka Associate Professor and Director of the Center for Advanced Study and Research on Intellectual Property, University of Washington, School of Law. Li Westerlund S.J.D., Stockholm University Law School. Scholar, George Washington University Law School Dean Alderucci Chief Counsel, Intellectual Property, Walker Digital Corporation. David Carlson Partner, Seed IP Law Group. Sonya Erickson Director, Venture Law Group. Eliab S. Erukar Associate, Cooley Goodward LLP. Judith Ann Hasko Partner, Cooley Goodward LLP. David Maki Vice President, Trandegar Investments of Counsel, Seed IP Law Group. Chun Ng Partner, Brakely, Sokoloff, Taylor & Zaffman. # #- SE1WSSE fflSft E Mllfi A B Sft Mffl?iAB*eHt$«S#toS HISW%t8ABE EE T 105-0001 ITS 19# 5 9 TEL : 03-3591-6202 FAX : 03-3592-1368 E-mail : [email protected] B * ...... i ...... V mi# ...... 1 ^2# g#^#^$$X_6m^(D^0^:MIT(DL/<^...... 14 ms# <> M cio ^ < t >x ...... 23 %%4# 21 #E(D^069Mjg#(D#m...... 31 ms# ...... 47 63 m?# ...... 73 1 9S/>h>±#(D^...... 73 2 ...... 74 75 4 ^ >7 ...... 76 5 ...... 78 6 ...... 79 7 ...... 80 8 ...... 81 9 ...... 82 #8# #:f (h/W l/T— " " 85 m9# ;w^7^y ...... 91 mio# ...... 100 Abstract of the research This report was made for promotion of cooperation among industry, academia, and government centering on the National Institute of Advanced Industrial Science and Technology. The Chapter 1, “Tangible Research Property in the 21st Century from the viewpoint of Universities” was written by Mr. Niels Reimers, Director Emeritus of Stanford University Office of Technology Licensing. When one considers the term “intellectual property ”, what first comes to mind are the intellectual property rights of patents and copyrights. Here the rapidly growing area of licensing by universities of what is being called Tangible Research Property is described. The Chapter 2, “Supporting Organizations of Industrial-Academia Cooperation- Mechanisms of MIT” was written by Dr. Sachi Hatakenaka, who majors management in the MIT. It is shown that various forms of industrial-academia cooperation, not only licensing but also Industrial Liaison Program, consortium, individual research supporting projects, and so on. In MIT, researchers are always asked what is an actual impact of their research. The Chapter 3, “Licensing and Technology Transfer in India” was written by Dr. Sonia Baldia, research associate of George Washington University Law School. Beginning in 1991, India substantially liberalized its regulatory regime by making watershed reforms to its industrial policy and making the investment climate more conductive to foreign investment and technology transfer. The Chapter 4, “Intellectual Property Trends for the 21st Century: The Road Ahead” was written by Mr. Q. Todd Dickinson, Former Under Secretary of Commerce for Intellectual Property & Director of the U.S. Patent and Trademark Office. In this review he mentioned the White Paper on so-called “patent pooling ” to analyze whether this traditional means of dealing with patent layering might be appropriately applied in biotechnology. The Chapter 5, “Managing Intellectual Property Assets and Current Trends in U.S. Patent Law” was written by Ms. Andrea Reister, Attorney at Covington & Bruling. By developing and maintaining the IP matrix in the manner described here, it is possible to identify what technology and intellectual property assets are needed for a project, and to make an assessment of “build v. buy ” for the technology. The Chapter 6, “Comparative Study of Examination Guidelines for Computer-Related Inventions between United States and Japan ” was written by Mr. Huan Yi Lin, S.J.D. candidate of George Washington University Law School. This chapter compares criteria for patent eligibility and non obviousness of computer-related inventions. i The Chapter 7 is based on a series of hearings from lawyers in Seattle, where biotech industry and IT companies are very active. Two professors from University of Washington, Prof. Roland Hjorth, dean of School of Law, and Prof. Toshiko Takenaka, director of the Center for Advanced Study and Research on Intellectual Property (CASRIP), mentioned new programs of intellectual property or business law aiming at providing high-tech industries with the specialists of high-tech related laws. The Chapter 8, “Patents and Biotech Inventions • the Law and R&D Contracts ” was written by Dr. Li Westerlund, Stockholm University and George Washington University. In today ’s business environment, R&D contracts is often vital for commercial success of, for instance, pharmaceutical companies. The Chapter 9, “A Nobel Trend of Biotechnology Patents” is based on a lecture Prof. Adelman made in the symposium held by JITA and RCAST on March 22. He argued based on the decision of “Amgen, Inc., Plaintiff, v. Hoechst Marion Roussel, Inc. and Transkaryotic Therapies, Inc., Defendants.” in United States District Court for the District of Massachusetts on January 19, 2001. The Chapter 10 summarizes the whole report and makes suggestions to utilize this knowledge to IP management in the National Institute of Advanced Industrial Science and Technology or other public institutions. n USE A1"S A A £ B to A L T& £ flit amtcMf st)©x&s. BlSTIi. A^tc*IfZftBCDfJfftgiM (TRP) ©mD#©A#C6tiA. B*lcj3tt-5tt $se®K*ttc:n$T-H, t>x#4-&R3 AndXx-XcS'd'ixitt)©©*!.- 7)Vj:£nT£&7)>-bfc/»i, i.5©i/j>l£*>^'A(::iot, TRP SMfctBxT B 2 ST’tt, E#aW5rSx«.fi^®*D^fCQ®T, ?tfa-tryis*f (MIT) © MJSMlLifco 5'f-k>x>X'/£WcA A$-Sf\ -f >X'X h U 7)1/ • Uxv'X-v’nifxA (ILP), 3>V-->7A, flSSiMJEASVn'Xi^ h&A. fils &l/^)l/T©S»a#^'fftofl T©SC AA%£flT©S. E^StoflcttoMAUT. ^©E^^mBM-TX/^X HIM egicMtfiaj;g^mmemscxt>e$T&s 5. B 3 Ski, j£±EK©ft«#e©WiJAUT, •T>K£®0±tffc, ftAUTWETSO, A#V»&%#M^bABAA%m&7 0, *fm©##&j: B4Stt. 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SiWIJElSeDilW&ffS t A afSifciblXi&ll&lilBi: LTdsAA&fro/Zc Vll 1 # ' 7<7-7 #^ijT&6o W'U, ±#^7 96-517 (;i< ' F-;bm) 1:3:0, ^16 10 ^6 20 TRP (D7 TRP^(D77tx^m WAflflkL TRP^(D77t7(D{Sm(!:, TRP FU h lx — F * 7 — 7 U y F $> <5 IU3 Bailment (Sib : H7i# U PR b tl /iSW • A^lTW/5(DT&tU3, W#a9^:f^#13^^^^Lu TRP (hLT(%)77H^-7-' 77 F7j:7(7)7 T& /:57o -l TRP^^# • ## • Wi7 t~^ 1. JtMtb & 'r ~~ 7 s (n > b° ul — ^ — • V ~7 (D# o' ^ (D33T&6o -2 “Tangible Intellectual Property in the 21st Century from the Viewpoint of Universities” Niels Reimers, Presented March 22, 2001 at the Conference on Intellectual Property Law in the 21st Century. 1. Introduction When one considers the term “intellectual property ”, what first comes to mind are the intellectual property rights of patents and copyrights. These property rights can be considered intangible legal rights; that is, your right is not that of possession of a tangible item but the intangible legal right to exclude. As opposed to a tangible item of property, many parties, when authorized through a license grant, can in effect legally use the same item of intangible property at the same time. This paper, will discuss the rapidly growing area of licensing by universities of what is being called Tangible Research Property, or simply TRP. An item of TRP from a university might be a biological organism, an integrated circuit chip design, a prototype of an instrument, a chemical, computer software, or the like. However, most items of TRP will be biological material or computer software There are unique issues for a university licensing office in the handling of TRP which will be discussed in this presentation. 2. University Technology Licensing Let me begin with background from the U.S. experience to put today ’s remarks in context. Beginning in the late 1940 ’s in the U.S., the Department of Defense began to support university research. Later, the National Science Foundation, NASA, Department of Energy, National Institutes of Health, and other government agencies initiated research programs at universities. Each agency tended to have different regulations concerning intellectual property rights In the late 1970 ’s, universities, with support of certain agencies, began an effort to seek legislation that would make uniform the varying intellectual property regulations of the over 20 government agencies funding university research. Universities were able to demonstrate that when they held title to inventions under government agency research funding, it was 10 -3- to 20 times more likely the invention would be commercialized for the benefit of the public and the competitiveness of industry. In 1980, Public Law 96-517 was passed which gave universities that had means for licensing of their technology (either through a campus licensing office or through a third party such as Research Corporation) the title to inventions that arose from government agency funding. PL 96-517 included many other provisions, which provisions do not relate to the matter of management and licensing of TRP. Indeed, other than regulations concerning physical items procured with research funding (such as test equipment and supplies), there was no mention of TRP. Universities were on their own in the handling of TRP. At the same time as the passage of PL 96 517, the rate of creation of tangible research properties, principally from the biological sciences and computing sciences, began to rise. These items of TRP can have great scientific as well as great commercial potential. 3. Advancement of Science For the advancement of science, it is the credo of all universities and their scientists that research results be promptly and openly shared with scientists throughout the world. Such sharing of research results is primarily through publication in academic research journals. This works well for research findings that can be expressed in written form, but what about TRP? Without access to the tangible biological organism or source code of a computer program developed by the first scientist, is there really full “publication ”, so that the second scientist can promptly build on the research results of the first scientist? I believe that it is clear that without prompt access to the item of TRP, the progress of science will be slowed, and in some cases completely impeded. If distribution is delayed, your scientist may be the second to publish and his research publication may be recalled only as a footnote to scientific colleagues throughout the world. The greatest academic recognition by the academic community, including Nobel Prize reviewers, goes to the first to announce that important discovery. At the same time, we recognize that an item of TRP also may have great commercial value and unrestricted public distribution can frustrate commercialization and thereby access of the public to the benefits of the research finding. A university licensing officer can both aid prompt publication and capture the economic value of the TRP. -4- 4. Patents An item of TRP can also be covered by a patent claim. The basis of the patent systems of countries is that, in return for fully disclosing an invention to the public, an inventor receives a patent grant, allowing the inventor to exclude others from use of the invention for a limited period of years. A patent office also recognizes, that without access to the item of TRP covered by the patent claim, there has not been full disclosure of the invention to the public. This has led to the requirement that, for a patent claim to be issued on a biological organism, the organism must have been deposited in a public respository at the time of filing and available to others at the time of patent issue. For a U.S. patent, the American Type Culture Collection (ATCC) is the usual repository. A university licensing officer must consider the advantages and disadvantages of patent filing and make a determination whether or not to include a patent claim covering an organism. A university licensing officer must also consider the “prior art” effect of TRP distribution. That is, if a technology is publicly available for a period before patent filing, the patent office may deny a patent on the basis of prior art. Reference 1 is a paper discussing “The Prior Art Effect of Material Transfer Agreements ” and is recommended reading for university licensing officers. In essence, if you haven’t filed before distribution of an item of TRP, and intend to file later, then the distribution must be under appropriate confidentiality provisions to avoid the prior art effect of blocking a patent. 5. Trade Secret? Are we really talking about “trade secrets” when we license TRP without intangible intellectual property rights? Some will say that a trade secret is a contradiction in terms for a university and they are right. A university is not a commercial company and its research findings are promptly made public. However, universities have learned that they can both fulfill their public service mission of open publication (physical distribution for TRP) and capture royalties for academic purposes. We can see that a properly handled item of TRP from a university is not kept “secret” and is broadly distributed. But we can also acknowledge that if a recipient of an item of TRP does not follow the terms of the agreement by which he received the item of TRP, that the nature of legal remedy is, in part, similar to that of a trade secret. -5- 6. Bailment A “bailment” is an old legal tool, where possession, but not title, of a tangible item of personal property is transferred to another party for a limited purpose and for a limited duration. Reference 2 “Use of Bailment in Transferring Technology from a University ” is also a recommended reading. The author, P. Martin Simpson, Jr., is University Counsel of the University of California. Mr. Simpson makes good arguments for the use of the bailment option. University licensing officers and their counsel should discuss whether or not it is advantageous to use the principle of bailment for transfer of TRP 7. Distribution agreements Biological Material In general, the physical distribution of the item of TRP will be made by the scientist-creator, generally in coordination with a licensing officer if the TRP may have commercial value. However, most TRP will not have commercial value and often may be distributed without an agreement. If the item of TRP is a biological specimen, it is generally wise to include wording that the item is a research product, may not be further distributed, and the recipient is accepting the item without any warranties. Attachment 1 is an informal “Letter Agreement ” which a Stanford scientist can choose to use to distribute biological material to scientific colleagues at other nonprofit scientific organizations. No university approval is needed. As a cautionary note, be aware many universities insist on more strictly worded distribution agreements. Attachment 2 is a “Simple Letter Agreement for Transfer of Non-Proprietary Biological Material” that is also used by Stanford, but which is more formal and requires signatures by authorized officials at the receiving institution. Attachment 3 is a template Biomaterial Letter Agreement used by Stanford for the distribution of an item of biomaterial to a company. The company is authorized to use the biomaterial for evaluation purposes only. If the company later wishes to use the biomaterial for commercial purposes, the company must request a commercial license from Stanford. Stanford, however, has no obligation to grant a commercial license to the company. A situation could have arisen where, during the evaluation by one company, another company, which also received the biomaterial for evaluation, has requested and received an exclusive commercialization license. It can be seen this certainly encourages companies to not delay in their evaluation of the commercial utility of the biomaterial! — 6 — In some cases, an item of TRP may not be easily reproducible and cannot be made broadly available to all scientists. The creating scientist will select which scientific colleagues are to receive the TRP that is available. A single prototype instrument may be loaned to a company during their development period. However, I have found that in most cases the originating laboratory desires to continue the instrument use for experiments, and does not want to give it up. There then follows a period during which company engineers spend a limited time in the university laboratory for technology transfer purposes. 8. Distribution Agreements Computer Software Sending a computer code can be done electronically today with no or negligible cost. On the other hand, sending a biological material item may be expensive. If the research funding of the scientist so permits, it will be send at no cost. Otherwise, it will be sent after payment for a handling and shipping fee. In the U.S., recovering more than actual cost may be considered a commercial sale and jeopardize the university ’s non-profit tax status. (A U.S. university may receive income attendant with its educational mission, such as tuition. Other income is prohibited except for “rents and royalties ’’.) Attachment 4 is a “ClickWrap ” agreement used by Stanford for free non commercial distribution of a software program, “Plaid”. An academic institution desiring to use Plaid, which covers gene expression data, can both electronically enter into the license agreement and electronically receive the software. 9. Material Transfer Agreements (MTAs) The handling of MTAs are easily the most arduous task university licensing officers have before them today. MTAs are used for the transfer of biological materials between universities and companies, between universities and universities, and between companies and companies. As the level of biological research has increased, the amount of biological TRP being created also has increased. All parties desire to protect any commercial value of their biological TRP. At the same time, scientists in companies and universities desire to openly exchange with each other research information that is in the form of TRP. Companies, and even a few universities, greatly overreach through clauses in MTAs. Some would prohibit the recipient from publishing research results or might require ownership of any patents or new TRP that might result from use of the provider ’s TRP. ___ 7____ This has led to many meetings of university licensing officers with their counterparts at companies to consider means for exchanging biological TRP in an efficient manner without overreaching. What has resulted from these meetings is a Uniform Biological Material Transfer Agreement (UBMTA). This complex agreement, actually designed by a committee, has failed to become widely used. However, if both parties have agreed to use the UBMTA, each transfer is made by a UBMTA “Implementing Letter”, included hereto as Attachment 5. The UBMTA itself can be found on the Association of University Technology Managers website (Reference 3). As the UBMTA is not accepted for use by most companies, some universities such as Stanford University have sought to develop master biological MTAs for each company, beginning with the form of transfer agreement provided by the company. This has not been easy as the provisions under which a company (or some universities) will send material are not acceptable to them for received material. They want it “both ways ”; that is, many restrictions for you to receive their material and few restrictions for them to receive their material. In the meantime, the advancement of science is frustrated as negotiations for biological material transfers are at best time consuming and worst, the biomaterial is not transferred. 10. Clinical Technology Assessment Agreements For completeness, a passing mention should be made to CTAAs, or Clinical Trial Assessment Agreements. Under these agreements a company provides experimental drugs to a researcher who administers the drug to patients under a specific protocol. For more information on such agreements, see Stanford University Office of Technology Licensing ’s website (http:otl.stanford.edu/industry/policies.html). 11. Computer Code Strictly speaking, one can say that computer code is not tangible, except as it may be fixed in a medium of expression such as computer tape or disk. Computer code is similar to written symbols, which are generally fixed to the paper medium of expression, as in the case of this writing you are now reading. For both computer code and writings, copyright protection is available. Nevertheless, the academic science requirement for broad distribution to other scientists and the means of licensing such “TRP” are in general the same as for other TRP. The matter of whether or not to copyright computer code should be discussed by a university licensing officer with his intellectual property counsel. In many cases, the computer software, in object code format, is adequate for the receiving scientist to continue research. In other cases, access to the source code is needed. We can also recognize that academic software is not always well documented, has bugs, and there may be no support available. If there is potential for broad use, the university should consider licensing the source code for commercial use, whereby the licensee will further develop the software, debug it, develop manuals, sell, and support the software. The commercial development software license from a university is generally exclusive for several reasons. First, there is generally close interaction needed with the originators of the software and academic scientists will have limited time available for such commercial interaction with a multitude of companies. Further, a company will be concerned that if the software originators are interacting with many companies, they are likely to reveal the commercial adaptations they have made (to the software) to their competitors. 12. Licensing of TRP Attachment 6 is a chart that illustrates the distribution and licensing by a university of software and other forms of TRP. Attachment 7 is a table of “Representative Standard Rates (Biotechnology) ” that resulted from personal experience and an informal survey by Tom Kiley in 1992. Mr. Kiley was at the time the Vice President and General of Genentech, Inc., a leading biotech company. Most items of TRP from universities are either biomaterial or computer software and the principles of licensing these TRP items are similar. As shown in Attachment 6, there are basically three forms of distribution, which I have termed “tiers”. Tier 1 is the distribution of TRP for non commercial scientific use only. As seen on the sample agreements, the item of TRP is provided “as is” at no cost or distribution cost, with no support, and no right of further distribution. While most Tier 1 distribution is to scientists at universities and other nonprofit institutions, in many cases the creating scientist will wish to have the item of TRP also provided via Tier 1 distribution to scientific colleagues at companies. Tier 2 is the distribution under a non exclusive license to companies, also on an “as is”, no support, internal use, and no right of further distribution basis. Tier 2 licensing occurs when a company is willing to receive the item of TRP, more often software, for internal use only, and is able to do so without support. In a Tier 2 distribution a single royalty payment is -9 - “priced ” by the university licensing office. Tier 2 distribution is primarily of computer software. Tier 3 covers the licensing for commercial make, use, and sale of an item of TRP, usually on an exclusive license basis if it is computer software. For an item of software, the company will develop it to a commercial state by debugging, adding enhancements, adding improvements, developing manuals, and incorporating user-friendly routines. The university creators often may be engaged as consultants for a period. The company will of course assume all commercial risk and will support users. Often, a Tier 1 or Tier 2 “customer ”, having learned of the benefits of the software, but preferring an enhanced and easier to use and supported version, will procure the developed software from the Tier 3 licensee. A Tier 3 TRP license will include normal license terms, including an up front payment, diligence provisions, and earned royalties. 13. Summary We have taken a quick review of some of the facets of the handling of TRP by a university licensing office. The handling of each item of TRP requires a knowledgeable licensing officer. Most items of TRP are not of commercial value and processes should be in place to aid, and not inhibit, the academic principle of prompt dissemination of research results that happen to be in the form of TRP. 14. References (1) The Prior Art Effect of Material Transfer Agreements, by J. Steven Whitaker, M.D., J.D. Journal of the Association of University Technology Managers, 1994 (http 7/www. a ut m. net/p ub s/i our n.al/9 4/MTA94 . htrnl) (2) Use of Bailment in Transferring Technology from a University, by P. Martin Simpson, Jr. J.D. Journal of the Association of University Technology Managers, 1998 (http 7/www. autm.net/pubs/iournal/98/simpson.html) (3) Universal Biomaterial Transfer Agreement (http 7/www. autm.net/policy/agreements/start.html) -10- 'V * Tangible Intellectual Property in 2; : the 21st Century from the Tangible Research Property :: : Viewpoint of Universities Biological material Computer software - Presented at the University of Tokyo Conference on Z Intellectual Property Law in the 21* Century 1C chip design Chemical sample Prototype instrument By Niels Reimers, Director Emeritus, Stanford University Office of Technology Licensing March 2001 % ...... 0 . Z U.S. Public Law 96-517 r * Advancement of Science % N t • PL96-517, enacted in 1980, established a uni form -Z - • Academic principle of prompt and full - % patent policy for university recipients of federal !7. - government grants and contracts. - - publication of research results. Z • PL96-517 overlooked TRP, leaving universities Z. Z * Publication through distribution while % to work out policies on their own. t retaining economic benefits. • With advent of biotechnology and computing, the * rate of creation of TRP has risen sharply. ; ; Z • Items of TRP have great scientific as well as - ^ commercial potential. \ mm •••* m £ : Patent rights vs TRP rights ,r Z TRP as “Trade Secrets”? mm-m 11 . .. » • Deposit in public repository required if patent ~ - • A university will not keep a scientific C claim covers item of TRP. - ■ - advance secret. Z Z • Patent rights may be lost through doctrine of - ' • However, if a TRP recipient fails to honor % “Prior Art” if confidentiality provisions are m - 1 overlooked in distribution of an item of TRP . terms of a TRP distribution agreement, the * • Reference 1: “The Prior Art Effect of Material ■y Z nature of the legal remedy is, in part, Z % Transfer Agreements ” is recommended reading. ~ 2 similar to that of a trade secret. ’ -11- : Bailment as Legal Tool for r: * Informal Letter Agreement for Distribution of TRP ::: % Distribution of Biological : » • Bailment provides that possession, not title. Z : Material to Scientific Colleagues » of an item of personal property is -- - 7 • “The Biological Material is provided for - * transferred to another party. .2 ^ nonclinical, noncommercial research purposes. T" 2 Please do not distribute the Biological Material. - t • Reference 2: “Use of Bailment in » including any progeny and any genetically 2 Transferring Technology from a University " ■-.. » engineered modification which is substantially % is recommended reading. 22 2 based on and incorporates an essential element of 7 % the Biological Material, to any other individual or » ^ entity without my prior consent.” (Attachment 1) 22 2 * No university approval required. : A More Formal Letter > f Agreement for Distribution of £ : Agreement for Distribution of r- : Biological Material to a £ 2 Biological Material to Scientific : Company l ... % • The company ’s use is restricted to that of Colleagues . ■» evaluation purposes only. •» • Attachment 2, “Simple Letter Agreement ~~ * • If, after evaluation, the company desires a ;♦ for Transfer of Non-Proprietary Material” * .... commercial license, it may request such a license -* provides stronger language limiting use of from the university. 2,2 - the biological material provided. * • The university is under no obligation to grant the ;; • This agreement requires signature by an 7 ; I company a commercial license. % authorized official of the recipient research a • Provides for payment of handling fee. 2l~ .1 * Included as Attachment 3. 7 organization „ m 1 Example “ClickWrap” 1113 * m :7 : Material Transfer Agreements :: Agreement for Distribution of : Computer Software .2. * • MTAs have become the most difficult 2 I agreements to administer. 2 • Royalty free, internal use only license. 2 2 • Universal Biomaterial Transfer Agreement % • Electronic agreement. % 2 (UBMTA) developed but little used. * • Electronic distribution. a: 2 Reference 3 identifies web location of % 2 UBMTA. | - * • Provided as Attachment 4. 2 • “Implementing Letter” to UBMTA used - - for each item of TRP. (Attachment 5) -12- * * Representative “Standard” Rates (Biotechnology) . — * 1. Product: Recombinant Pharmaceutical m Exclusive Non-exclusive * Early stage 7. 10% 3-4% ■ developmental . Z Approved(able) 12-15% 5-8% Distribution * 2. Product: Monoclonal Antibody Non-exclusive • No supp >rt ‘ ^ Exclusive • Debugs Therapeutic 5-7% 3-4% • Manual i, etc. Z • No right No r ght of distribution Z Diagnostic 3-4% • Sells and supports 1-2% * Component with sig- • nificant,high value- 1-2% Vi% %% Z added apparatus Representative “Standard” Rates (Biotechnology) (Continued) 3. Enabling or Supplemental Technology Exclusive Non-exclusive * Production method 3-4% %-2% ■* or means ■* Drug delivery 2-3% 'A-2% * component -13- 2$ ####&$20 frfc : MIT MIT XD->X:7-)I/ ST # 1. liUtolc A^BTiTfettSMtoAXSIM LtAU -607X 'J iSS££®fTl >aA'fAA77At >X'7'7;SXS o $Ti*«,ht .7 WCtil/vr. MITttrL--7T. 7U 3>A>-iC|lcBtj-T. ;iz-h 128 ®S*jfeHS^0±tffc«*(oyx-7 1987), 75^ 77# A07tt#TfcSi*0.&0* 'A##0#A0< (77> h 1987). 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A#MIT ©A5Zj:eW«iEA6oZtEMA43©Tlf d r«© Bl Am%Alj&eXmMX#6 rgjTttiAStoAt)Kro(A-ba5^ST*55, lav. ireffitofic5i-sii©ttSAsar -6 mi am a AAA#EIAA^#A©THAA^XAA, %LT©< AAj(A*tLT8l#©!tagA AXjAXXW,tfAZcXZ)Zj«XX$LTXXtXATAX, ALT, @X ©RgA 3 AA A A © X AIXTA < s#Hg A A© AX ABMk&tb T Win £tttf, *5 ©I&fiiTS© A£ L t'x--f •3*A*ffl©- AAXTAAl A: A X A. 21- 6. 1/77 1/>X BankBoston. 1997. MIT the Impact of Innovation. Boston MA: BankBoston. Bower, N. 1992. University-Business partnershipsAn assessment. Lanham MA- Bowman & Littlefield Publishers Inc. Boseman, B. 2000. Technology transfer and pubhc pohcy-' a review of research and theory. Research Policy 29, pp 627*655. Brand, S. 1987. The Media Lab- Inventing the Future at MIT. New York- Viking Penguin. Etzkowitz, Henry. 1998. The norms of entrepreneurial science: cognitive effects of the new university-industry linkages. Research Pohcy 27, pp 823-833. Etzkowitz, Henry and Loet Leydesdorff. 2000. The dynamics of innovation: from national systems and mode 2 to a triple helix of university industry govemment relations. Research Pohcy 29, 2000 pp 109 123. Goldbhth, S. 1979. Statement to the US House of Representative. OwenSmith, J and Walter Powell. 2001. To patent or not: faculty decisions and institutional success at technology transfer. Journal of Technology Transfer, 26, pp 99*114. Roberts, E. 1991 Entrepreneurs in Highe Technology:Lessons from MIT and Beyond. New York: Oxford University Press. Saxenian, A. 1994. Regional Advantage. Cambridge, MAHarvard University Press. Schein, E.H. 1992 Organizational Culture and Leadership. San Francisco: Jossey Bass Pubhshers. Weick, Karl E. 1995 Sensemaking in Organizations. Thousand Oaks, CA: Sage. MTT Un.-40 -22- 3$ V%7 ' 7 < > 1947 #^:%M:L, 1950 #(:m&^^Lyc. #1L# 50 # r#^j commu&wT, 1983 #(D TH, i98o#ft##a#n, 1991 #JMK OKU## s/A7A^a^$Lj;3^wc,me ' #, 1951 # 1969# - 1973 # - A (#@) m. 1947 # - 1956 # - ##% 1970 # 1958# ' Bfm##, 1961 # - 1991 # - 1983 # -5o 23- Licensing and Technology Transfer in India Sonia Baldia* 1. Applicable Rules For almost all of the 50 years since it gained its independence, India remained reticent about any form of foreign investment or technical collaboration. The Indian government has adopted the policy of ‘selectivity ’ towards the importation of technology, being more favorably disposed towards agreements in high technology areas, either export-oriented or for import substitution that would enable indigenous industry to upgrade its existing technology. As stated in the Technology Policy of 1983, special emphasis has been placed on the local absorption and adaptation of imported technology through adequate investment in research and development. Until the late 1980s, a complex and highly bureaucratic regulatory framework controlled international flow of capital and technology to local markets. Beginning in 1991, India substantially liberalized its regulatory regime by making watershed reforms to its industrial policy and making the investment climate more conducive to foreign investment and technology transfer. The basic thrust of the new policies is to move from a highly regulated regime to a market driven system. Foreign investment and technology transfer in India are generally subject to one or more of the following laws, rules, regulations and procedures formulated by the Central Government. Various bodies and financial institutions have been established to regulate and administer these laws and policies so as to foster foreign investment in India. > The Industrial (Development and Regulation) Act, 1951 > The Monopolies and Restrictive Trade Practices Act, 1969 > The Foreign Exchange Regulation Act, 1973 > The Import & Export (Control) Act, 1947 > The Companies Act, 1956 > The Patents Act, 1970 > The Trade and Merchandise Marks Act, 1958 > The Income Tax Act, 1961 > Statement on Industrial Policy, 1991 > Foreign Investment Board guidelines > Technology Policy Statement, 1983 * Dr. Sonia Baldia is an Indian national licensed to practice law in India and the United States. She is a private practitioner and consultant specializing in intellectual property law and electronic commerce. Dr. Baldia prepared this contribution during a visiting fellowship in the Intellectual Property Program at the George Washington University School of Law in Washington, D.C. -24- 2. Approval Procedure Since 1991, industrial licensing has been abolished for all projects except for a short list of industries related to national security and public concerns. The New Industrial Policy of 1991 has significantly liberalized the economy and deregulated foreign investment and technology licensing. Certain regulatory approvals and requirements still remain such as- Foreign investors are typically required to have local equity partners and may require approval from the Foreign Investment Promotion Board (the “FIPB”) - a special body created to provide “fast track” clearances for foreign investment and technology transfer proposals, or clearance for the import of Capital Goods under the Imports & Exports (Control) Act of 1947, and permission from the Reserve Bank of India (the “RBI”) for foreign exchange remittance under the Foreign Exchange Regulation Act, 1973. Pursuant to Section 39C of the 1991 Statement on Industrial Policy, foreign technology agreements are automatically approved in “high priority ” industries (listed in Annexure III of the Statement), if the lump sum payment of the price of the technology does not exceed 10 million Rupees and the royalty payments do not exceed 5 % of domestic sales or 8% of exports, subject to total payments of 8% of sales over a 10-year period from the date of agreement or seven years from commencement of production. These prescribed royalty rates are net of taxes. The Indian party to the agreement is typically made responsible for taxes, at a rate of 30%. Technology agreements involving higher rates of royalty or lump sum payments than those described above require specific approval from the FIPB or the Secretariat of Industrial Approvals in the Ministry of Industry, which can require approximately 4 6 weeks from the filing of the application. No permission is necessary to hire foreign technicians and foreign testing of indigenously developed technologies. Technology agreements in non-priority industries are automatically approved if there is no foreign exchange required for any payments. Typically, the Indian government is more receptive to royalty arrangements that offer continued access to technical know how, rather than the right only to exploit a patent. The government also requires sub-licensing clauses to avoid duplicative licensing of similar technology. Under Indian regulation, former licensees may continue production after the licensing contract expires without further consent or payments to the licensor even if the product is still protected by Indian patents. Additional approval is required from the MRTP Commission if a technology agreement has a restrictive or anti competitive effect on trade in India. Such agreements must be filed with the Registrar of Restrictive Trade Practices after they are executed. Foreign technology partners also need to be aware of the following other statutory restrictions- (i) Royalty payable is to be capped at 5% (of net sales minus the value of imported items) over a period of five years. Higher rates of royalty may be permitted on exports and on import of sophisticated technology! -25- (ii) Minimum guaranteed royalties are not permitted in agreements; (iii) Upfront royalty payments are generally paid in stages- one third after the Government approves the agreement; one third after the transfer of documentation; and one third after the commencement of production; (iv) Export restrictions on the licensee are disfavored unless the collaborator has existing sublicensing arrangements; (v) Any restrictions placed on the licensee regarding procurement of capital goods, components, pricing policy, selling arrangements etc. are disfavored; (vi) Provisions on payment of interest on delayed payments are disfavored; (vii) If a technology agreement involves payment in foreign currency, the RBI stipulates that Indian law governs the agreement; (viii) Technology agreements are typically valid for a period of 10 years from the date of the agreement or seven years from the commencement of production. 3. Registration Procedure for the License or Transfer of Intellectual Property Under Indian law, all forms of intellectual property rights can be licensed or transferred, except for geographical indications of origin. Agreements relating to licensing or transferring of such rights should be in writing and registered with the relevant authorities in order to be valid. For instance, a patent or a design license is valid only if it has been registered with the Controller of the Patents. These procedures, including the rights ensuing from such registration, are discussed in detail under the relevant intellectual property Sections above. 4. Anti-Competitive or Restrictive Trade Practices Restrictive trade practices are governed under various Indian statutes, namely the Indian Contract Act, 1872 (Section 27), the Patents Act, 1970 (Section 140) and the comprehensive Monopolies and Restrictive Trade Practices Act, 1969 (the “MRTP Act”). The MRTP Act contains the comprehensive law on competition policy in India. The MRTP was originally enacted to restrain the disproportionate growth of large undertakings and to prevent the concentration of economic power in the hands of a few. In the last three decades, however, it has been considerably restructured to keep pace with the changing requirements. The requirement of prior approval for expansion of existing units, establishment of a new undertaking, amalgamation, merger and take-over of undertakings of a particular size, -26- assets criteria has been removed. The MRTP’s focus has significantly shifted to regulating the monopolistic, restrictive and unfair trade practices that are prejudicial to public interest. The statute establishes the MRTP Commission and vests the commission with broad powers to investigate and monitor restrictive trade practices. The statute applies equally to domestic and foreign enterprises, as well as to private and government owned companies. Its provisions are broadly based on the antitrust legislation in the U.S., the U.K., Japan, Canada and Germany. The MRTP Act defines a ‘restrictive trade practice ’ in Section 2(o) as “any trade practice which has or may have the effect of preventing, distorting, or restricting competition in any manner, or which tends to bring about the manipulation of prices or conditions of delivery, or which tends to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions. ” This broad definition covers not only restrictive trade practices arising out of collective or bilateral action, but also unilateral trade practices that are restrictive in nature. A ‘monopolistic trade practice ’ is defined in the Act as any practice of preventing or reducing competition in the production, supply or distribution of any goods or in the provision of any services by adopting unfair methods or unfair or deceptive practices. An ‘unfair trade practice ’ is defined as a practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any services, adopts one or more of the practices mentioned in Section 36A and thereby causes loss or injury to the consumers, whether by eliminating, distorting or restricting competition. Unfair trade practices enumerated in Section 36A include misleading representations, false advertising, bargain price or bait advertisements, offering of gifts, prizes etc., conducting promotional contests, and hoarding or destruction of goods. 1 The MRTP requires mandatory registration of any agreement that could be construed as giving rise to or otherwise expressly or implicitly promoting a restrictive trade practice that falls within any of the categories enumerated in Section 33(l). These categories include customer restrictions, tying clauses, differential concessions, resale price restrictions, refusal to deal, territorial restrictions, control of manufacturing process, boycott, predatory pricing practices and exclusive dealing arrangements. An agreement that does result in the engagement in any of these practices is void unless (i) the agreement has been expressly authorized by law," or (ii) it has the approval of the Central Government, or (iii) if the MRTP Commission is satisfied that the agreement has a beneficial effect or a redeeming virtue under what is known as a Section 38 ‘gateway ’ provision. Section 38 provides that a 1 Unfair trade practices are also covered under the comprehensive Consumer Protection Act, 1986, and several other Indian statutes such as the Sale of Goods Act, 1930, Essential Commodities Act, 1955; Prevention of Black Marketing and Maintenance Act, 1968; and Trade and Merchandise Marks Act, 1958 etc. -27- restrictive trade practice is prejudicial to the public interest unless it meets one or more of the criteria or gateways (mitigating circumstances) listed in sub clauses (a) through (k) of Section 38(l). Consequently, a restrictive trade practice may be allowed under these gateway provisions provided the harm caused by injury to competition is outweighed by the public good determined to flow from countervailing circumstances. This involves a balancing act between the pro and anti-competitive effects of restrictive practice in the agreement. In addition, the MRTP Commission must be satisfied that the restriction is not unreasonable, giving regard to the balance between its purpose and any detriment to the public, resulting or likely to result from the operation of the restriction. The provisions of the MRTP do not apply to acts that can be regarded as the exercise of rights under the Patent Act. The MRTP provisions apply mainly to know how licenses but not patent licenses. Patent licenses fall within the ambit of the Patents Act, 1970, which requires them to be in writing and registered with the Controller of Patents within six months of their execution (or within a period as extended by the Controller). It is at the time of registration that the Controller may insist upon the deletion or modification of restrictive conditions deemed to violate Section 140 of the Patents Act. See also the discussion on “Compulsory Licensing and Licenses of Right ” in Section II.A. Patents. In practice, competition law and policy in India plays a dual role: to protect competition and to protect local licensees and to encourage the establishment of local export-based industries. Consequently, the clauses in a license agreement that are most likely to raise concerns and risk invalidation include: (I) Export Restrictions . A restriction imposing a total ban on exports from India is disfavored except in certain circumstances when extended to countries where the foreign licensor has patent rights or existing distribution or manufacturing arrangements. These restrictions must be limited to a reasonable period of time, and a list of such countries must be disclosed in the agreement. (ii) Tying Arrangements . Section 140 of the Patents Act makes it unlawful to require a patent licensee to purchase unpatented material from the licensor or to restrict the licensee's right to acquire or use unpatented material from other suppliers. The licensor may, however, retain the exclusive right to supply any parts necessary for manufacturing the patented article and for subsequent repair and maintenance. In a know how agreement, a tying restriction may be permitted only if necessary for the quality control and maintenance of the licensor's product, and must be limited to a reasonable period of time. (iii) Exclusive Dealing . Section 140 of the Patents Act permits limited exclusive dealing clauses in patent licenses that prohibit the licensee from selling, acquiring or using goods other than those of the licensor. In the case of know how agreements, such -28- clauses are analyzed for their effect on competition under the gateway provisions of Section 38 of the MRTP Act. (iv) Post-Expiry Restrictions . Termination of a license may not necessarily mean that the licensee needs to cease use of the licensed intellectual property rights after such rights have expired. Under Section 141 of the Patents Act, the licensee has the right to terminate a license agreement by giving a three month notice at any time after the patent expires. After such termination, the licensee may still have the right to continue use of the expired patent. Hence, imposition upon the licensee of an obligation not to use the licensed technology after the expiration of the patent right or to pay royalties for the use of the licensed technology after the expiration of the patent right will not be permitted under the Indian law. In know how agreements, the government insists on the licensee’s right to use the imported knowhow and to avoid its repetitive import after the expiry of the license agreement. However, the license agreement may contain secrecy clause to prohibit the disclosure of information to third parties provided it is for a reasonable period of time. (v) Exclusive Grant-Backs. A restriction on the licensee to assign back improvements to the licensor without any consideration is not normally permitted. It would be permissible, however, if the licensee grants back to the licensor a non exclusive license with the right to sub-license the improvements developed by the licensee. (vi) Price Fixation . Any agreement between purchaser and seller, or between groups of dealers or suppliers, agreeing to sell the product at a certain stipulated price or on certain specific terms and conditions is a restrictive trade practice under MRTP and is declared void if the MRTP Commission passes an order to that effect. Again, the Commission's decision on whether the agreement is restrictive is based on the gateway provisions of Section 38 and not on the theory that any restriction concerning price is per se illegal. (vii) Resale Price Maintenance. Under Section 39 of MRTP, any restriction relating to resale price maintenance is per se illegal and unenforceable. This applies only to the resale of goods. This section also applies to patented articles when supplied to a dealer for resale. The supplier may not impose any condition fixing the resale price. However, a patent owner may impose certain restrictions thereby regulating the price at which articles produced or processed by the licensee or assignee are sold. Sections 39 and 40 of the MRTP Act impose criminal penalties for offences relating to resale price maintenance. 5 . Enforcement of MRTP Act The MRTP Act provides for civil remedies, which include injunctions, consent orders, or cease -29 and desist orders and compensation for damages caused by restrictive trade practices. The MRTP Commission is vested with the powers of a civil court for certain purposes. The Commission may start an inquiry into a restrictive trade practice either on the basis of a complaint received or upon its own knowledge and information. It has the power to issue temporary injunctions of restrictive trade practices, including during the pendency of its investigations, as well as to order a party to pay compensation for damages caused by restrictive trade practices. The MRTP’s orders have the same force and effect as court orders. The MRTP also provides for stringent criminal remedies. Failing to register an agreement that falls within the ambit of the MRTP may be punishable by imprisonment for up to three years and fines of up to 5000 Rupees. Persons engaging in unfair trade practices may be imprisoned for up to six months and fined up to 5000 Rupees. Harsher penalties are levied for continuing offences. For violations of injunctions, a persons property may be attached and the person incarcerated for up to three months. Violation of an order of the MRTP Commission may result in imprisonment for up to three years and fines up to 500 Rupees per day. If the MRTP order relates to unfair trade practices, the penalty for its contravention is three years imprisonment and a fine of up to 10,000 Rupees. -30- 4$ 2i F v F • t4 6 > V > 1. 6 >FPy^->a> *Bto8iS*ti:SS«Cj:oTt>/t6SnTi^ = Sr VuSSilcy-f 5tttoMe#ro«Stt- 2i 6%, cniT^eawaR&Dtciotts^ tmy,±CBbti/S5 5. 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WIPO#6## iti. teyreftiA tiEfirnmunx^tz, 2000¥ 12 a , A7*-x- • 77 f m «©#«*») ICXUTttx $ 3. jksicteitsEnsmzttofititistiroea An$T*B©&*Ttt- tt*SIW»«l«tt£»bT*Zc. 4-Tte, »WI«*ttS^$F ttSAISHiC, WSWtCfffflT^^XjSt^xSn-SAxCZioZc. aW14S©77'X7> F1C mvxH, tffiWBf • ffttZ)$astczj:oT<«.o LTA#©iR#&A*sz:& tctt, ra^-r-5«±©IM6a*65^tfe*ST*-5<. -31- IBM IS# I: IBM IS«6WEW£ EriHWS®t t;&«-7'it. usPT0^6©*t>^<®!f#if^f8 fT$nsc:ttft-3/co Mtoro#®s5tt7)s's$^con, eseicuctz, &##mmisa roMEsffa®fci6©D—t'X6H{ttLte&Tt^-S>. $fc. 3>+)-EtA »£It7 i5t:ftoTl'5. 4. t'roaSttWWEW (6< lc#R) »<$£:*: OTl'-i>ro*>? ffi¥. #:fRl#g&W#^K±L, WA, V7l^i7fti'Sfca^t5i5l:ftotl'5. *H®#ifSi)*®isiijtt. r-r^T0S«5)-mcyLTi 9 iDS»^iiffl-r-5j aAxcax&s. C0lMR#%^Ab Af, StUX8 «IcSCStol" 3 A £ y)t =1® X A: o T X S, *WJfF/TlS, 5. /W;fTX/Oy- 1980 ¥fflft?7A'f-f fl*IS,*m#*l:S 3IS3##f#0XX>7'- HSSft-SfelDifto tzo cnt; 6. 8tfllcSx.5 y/AWftoieis'eis, s«isss-r«.rx-fexict3ATfe=ti*L^£Ataissca . xoxxy -txx, AA> h • St- h 7* >J ^"Sj:£>fflATPi||lcS;fffiTA#X'$.-5. y/A^sret), -o0#a*M%f 30i:#&0Wj#0*B&#Aissus'Ais%AXA7 At> h • l/yy-U >X'0[j.HIA£ CTX3. ASUcSfLT, USPTO IS*ffi, /tf>h • 7° — U AX'S SIMULA, /If 7 h • 7°— U AX'ilS, £ $ S'S/SAy > HS:S$bT, ff t> ->>y • 7‘n AAlcj/O. ^gW##T##0K#l:7XS:X£#3t0? &3„ AOtfUHS, y*yAHi$#lfl:f)STIS$0, #b*TSi|m##A,% A A#x 6SI3. -32- Tc o T^^ 7. -f >^-T'7 h^tofcli'y^^ CAFC(:^^6 State Street Bank /zoTW6. #g—^^7 705 #T^< ToamnowT#, 8. ISE ro]^/c#et)^CTW6. 4#, pcT##m# -33- “INTELLECTUAL PROPERTY TRENDS FOR THE 21^ CENTURY: THE ROAD AHEAD” Q. TODD DICKINSON Former UNDER SECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY & DIRECTOR OF THE U.S. PATENT AND TRADEMARK OFFICE 1. BACKGROUND AND CURRENT STATUS Charles Dickens, one of the great English writers of the 19 th Century, (and a great protector of copyright interests, by the way), began his most famous novel, A Tale of Two Cities with the quote- “It was the best of times! it was the worst of times”. In some ways, this is also an appropriate metaphor for where we find ourselves at the beginning of the 21st Century in the world of intellectual property. Never before has intellectual property been so critical to the economic development and sustained economic success of the industrialized countries of the world. Even allowing for the apparently difficult times ahead for our respective economies, our great recent successes, and certainly the way back, will be heavily dependent on continued technological growth. In my country, no less a figure than the Chairman of the Federal Reserve Bank, Alan Greenspan, has repeatedly attributed much of the recent strength of the US economy to the increased productivity brought about by new technologies. Intellectual property remains perhaps the key means to protect and nurture the new technologies arising from that growth. New technologies are particularly vulnerable, requiring the protection intellectual property systems offer. Far from impeding their development, intellectual property provides a crucial mechanism by which capital investment and additional research dollars flow much more freely and securely in the direction of those new technologies. As if to prove the point, just this morning Asian Wall Street Journal had a front page article on the so-called Technology Bubble in the US. While criticizing certain aspects of it, the article affirmed that such technology spurts have great general value in the long-run, since much technology was developed that might otherwise not have, and it very often finds application in other areas than the one for which was originally invented. The article quotes a professor at the University of Chicago, Boyan Jovanovic, saying the problem historically with markets isn’t too much risk taking, but too little. That is because all of society reaps the benefits of an invention, while the innovator bears the cost. “We’re never worse off for having generated more ideas”, he says. The article goes on to note the correlation between -34- the increase in the NASDAQ stock market and the number of patent applications filed in the USPTO, and cites another fairly famous study by Josh Lerner and Samuel Kortum at Harvard with attributes a chunk of that increase to increased venture capital investing, which they conclude generates more research expenditures than traditional corporate R&D departments. In addition to the effect of intellectual property on mature economies, never before has intellectual property brought developing countries so close to the promise of joining in the prosperity that technological growth can bring. With the coming of the Trade Related Aspects of Intellectual Property or TRIPS, (and despite the challenges some developing countries claim to see in its implementation, all WTO countries potentially have the capacity to develop intellectual property systems and enforcement mechanisms which history has clearly demonstrated lead to important investment in new technology and the resulting economic successes technology can deliver. On the other hand, the increased importance and visibility of intellectual property has also seemed to have engendered a heightened public debate! a debate about the systems themselves, and about how access to those technologies can be best facilitated. What types of protection are necessary? What is or should be the scope of that protection? How are intellectual property issues best integrated with existing and developing systems of international trade? This debate has been widespread and vigorous. Among the issues discussed prominently in just the last few months are the impact of intellectual property on* 0 access to life-extending pharmaceuticals in areas of the world critically stricken by AIDS, 0 the ability of the U.S. average college student to download music through peer-to-peer file sharing mechanisms on the internet, like Napster! 0 the ownership and control of domain names on the internet and their intersection with valuable trademark rights! (4) the ethical and legal implications of patenting and licensing human genomic and proteomic inventions! 0 whether or not the patenting of software-implemented business method patents is appropriate as a natural outgrowth of the direction of new technology or is a potential impediment to the development of that same technology, These questions are on the front page and the front burner for policy makers worldwide, and the direction they lead will greatly affect overall intellectual property policies now and out into the future. -35- Yet still other questions of IP’s impact are raised by researchers in academia and non-profits. In this world, there is a perception in some quarters that the “gears ” of the intellectual property system and the research establishment may be grinding against one another -- that the IP system may not be doing as much as it could to increase social utility with minimal transaction costs. What I would like to discuss and focus on today are the factors involved in these trends, including the political, the economic and the technological, the direction in which I see them going; and, perhaps most dangerously of all from a speaker ’s perspective, some predictions on where we might end up. 2. INTERNATIONAL TRENDS Just in the international aspects of intellectual property protection and enforcement, we have seen unprecedented developments over the past half decade. Since 1995, we have seen no less than 6 major intellectual treaties negotiated, 5 of them successfully. Beginning with Trade Related Aspects of Intellectual Property, or TRIPS, we continued through the two major treaties concerning copyright and the internet, the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty! the Trademark Law Treaty and the Patent Law Treaty, both of which established the formalities frame work for an integrated international filing and prosecution system for their respective forms of intellectual property! and finally the revisions to the Hague Agreement for the Protection of Industrial Design, which allowed the US, among other countries to integrate their design protection systems with the rest of the world. The only recent failure was at the diplomatic conference this past December on the protection of audio visual performers ’ (i.e. actor ’s) rights. Since agreement was reached on all but one of the articles, however, there is optimism on all sides that the remaining issue will be resolved in the future and the treaty will proceed. There is even more on the near horizon. On the patent side, in particular, there is a need for international harmonization of the substantive aspects of the law and policy, as well as a simplification of existing systems. Fortunately, we have seen both issues recently taken up by the World Intellectual Property Organization in Geneva in the past few months. We have optimism that simplification of the Patent Cooperation Treaty or PCT and the Standing Committee on Patent’s recent start of deliberations yet again on substantive harmonization will bear fruit. I will address some of the specifics of these developments a little later in my remarks. And a little further out into the future, issues of particular concern to the developing world, the protection of genetic resources and indigenous people ’s rights, will demand greater attention. -36- 3. TRIPS Probably the most significant of these developments, by far, is the passage of TRIPS. The great advantage of TRIPS, of course, is that, in many ways, it folds the intellectual property system into the world ’s trading system, governed by the WTO. For the first time, it requires all of the Member States of the WTO to have a threshold level of intellectual property protection and reasonable consistent systems one with the other in order to participate in the advantages of the GATT. Even more important, however, it provides the potential for significantly enhanced enforcement mechanisms, in the form of trade sanctions, for violations of TRIPS, thus giving real teeth to the enforcement component of international intellectual property protection for the first time. Just last week we saw a vivid illustration of the power of this mechanism. In South Africa, President Mbeki decided not to declare the AIDS crisis in his country a “national emergency ” as defined under TRIPS, which would have triggered the compulsory licensing provisions relative to AIDS pharmaceutical therapies. Despite the critical issue AIDS is in Sub- Saharan Africa, he indicated that the downside risk of damage to South Africa’s broader trade relationships could not warrant such as drastic step. Of course, the pharmaceutical manufacturers have acted more responsibly now in agreeing to significantly lower the price of the AIDS cocktail drugs in that country. In addition to the TRIPS mechanism, we are seeing interesting evolutions of some country ’s traditional position on intellectual property protection, especially as new technologies grow in those countries. A current example is India, who ’s antipathy towards pharmaceutical patent protection is legendary and which continues to feud with the United States over the patenting of genetically engineered forms of crops alleged to be indigenous to its region. The extraordinarily rapid development of the Indian software industry, however, has caused that industry to question the Indian government and its policy makers on how to best protect their new industry. Well, the answer of course, is intellectual property, and this has led to a renewed debate about how whether previous approaches and policies best serve the needs of this newly emerging technology sector. 4. STRATEGIC INTELLECTUAL PROPERTY MANAGEMENT Much of the Conference on Monday dealt with the issue of technology management, in that case in the University setting. Today, let me address a related and very fast growing trend in the United States- strategic intellectual property management. Traditionally in US corporations, intellectual property has been treated principally as a legal issue, to be dealt with by the Legal Department, often in conjunction with Research and -37- Development. As the importance and value of intellectual property has come to be recognized more widely within the corporate structure, we are seeing that intellectual property has more and more come to be viewed as an asset to be managed, much the same as other assets such as real property or cash or inventory. As one indication, we are now also seeing that responsibility for such management is moving from the lawyers alone to more traditional managers, with titles such as Vice Presidents of Business Development or even new Vice President for Intellectual Property. Moreover, it is seen as an asset that must be managed strategically . It is now no longer enough to simply file and prosecute patent applications or trademark registrations. The strategic management of these assets demands that issues be considered such as- present and future value and means for assigning valuation; the strategic direction of that protection, including the deployment of increasingly scarce resources; an in depth understanding of your competitor ’s intellectual property and their strategic direction; the impact of public policy decisions, such as legislation and regulation, on those assets; and, of course, opportunities to develop and exploit these assets for the benefit of the overall corporate bottom line. A paradigm of this latter direction is the IBM Corporation. It is estimated that IBM derives over $1.3 billion dollars annually from the licensing of its technology. This is bottom line revenue. I am not certain how much product IBM would have to sell or services delivered to achieve a net of $1.3, but it is certainly considerable. Consistent with this approach, IBM has also decided as a matter of corporate strategy to become and remain the largest issuer of patents from the USPTO, which they have achieved through much of the last decade. Other companies have recently announced similar goals, (a phenomenon which is helping fuel the increase in the number of applications filed at USPTO, by the way). Out of this change is corporate philosophy has also come a need to deliver new and different services to those responsible for managing these assets. And so, we are seeing the introduction of consulting services applied in what was traditionally a legal services arena. Law firms have also begun to develop groups focused on delivering these services and the major consulting firms have also announced their ability to provide them, (although it is somewhat unclear how they avoid legal restrictions on providing the legal services component of the packages). Some law firms are also discussion entering to joint ventures or strategic alliances with consulting firms. At its most basic, this has even led to a change in the vocabulary we use in relation to intellectual property assets. No longer do we discuss issues in solely legal terms, such as section 112, paragraph 6, or the Doctrine of Equivalents, but rather in what are more traditionally management concepts such as “deliverables”, “asset deployment ”, and “income maximization ”. Companies are also reviewing their entire portfolios of intellectual property assets to make sure that what one writer has referred to as “Rembrandts in the Attic” are -38- not overlooked as companies have downsized or moved these assets. While hidden treasures can turn up, more likely is a greater appreciation for the overall licensing potential of these assets, as well as how groups of assets may be packaged and either sold or licensed for maximum economic return. Other potential clients for these services would likely include start-ups needing threshold advice on how best to protect their core technology and make decision as to just what is “core ”; helping maturing start-ups establish internal functions and systems for managing their IP; and even counseling on the ability to use intellectual property management as a tool for tax minimization strategies under the laws of several individual states. I would also expect this strategic intellectual property management trend to accelerate, not least because law firms view this as a means to increase the leverage with their clients, and, frankly, increase billings. Strategic management will thus become a third component of service delivered in this area, joining prosecution and litigation. Some traditionalist lawyers suggest that these are services which have traditionally been provided all along by IP lawyers and simply being repackaged. While there is some truth to that, the “repackaging ”, such as it is, can provide enhanced value to the client and bring need service to a new, and newly empowered, manager. It is therefore valuable to a client, especially in increasingly competitive markets and unsettled economic times. 5. SUBJECT MATTER EXPANSION Let me turn from management issues, to a topic which has engendered much interesting discussion and significant public policy debate* how far should intellectual property rights be expanded. As you probably know, there has been a lot attention recently, especially in the media, about patent subject matter expansion and patents being applied to emerging technologies. Most of these concerns have been focused on biotechnology, especially genomics, and computer software and business methods. These discussions have not been limited to the United States! they have also been widespread here in Japan and in Europe. One of the great foundations or principals of the U.S.’s 210 year-old patent system is that it is technology-neutral, in that it aims to apply the same norms to all inventions in all technologies. While some are critical of this system, the uniformity and facileness of the patenting standards of novelty, non-obviousness, and utility have allowed the patent system to respond to whole new sciences and entire new industries, without the need for Congress to constantly retool the law. This natural evolution of the patent system is no small achievement. 39- While the subject matter that is eligible for protection is for our courts and Congress to decide, the USPTO has been receptive to a continued expansion of subject matter eligibility, where appropriate, and in keeping with the basic principles of our patent system. They are committed to ensuring that their practices and policies promote the innovation and dissemination of new technologies. 6. BIOTECHNOLOGY As far back as 1980, the Supreme Court of the US provided the patentability standard for biotech inventions that has guided us ever since. That, of course, was the landmark 1980 Chakrabarty decision. The standard is as follows: a product of, nature transformed by humans, can be patented if it is new, useful, and nonobvious. Products produced from raw materials, giving these materials new forms, qualities, properties, or combinations, are patentable, provided that they are supported by either a well-established utility or by an asserted utility that is specific, substantial, and credible. Novel processes for achieving these results, such as genetically engineering a cell, can also be patented. The decision in Chakrabarty paved the way for a variety of U.S. patents involving living materials, including genetic materials and genetically engineered plants and animals. For example, we began allowing patents on sexually reproduced plants in 1985, when our Board of Appeals and Interferences decided In re Hibberd. And recently the Federal Circuit issued a decision in Pioneer Hi-Bred International, Inc., v. JEM AG Supply, Inc. which affirmed that sexually reproduced plants are patentable subject matter under 35 U.S.C. §101, although the U.S. Supreme Court has recently agreed to review this decision, which will likely give us further valuable guidance in this area. 7. GENOMICS From Chakrabarty , many have argued, has come the tremendous growth in the US biotechnology industry. One of its most recent achievements, and probably the last great invention of the 20th Century, is the discovery of the make up of the human genome. Whether by government"sponsored research (the NIH’s Human Genome Project) or private industry, (led by Celera Corp.), this will stand as a signature achievement in human scientific research. And in many ways, like a lot of good science, it leads to may other questions than the ones it set out to answer. What is the implication, for example of the fact that there are only 30,000 human genes, instead of the predicted 100,000, scarcely fewer than the mouse. One answer now seems to lie in the newly-named field of proteomics,' namely, that it is the great variety in the proteins that these genes express, rather than the genes themselves, that is responsible for human complexity. -40 With the understanding of the human genome comes, of course, a desire to protect the results of that research investment. One of the great advantages of our patent system is that it is technology neutral; that the standard we use to judge the patenting of genes is the same as all other inventions. And let me be clear* under current law, genomic inventions are patentable. While this may be difficult to explain conceptually to the public and especially an often* skeptical media, it remains the law, and should be. The economic impact of confusion in this area was vividly demonstrated last year, however, when President Clinton and Prime Minister Blair issued a joint statement regarding free access to raw data of the human DNA sequence by the world ’s scientists. Contrary to many people ’s impression, including some on Wall Street, this statement did not address patentability. Patent law dictates criteria for patentability, and nothing in this statement superseded these criteria. Unfortunately, the markets did react as if that were the case, and some $50 Billion in value, and the related research investment potential for the biotech industry, was drained from the stocks of biotech companies in an afternoon. The key issue for determining whether a genomic invention is patentable comes largely down to the question of utility under 101. That is why the USPTO continues to take steps to ensure that patent applications in this area are meticulously scrutinized for an adequate written description, sufficiency of the disclosure, and enabled utilities, in accordance with the standards set forth by our reviewing courts. In fact, in order to ensure the highest standards of utility, USPTO recently finalized new “Utility Guidelines” that require patent applicants to explicitly identify, unless already well- established, the specific, substantial and credible utility for all inventions, including genes and gene fragments, such as expressed sequence tags (ESTs). In other words, USPTO raised the bar to ensure that patent applicants demonstrate a “real world ” utility. And frankly, we believe that this may lead to the denial of hundreds of patent applications that failed to identify genuine utility in the gene sequence being claimed. I am pleased that former Director of the National Institutes of Health (NIH), and winner of the Nobel Prize for Medicine, Harold Varmus, who had been critical of our earlier guidelines, recently stated that he was “very pleased with the way [the USPTO] has come closer to [NIH’s] position about the need to define specific utility. ” The analysis of whether an invention meets the utility requirement is explained in our “Revised Utility Guidelines,” which are available on the USPTO Website at www.uspto.gov . You also can find on the Website new training materials on these guidelines, which will -41- assist those of you who might be drafting patent applications in these areas. The training materials are drawn to specific biotech examples, such as genes and gene fragments, and will help us ensure the issuance of high quality patents. 8. RESPONDING TO CRITICS Unfortunately, a lot of the debate over genomic patents has missed some key points. For one, issues of patentability and access are often confused. The fear is that patents on gene fragments, such as ESTs and single nucleotide polymorphisms (SNPs), will form an intricate licensing web that will prevent researchers from using the discoveries to make other health related advances. I agree that issues of access -- which come down to licensing -- are very important. But the marketplace has traditionally enabled the system to regulate itself through practices such as cross licensing. And in the event that someone uses their patent portfolios uncompetitively, there are methods for dealing with that, such as the Justice Department ’s anti trust guidelines. Another significant and justified concern is the issue of “patent layering ”, or the potential need to go to multiple patent holders of genomic invention patents in order to develop, and market, life saving therapies. This is potentially inefficient and costly, and possibly even a threat to the integrity of the system. To address this concern, I commissioned a White Paper on so-called “patent pooling ” to analyze whether this traditional means of dealing with this issue might be appropriately applied in biotechnology. Patent pooling is usually industry-initiated, and is most often used in industries with a significant requirement of norm or standard setting, most recently MPEG and High Definition Television, for example. The owners of the patents “pool ” them together and develop a licensing protocol to allow for access to all on reasonable terms. The paper I commissioned found that this model was appropriate and potentially useful in the area of genomic patents, and I am hopeful that the affected industries will strongly consider its adoption. The White Paper can also be found on the USPTO website. Another good example of an appropriate access mechanism is the licensing protocol for the patent issued about twenty years ago to Stanford University and the University of California-San Francisco for the technique invented by Cohen and Boyer for manipulating recombinant DNA. Although the invention was broadly patented, they chose to have a modest licensing program for commercial institutions, and they allowed researchers at other academic institutions to use it for free. As a result, the biotech industry continued to grow and prosper into the powerhouse it is today. 42- Lastly, patents on products extracted from the human body aren’t a new thing. We have issued hundreds of patents to products extracted from the human body for pharmaceutical or diagnostic use, including clotting factors to treat bleeding, clot-busting proteins to treat stroke, cancer antigens for detection of cancer, enzymes to treat heart attack, immune system proteins to treat immune deficiencies, and antibodies to treat infection. And while most patents to vitamins were generally isolated from plant and animal sources, we’ve also issued patents to vitamins derived from the human body. Human Growth Hormone was also originally isolated from human pituitary glands. I wish some of our critics " and those in the media who report on this debate -* would take the time to educate themselves on these issues. The problem is, it’s an issue that’s very easy to demagogue. 9. BUSINESS METHOD PATENTS Another area of patentability which has caused much discussion, especially here in Japan, is the question of patent business methods, including methods of using the Internet. While the USPTO has been issuing patents in this field for over 100 years, the recent case of State Street Bank vs. Signature Financial Corn. , in which the Court of Appeals for the Federal Circuit affirmed their patentability, has raised this issue to a matter of broad public debate. In your country, that debate has reached the highest levels, including a former Prime Minister who has appeared on television to express his concerns that such patents might interfere with financial institutions, and may even represent a strategic attempt by the US to maintain “hegemony ” over the Internet. This charge is totally without basis, but it underscore the seriousness of the debate. Additionally, the G'8 Finance Ministers also recently demanded a briefing by their countries technical patent experts on the details of such patents and their potential impact on financial institutions and markets. This meeting was held here in Tokyo, and, by all accounts, put to rest many of these concerns. These patents represent in many ways a natural extension of the development of new technologies. People are inventing on the internet and it should not be surprising that they look for ways to protect their inventions. Of course, it is important for the world ’s patent offices to be prepared to issue high quality patents in this area. For that reason, last year I promulgated a Business Method Patent Initiative, which basically provided two improvements. First, the Office has partnered with the affected industries to develop new sources of prior art and significantly enhance examiner training in this area. Secondly, all applications in Class 705, where the bulk of -43- these applications are examined, are getting what is called the “second look ”, a second review by a senior examiner. Among other things, this has resulted in a significant drop in the rate of allowance of applications in this area, from 57% down to 35%. (The overall allowance rate for all applications in the USPTO is approximately 65%). In other words, 65% of applications filed in this area have some deficiency, such as obvious combination or simply automating known processed, which is not patentable, and are being rejected. All signs suggest that this is both improving the quality of these patents and increasing industry confidence. I believe another factor may come into play as the Technology Bubble continues to play out. Many of these applications were filed by so-called “dot com ” companies, whose business models were dependent on the integrity of these internet methods. As these companies are moved out of the market, it is entirely possible that the number of these applications, which was already fairly modest as a percentage of overall applications (i.e. roughly 2000 out of 300,000 overall), will begin to fall. Even if they do not, I would predict that the system will continue to learn to adapt to them, as it has to every other new technology from electronics to aeronautics to polymer chemistry, and the debate will subside. 10. INTERNATIONAL ISSUES Finally, let me return to a subject I addressed briefly earlier in this talk- harmonizing the requirements of the world ’s individual intellectual property systems. The recent omnibus patent reform legislation in the U.S. brings our patent system into greater harmonization with our foreign counterparts. For example, the publication of pending applications after 18 months, a standard practice in the rest of the world, is now the law of the United States, and the first publications will occur this month on the Internet. It will especially interesting to see whether the benefits anticipated from this reform, such as more timely ability to make research investment decisions and the possibility of greater access to higher quality prior art by the Examiners, will be realized. That having been said, however, much remains to be done regarding harmonization. We still have a global hodge podge of jurisdictions and legal systems that are expensive to use and maintain. Given the diversity of existing systems and the various proposals for a new one, it's clear that achieving a consensus on a global patent system will be challenging. This will be true not only from a technical standpoint, but also from a political one. We have to grapple with a number of tough questions -- ranging from sovereignty issues to the need to harmonize standards of patentability. Other difficulties include the historic and -44- traditional first-to-invent system in the U.S. and the lack of a meaningful "grace" period in much of the developed world. The Standing Committee on Patents of the WIPO has again taken up the issue of substantive harmonization, as a very positive first step on this long road. The United States is encouraged that relatively more easily negotiable issues, such as the definition of “invention" and “obviousness ”, will be taken up first, so that there are diplomatic successes before tackling harder questions, such as “first to file". With all that said, I still believe a global patent system is attainable. The adoption and implementation of TRIPs provides us with a common starting point in the 134 countries that are now WTO members and the 30 economies seeking WTO membership. There are also a number of market forces propelling us toward a global patent, albeit an undefined one. These include- the increasing pressure on industrial property offices to decrease costs; advances in information and communication technology; and increasing global competition for investment and technological advantage. For example, the Japanese Patent Office recently adopted a series of revisions to their patent regime because they need, in their words, "to build a system where the economic value of IP is raised to international standards." Specifically, the JPO proposal shortens the period during which the examination of the application may be deferred, expands remedies for infringement, and expands the application of patent term restoration. A truly global patent system will be realized only when the currently divergent requirements -- both substantive and procedural -- converge. As I mentioned earlier, the US has also proposed a simplified version of what has for over twenty years been the world ’s only broad based patent treaty, the PCT. Led by Director General Kamil Idris, the WIPO Governing Body of Member States had formed a body or committee to take up our proposal on an appropriate time table, and we are encouraged and gratified by the reception thus far. The support of the JPO, in particular, has been extremely helpful and I would like to thank them publically for that support. The proposal contemplates simplifying the PCT in two stages. The first stage includes simplification of filing date requirements, residence and nationality requirements, and demand requirements. It also includes elimination of signature requirements and acceptance of fees for postponing national processing. The second stage of PCT reform includes a more comprehensive overhaul of the entire PCT system. It would incorporate the regionalization of current search and examination authorities; eliminate distinctions between national and international applications; and — 45 — provide for electronic publication of applications and transmission of search and examination results. It is hoped that this second stage will coincide in time with the substantive harmonization work of the Standing Committee on Patents, so that the two can be effectively meshed. 11. CONCLUSION As you can see, it is an extremely interesting time in the world of intellectual property. The challenges are significant, and there are those who even suggest that the tide may be, or should be, turning away from strong protection. I do not agree. Throughout the history of these systems and their administration, the consistent result has been that such protection has provided an extraordinary means for the nurturing of new technology and the economic development that flows from that technology. Our biggest challenge remains the harmonization and globalization of these systems, the strategic management of them, and the development of new approaches to emerging forms of protection. Given our measured and intellectually rigorous approach to these advances, I remain confident that we are on the right path forward. I wish to thank Professor Tamai and the rest of the staff at RCAST for their kind invitation. Organizations like RCAST are also reflective of these new trends and I have found the intellectual property component of them to be very encouraging. Thank you all again for your attention, and I will be happy to yield the floor to Professor Adelman. — 46 — 5 m 7> H 1/7 - 777^- 1. ^^*#0## miaii, A#(7)m-m (7)3/4^#^(7)Mm'r&6^:66, ^ #$ij^(7)M^(7)^T, A#ll, "76 6^3 ^^(Dai/T^mc)it6ai:w6. %M#S(7)^&6i: ip 6/:66(:jA^1±^WC H#^6#7^V^W^^V^(7)^, aW3C(h^^6C«ht)Te^).IPThU/7%(D4:l:^, ^J#T6C^I:4:0, #%(7)#M:^##LTV^W^(H3^^7,^6. IP T HJ //71:#C)X Hi/7A77 2. *emrF;£(£>ito )Km#m:(7)m^^#^4; USPT0I1#]S, #m#^7 H 77 > A Written Description ^7 K77>&^L%:. -47- CAFC(D±^m^, 2000 ^, Festo#fij(7)#^ &mL&. c^UCckoT, (D&chO AT&T$f):(DfiJ^Tt), 7 7'7> - Mv h ' 3 Aa/i->X - 7> M - y-y;i/(D^(D9>^ U #^#T^7 X->X%#0:c7th< h&7lf< >La2% 2000 ^ io ^ rn^^7^&#M:%#^(2000)j 4;^ «h, TW6. ##?& 103^^#1EL, T&6(h#^$a6 4:c, 48- Managing Intellectual Property Assets and Current Trends in U.S. Patent Law Andrea G. Reister 1 Of counsel Covington & Burling I . Managing Intellectual Property Assets A. Objective- Increase Shareholder Value and Profitability Increasing shareholder value and profitability is the objective of management of companies from small to large. Many companies have focused on organization and education of the workforce, inventory and quality control management, and maximizing the value of physical assets, such as buildings, equipment, etc. However, recent studies indicate that up to three- quarters of a company ’s value today is represented by its intangible assets, primarily intellectual property (“IP”). Intangible assets include such items as software programs, databases, processes and methodologies, drawings, documents, designs, inventions, and knowhow that have been developed by the human capital of a company. Intangible assets can be transformed into cognizable assets in the form of intellectual property, including patents, trademarks, copyrights, and trade secrets. An asset such as a patent provides legal protection of an economic right. Maintaining that protection is unjustified, and expensive, if the company has no strategy for capitalizing on the value embodied in the economic right. Once transformed into intellectual property assets, the intangible assets of the company should be used to support a company ’s business strategy and create shareholder value. In every business, not just “knowledge intensive” ones, intangibles present real challenges to people who allocate resources internally - that is, managers - and their external counterparts - investors. In both cases, says [Harvard’s] Michael Porter, capital “is more likely to be dedicated to physical assets than to intangible assets whose returns are more difficult to measure.”12 For historical reasons, many companies use a cost-based accounting system in which internally-generated intellectual property assets are not quantified and do not appear on the balance sheet, even though they may account for a significant portion, if not the majority, of 1 The views expressed herein are those of the author, and do not necessarily represent the views of Covington & Burling or its clients. 2 Thomas A. Stewart. “Trying to Grasp the Intangible, ” Fortune, Oct. 2, 1995, p. 157. © 2001 Covington & Burling . All rights reserved. -49- the value of the company. However, if the patent or technology was acquired or licensed from a third party, then it would appear as an asset on the company balance sheet. This leaves the vast majority, if not the entirety, of a company ’s intellectual property assets with no accountability throughout the company. The Traditional Patent Model Many companies have a “patent department ” or other similar entity that is responsible for the intellectual property assets. The patent department may be organizationally located within the legal department, or may report to the head of research and development (“R&D”), or even report to one or more operating business units. Typically, such a department is charged with obtaining and maintaining patents. Invention disclosures are submitted to the patent department, and a decision is made to prepare and prosecute a patent application. The decision to file may or may not be made based upon a business plan or strategy. Some companies adopt a defensive posture to obtain as big a pile of patents as they can to provide a “patent shield” in case the company is sued by a competitor. The rationale here is that competitors would think twice before filing a patent infringement lawsuit against a company that could turn around and sue them on one or more different patents. Such patent departments also dutifully maintain patents by monitoring and paying annuities and maintenance fees on the patents. This is quite often done passively and reactively, with little if any analysis of the technology covered by the patent, and how the technology relates to the current and future business plan of the company. These new economic realities may demand significant shifts in strategy. For example, [organizations] may have to ally their company with another - maybe even a competitor — in order to succeed. Matsushita did that when it virtually gave away to competitors its VHS technology for videocassette recorders. In so doing, of course, it shut Sony ’s Betamax right out of the market.3 A New Patent Model To increase shareholder value from the intellectual property assets, a company needs to move away from the traditional patent department, and integrate the management of intellectual property assets with the business plan and strategy. In determining what to protect, companies should begin their analysis with the business plan, not with the technology. The focus should be on what companies want to protect, not what is protectable. Two key shifts in organization and focus can help achieve this goal: development of what will be referred to as an “IP matrix” as a management tool; and centralizing the IP 3 Curt Kampmeier. “Intellectual Capital: The New Wealth of Organizations, ” Journal of Management Consulting, Vol. 10, No. 1, May 1998, pp. 6163. © 2001 Covington & Burling . All rights reserved. -50- management function into a separate business unit that is held accountable for the IP management function (an “IP management business unit”). B. A Roadmap for IP Planning and Management with the New Patent Model 1. Educate from the Top Down- IP Supports Business Strategy and Creates Shareholder Value Companies are well versed in business planning - identifying long-range business objectives, including introduction of new products, committing to a research and development program, opening new plants and facilities - and short-term corrections to improve performance of the bottom line. Management of IP assets is an integral part of both long- range and short-term business planning. Active IP management can support the long-range business objectives of a company by, for example, raising awareness of the importance of IP throughout the company. This allows the company to obtain protection for its IP assets that will be used in, or are necessary for, the business objective. As an example, raising awareness throughout the company may allow a key component of a product to be patented, or to protect as a trade secret an aspect of a product or its manufacture that would otherwise have been disclosed. By developing and maintaining the IP matrix in the manner described below, it is possible to identify what technology and intellectual property assets are needed for a project, and to make an assessment of “build v. buy ” for the technology. The IP matrix also allows a company to centralize, yet disseminate, the IP assets that are available within a company. The availability of such information can avoid redundant development, and can shorten the time to market - both directly attributable to the bottom line. There is no longer any doubt that the financial and stock markets react to and value IP. IBM, Skandia and Dow Chemical have developed IP supplements to their annual reports. Eli Lilly lost approximately one third of its market capitalization when the Federal Circuit ruled against the extension of the patent covering its Prozac product. Visx experienced a US$2 billion loss in market capitalization when the U.S. International Trade Commission ruled in December 1999 that Visx’s rival, Nidek, did not infringe a Visx patent. “Achieving Caterpillar ’s goal of providing quality products and services requires more than superior engineering skills. It also requires the protection provided by patents. Without this protection our competitors would soon duplicate our inventions, and the features that differentiate Caterpillar machines worldwide would no longer be unique. Our return on research and development would quickly be eroded, and our mission of © 2001 Covington & Burling . All rights reserved. producing above average returns for our stockholders would become increasingly difficult.”4 2. Development of the IP Matrix A first step in actively managing IP assets and developing the IP matrix is to conduct an audit to inventory what the company has, either through outright ownership or licensing arrangements. However, the key to successful IP management is maintaining the viability and accuracy of the IP matrix. A person or organization in the company, preferably a separate IP management business unit that is held accountable for its performance, must be tasked with performing this function. This provides a process for systematically reviewing the entire portfolio of patents on a routine basis. The IP matrix should provide a correlation or mapping to the company ’s products, and include an indicator of any revenue attributable to the technology. At a minimum, the following information should be inventoried and maintained for each patent that is owned by the company or licensed-in by the company. 1. Whether the technology of the patent is currently in use, planned for future use, or used in the past; 2. Description of product(s) that relate to the patent; 3. Whether licensed, and an indicator of royalty stream; if not licensed, whether available for license; 4. Technology category; 5. Expiration date and date for next maintenance fee,' and 6. Value assessment (for example, whether it can be considered a “blocking ” patent to competitors; potential for cross-uses in non-core applications and products, etc.). A similar inventory can be used for other types of intellectual property, including trademarks, trade secrets, and invention disclosures. To maximize the utility of the IP matrix, it should contain information relating to the company ’s competitors. For example, the IP matrix can be used to track the patents of top competitors as a function of the company ’s product. The IP matrix can also be used to track the patents of top competitors as a function of technology or subject matter area by correlating the competitors ’ patents to the company ’s patents. Most importantly, the IP matrix can be used to correlate competitor ’s products to the company ’s patents, and provide a mechanism for early detection of possible infringements. An exemplary IP matrix is shown in Figure 1. Such a matrix can be implemented using a 4 Donald Fites, Chairman and CEO of Caterpillar, Inc. © 2001 Covington & Burling . All rights reserved. spreadsheet, or more preferably a relational database to more easily capture the interrelationships between the various parameters. The IP categories are shown along the “Y’-axis, and include the following- the company ’s patents, pending applications, and invention disclosures: the competitor(s) ’ patents and published applications: licensed-in patents: and licensed-out patents. Various correlative parameters are shown along the “X”- axis, and include the following: use of the IP by the company (past/present/future): the company ’s product(s) that embody the subject matter of the IP: the competitor(s) ’ product(s) that embody the subject matter of the IP: if licensed, licensing information such as royalty income, field of use, exclusivity, and expiration: if not licensed, whether available for license: technology category: expiration date and next maintenance fee due date: a cost column to track costs associated with the IP (e.g., research and development costs, as well as patent attorney costs, associated with a patented technology, or the costs incurred for acquisition of a patent); and a value indicator that provides a qualitative indicator of the importance of the IP, e.g., whether the patent is a blocking patent and a potential barrier to entry for competitors, or, conversely, whether the competitor patent represents a barrier to entry to the company. The IP matrix is key for a significant number of IP management functions. For example, the information contained in the IP matrix can be used to evaluate whether to file on a particular invention. The information relating to competitor products and patents may reveal potential cross-licensing opportunities, and identify what technology may be needed for future products. The IP matrix provides a mechanism for a company to monitor the research and development activities of competitors by tracking their patents and published applications. Through proactive use of the IP matrix, a company can more quickly identify potential infringements. Particularly for potential infringements, the information in the IP matrix can be supplemented with information obtained from internet and database searches, and as well as from conversations with scientists and engineers, consumers, suppliers, and the company sales force. The IP matrix is a centralized repository of information that allows a company to determine whether it has the intellectual assets for a new product or a new technology area. The IP matrix allows the company to look for and identify gaps in its own technology. It can avoid costly duplication of research and development efforts. By tracking the IP of competitors in key technology areas, a company can make a more informed decision of whether to proceed with research and development, or to procure the technology on the open market. If the technology is to be obtained through license or acquisition, the company will have more information for cross licensing opportunities that could be a favorable business deal on both sides. 3. Measure IP Performance The key to successful management of IP assets is using the information contained in the IP © 2001 Covington & Burling . All rights reserved. -53- matrix to increase shareholder value and contribute positively to the bottom line. To do so, the company needs to be able to measure IP performance. IP performance can be measured by evaluating cost savings, revenue generation, and the degree of IP integration in the management of the company. a) Cost Savings The IP matrix can be used effectively to cut costs and contribute savings directly to the bottom line. As many companies are aware, the cost of prosecuting and maintaining a large portfolio of patents is expensive. One large chemical company analyzed its portfolio of 29,000 patents and estimated that it would cost US$180 million to maintain those patents for a ten- year period. The company produced an estimated savings in maintenance fees of US$40 million by eliminating patents that were determined to provide little protection or that protected technologies that were obsolete, not commercially workable, too expensive, or otherwise not worth the expense of the maintenance fees. Cost savings can also be achieved through more judicious choice of the countries in which the patents are filed and maintained. Rather than filing every application in the same country, a case-by-case analysis should be done to identify which inventions should be protected, and in which countries that protection should be sought. Factors to consider include the technology or subject matter of the patent, where the eventual product will be manufactured and/or sold, the IP regime in the country (whether IP rights can readily be enforced, whether patent protection is available for the subject matter of the invention, such as software or business methods), and the filing and maintenance fee costs in the country. Because of the nature of the business of the company, it may make sense to consistently file in a number of countries. Additional savings can be achieved by selecting one or two foreign agents in a country to perform the work. The increased buying power of this approach allows the company to negotiate favorable rates with the foreign agents. Moreover, by reducing the number of invoices and accounts for receivables, the accounting costs of the company are also reduced. One key component to cost savings is the judicious choice of the inventions for which to file patent applications. The guiding principle for this decision should be the business plan, the product, and the features of the product. As noted by Michael Einschlag, chief patent counsel of Applied Materials, companies should patent “anything you brag to customers about as making you better than your competition. ” Many companies incentivize employees to submit invention disclosures (through monetary payments or stock options) so that key concepts are not missed, and the company has a large body of disclosures from which to select. The invention disclosures can be tracked through the IP matrix, and correlated to existing patents and products of both the company and the competitors. But there must be a systematic approach to the decision-making process for selecting those invention disclosures © 2001 Covington & Burling . All rights reserved. — 54 — for which a patent application will be filed. For example, a “patent committee, ” or other group brought together by the IP management business unit, should evaluate the invention disclosure by considering its importance to the business plan - current and planned products of the company, as well as the products and development efforts of the competitors. To accomplish this evaluation, the “patent committee ” should include representatives from the relevant research and development and scientific groups of the company, marketing, product development, and business development people, as well as patent attorneys. A similarly constituted patent committee can be used to “trim down ” patents for which maintenance fees should be paid, by eliminating those that do not serve a justifiable business function. b) Revenue Generation In order to effectively generate revenue from IP assets, it is particularly important that the IP management function be centralized and held accountable for its performance. The IP assets themselves may be owned by other business units - in fact this may be desirable from a tax standpoint. To use IP assets to generate revenue, the IP management unit needs input from corporate management on the direction and long-range strategy for the company, from the patent attorneys, from the research and development groups, and from marketing and business development. Like other business and operating units, the IP management unit should be held accountable for its performance. The IP management unit uses the knowledge contained in the IP matrix to not only control costs, but to affirmatively seek ways to generate revenue from the IP assets. The challenge is to obtain as much information as possible about each asset - particularly where the technologies are used in the core business and industry of the company - past, present, and future. An often overlooked source of revenue is other uses for the technology and IP assets of the company. Licensing outside the core business of the company in a “field of use” can contribute directly to the bottom line, without introducing another competitor into the marketplace. For example, a nuclear power company sought new applications for proprietary technology that shuts its reactor down in an emergency. The company ultimately licensed out that technology for use at a theme park, to quickly shut it down if the need arose. As noted by Steve Acosta, intellectual property portfolio manager at Xerox, “[y]ou have to know the technology and understand how it might work in another business or even another industry. To do that you have to grasp the essence of the technology, and not just consider its current use.”5 Revenue is generated from IP assets typically by licensing. It is also possible to generate revenue by selling particular IP assets, or by litigating to obtain damages. The IP matrix 5 Roger Carlile. “Strategic Management of Intellectual Property, ” Patent Strategy & Management, Vol. 1, No. 1, May 2000, pp. 14. © 2001 Covington & Burling . All rights reserved. -55- can be used to identify patents for sale or even donation for a tax advantage. Aside from the technical and legal analysis that must be done to determine the merits of the lawsuit, to generate revenue from litigation it is necessary to do a cost benefit analysis comparing a business solution such as a license with the likely damage award or injunction. Licensing has historically been the greatest source of revenue from IP assets. The success of some companies in generating licensing revenue is renowned, such as Texas Instruments (“TI”), and more recently IBM. Since 1987, TI has reported more than US$4 billion in licensing revenue. Two key aspects to a successful licensing program include a formal, written licensing policy, along with standardized license agreements, and periodic royalty audits of licensees. Standardized license agreements (prepared, monitored, and updated by appropriate legal counsel) reduce negotiation costs, as well as the costs to the company of monitoring the agreement. Periodic royalty audits help ensure that a company actually receives the royalty revenue to which it is entitled. The IP matrix is a useful tool in developing and managing a licensing program. The IP matrix allows the IP management business unit easily to monitor items such as field of use, any exclusivity, the royalty payment schedule, the expiration of the license, and the obligations of the licensor (company) under the license. Having a standardized license agreement assists greatly in this management function. If a particular license has an important deviation from the standardized license agreement, this information can also be captured in the IP matrix. c) IP Integration A company having an IP management business unit and an IP matrix is in good position to integrate IP into the operation and planning of the company as a whole. The objective is to use the information about the company ’s own patents and products, as well as the information about competitor patents and products, to determine how to proceed with a new product or development project. The company can use the information in the IP matrix to determine whether the technology is already available in house, or whether it may be available through license or assignment from a third party. The IP matrix can provide useful insight into the cost benefits of developing needed technology in house, as opposed to obtaining it from a third party. By tracking costs in the IP matrix, it can be used to estimate the cost of obtaining an exclusivity position for new technology. IP assets can be used for other functions that contribute to shareholder value and profitability. Like other assets, IP assets can be used as collateral for financing, such as through the use of security agreements. Tax benefits can sometimes be achieved through the use of IP asset holding companies, or even through donation of patents. For example, Ford has donated a number of patents directed to micromachining for chip manufacture to the University of Michigan, and DuPont has donated a patent for stabilization of non aqueous © 2001 Covington & Burling . All rights reserved. -56- suspensions to Iowa State University. 6 One indicator of integration of IP into business planning and management is performing a product clearance investigation for significant new products. After spending perhaps tens or hundreds of millions of dollars on research and development for a new product, it is catastrophic to then learn that the product cannot lawfully be sold because it falls within the scope of another company ’s patent. Early detection of these issues allows for redesign of the product to avoid the patent, or licensing-in of needed technology on rates more favorable than would be available after success of the product or litigation was initiated. Detection of these issues requires close ties between the research and development, product development, and IP management business units of the organization. Such integration, communication, and product clearance effort can avoid the debacle that befell General Electric Company and its magnetic resonance imaging (MRI) machine for imaging to detect cancer. General Electric was sued for patent infringement by Fonar Corporation, resulting in an adverse judgment in excess of US$100 million, not counting attorney fees, or the costs incurred by General Electric in developing the technology, and bringing the product to market. General Electric has developed a sophisticated product clearance process to avoid a repeat of the Fonar experience. The pinnacle of integration of IP into business planning and management is to create a market where none existed, and then protect the company ’s exclusive position in the market with IP assets. Good examples of this include the “Post-It Notes ” product of 3M, and the various products offered by the telecommunications industry, including cellular phones, pagers, personal facsimile machines, etc. Another good example of strategic use of IP assets in the market place is the patent obtained by Unocal Corp. for a low emission fuel blend that met the stringent requirements of the California Air Resources Board (“GARB”). In 1997, Unocal was awarded US$69 billion in patent infringement damages from its California competitors. II. Current Trends in U.S. Patent Law A. “Joint High Tech Agenda ” Senators Orrin Hatch and Patrick Leahy are proposing a “Joint High Tech Agenda ” for the 107th Congress. The eight-part plan includes a commitment to focus on the following intellectual property-related issues in the coming year: 6 Dr. Jay B. Rappaport, “IP Donation: The Corporate View,” presented at AUTM Annual Meeting, February 26, 2000. © 2001 Covington & Burling . All rights reserved. -57- 1. The rights of consumers and creators of intellectual property in the high tech environment; 2. Business method patents, biotechnology inventions, state government liability for patent infringement, and drug price competition; 3. Trademarks and domain names; 4. Broadband technology and access; and 5. First amendment and free speech issues in the high tech environment. B. American Inventors Protection Act of 1999 The final provisions of the American Inventors Protection Act of 1999 (“AIPA”) became effective on November 29, 2000. The AIPA fundamentally changed many aspects of the patent application process in the United States. Accordingly, the U.S. Patent and Trademark Office (“PTO”) has issued many new rules to implement these statutory changes. The attached Covington & Burling Memorandum describes the most significant changes implemented by the AIPA. Because many of the changes are fairly detailed and complex, consultation with United States patent counsel in connection with particular inventions and applications is advised. C. New Utility and Written Description Guidelines The PTO Final Examiner Guidelines on Utility Requirement and the PTO Final Examiner Guidelines on Written Description Requirement were published in the Federal Register on January 5, 2001 (66 Fed. Reg. 1092, and 66 Fed. Reg. 1099, respectively). Both guidelines are applicable to all areas of technology, but they do not constitute substantive rulemaking and do not have the force and effect of law. As such, any perceived failure by examiners to follow the guidelines is neither appealable or petitionable. The utility guidelines address the utility requirements of 35 U.S.C. §§ 101 and 112. The guidelines require that inventors identify a “specific and substantial credible utility ” for all inventions, notably gene-based inventions. The utility guidelines direct examiners to review the claims and the supporting written description to determine if the application has asserted for the claimed invention a “specific and substantial utility that is credible,” based on the view of one of ordinary skill in the art and any evidence of record. If no assertion for specific and substantial utility for the claimed invention is credible, and the claimed invention does not have a well-established utility, then the examiner must reject the claim(s) under 35 U.S.C. § 101 for lack of utility, and under 35 U.S.C. § 112 | 1 for failing to teach how to use the invention. Although applicable to all areas of technology, the utility guidelines have generated the most controversy with respect to gene-based patents. The final guidelines respond to comments received from the public on the Revised Interim Utility Examination Guidelines © 2001 Covington & Burling . All rights reserved. -58 published in 1999. Notably, the comments explain that “an inventor ’s discovery of a gene can be the basis for a patent on the genetic composition isolated from its natural state and processed through purifying steps that separate the gene from other molecules naturally associated with it;” a patent on a gene covers the isolated and purified gene but does not cover the gene as it occurs in nature. If the patent application discloses only nucleic acid molecular structure for a newly discovered gene, and no utility for the claimed isolated gene, the claimed invention is not patentable. However, if the application discloses a specific, substantial, and credible utility for the claimed isolated and purified gene, the isolated and purified gene composition may be patentable. The written description guidelines instruct examiners to look for consistency between a claim, and the factual support for the claim in the written description, as judged by one of ordinary skill in the art. The description of the claimed invention must show that the applicant was in “possession ” of the claimed invention. A description of an actual reduction to practice is one way to show such possession. Alternatively, the description can show that the invention was “ready for patenting, ” such as by the disclosure of drawings or structural chemical formulas that establish that the invention was complete, or by describing distinguishing identifying characteristics sufficient to establish that the applicant was in possession of the claimed invention. For each claim drawn to a genus, the written description requirement may be satisfied through sufficient description of a “representative number of species ” by actual reduction to practice, reduction to drawings, or by disclosure of relevant, identifying characteristics. As noted in the guidelines, “representative number of species ” means that the species that are adequately described are representative of the entire genus. If there is substantial variation within the genus, then a description of a sufficient variety of species to reflect the variation within the genus must be provided. Conversely, a single species may support a generic claim when the description of the species evidences to one of ordinary skill in the art that the invention includes the genus. D. Doctrine of Equivalents after the Festo Decision by the Federal Circuit The scope of infringement under the doctrine of equivalents is an issue of much debate as evidenced by decisions of the Court of Appeals for the Federal Circuit, as well as the Supreme Court. In an attempt to resolve some of the issues left open by the Supreme Court in the Warner-Jenkinson 7 case, the Federal Circuit agreed to hear the appeal in the Festo 7 Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 33 (1997). In this case, the Supreme Court stated that an amendment made for “a substantial reason related to patentability ” created prosecution history estoppel. However, the Supreme Court did not clarify whether “patentability ” referred only to prior art, or to other statutory requirements. © 2001 Covington & Burling . All rights reserved. -59 - case en banc.8 The majority opinion raised and answered four questions, finding that- 1. an amendment that narrows the scope of a claim for any reason related to the statutory requirements for a patent, not just an amendment made in response to prior art rejections, gives rise to prosecution history estoppel with respect to the amended claim element; 2. “voluntary ” amendments (such as preliminary amendments) are treated in the same manner as other claim amendments so that any voluntary amendment that narrows the scope of a claim for a reason related to the statutory requirements for a patent will give rise to prosecution history estoppel with respect to the amended claim element; 3. if prosecution history estoppel applies, no range of equivalents is available for the amended claim element; and 4. if an amendment is made without explanation, no range of equivalents is available for the amended claim element. In deciding issue (3), the elimination of any range of equivalents where there is prosecution history estoppel, the Court majority of eight members overruled the prior Federal Circuit case giving the broadest reach to the doctrine of equivalents, Hughes Aircraft Co. v. United States, 717 F.2d 1351 (Fed. Cir. 1983). The Festo ruling effectively transformed prosecution history estoppel by amendment into an absolute bar to asserting the doctrine of equivalents for an amended claim element. A complete bar to the doctrine of equivalents arises when there is a claim amendment that narrows the claim, unless the patentee can overcome the presumption that the reason for the amendment was related to the statutory requirements for a patent. Notably, the American Bar Association Section of Intellectual Property Law has adopted a policy resolution that “opposes in principle that an amendment to a patent claim shall necessarily operate as a bar as to all equivalents with respect to the amended language of the claim.” The Intellectual Property Law Section will use this policy as the basis for requesting approval to file an amicus brief9 in relevant cases. After Festo, a patent owner is limited to the strict scope of the amended claim element with no equivalents. Note, however, that amendments made to one claim element will not create prosecution history estoppel against other, non amended claim elements within the same claim. This represents a policy shift in favor of competition. The absolute bar to equivalents makes it easier for competitors to design around an issued patent by changing a detail of a claim element that was narrowed by amendment, regardless of the particular 8 Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 234 F.3d 558 (Fed. Cir. 2000). By taking the case en banc, the full complement of the Federal Circuit can overrule prior decisions of a three judge panel of the court. 9 An amicus brief is a “friend of the court ” brief that a court may consider when deciding cases, particularly when the cases are concerned with new and controversial issues of law. © 2001 Covington & Burling . All rights reserved. -60- rationale for that amendment. The Festo ruling significantly changed the landscape of the doctrine of equivalents. However, the ruling is subject to legislative action that Congress may take, as well as a further ruling from the Supreme Court. The counsel for Festo has indicated an intention to file a petition for certiorari, requesting the Supreme Court to consider the case. Even if the Supreme Court decides to take the case, the case will not be heard before the fall of 2001, with a ruling at least a year later. In the meantime, patent owners, as well as patent licensees, must assess the scope of their patents anew in light of the Festo rules. E. Proposed Business Method Patent Improvement Act of 2000 A new act entitled the “Business Method Patent Improvement Act of 2000” was introduced into the House of Representatives by Representatives Berman and Boucher on October 2, 2000. By introducing the bill, Representative Boucher wanted to begin a public debate about how congress should respond to the State Street Bank10 decision. The purpose of the bill is to develop an appropriate legislative framework for the U.S. Patent and Trademark Office (“PTO”) to assess claims and offer the public a meaningful opportunity to participate before - and not just after -- a patent is awarded. Moreover, the bill would force business method patent applications to disclose all the relevant prior art to the PTO, rather than “hiding the ball.” Under the bill, all business method patent applications would be published within eighteen (18) months of filing, thereby facilitating submission of prior art by the public. Additionally, an Administrative Opposition Panel would be established in the PTO for business method patents. The bill would also modify 35 U.S.C. § 103 so that the computer implementation of an existing business method would be “presumed obvious to a person of ordinary skill in the art at the time of the invention. ” F. Business Method Patent Litigation Electronic commerce (“E commerce ”) businesses have been aggressively pursuing patent protection for their Internet and business model inventions. Some of the pioneers in the E- commerce world have been enforcing their patents to gain a commercial advantage and to reap economic rewards. In 1999 and 2000, Amazon.com, Priceline.com, and DoubleClick engaged their competitors in patent infringement battles over business method and Internet technologies. In perhaps the most-publicized battle, Amazon.com and Barnesandnoble.com 10 State Street Bank & Trust Co. v. Signature Financial Group , Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998), cert, denied, 119 S.Ct. 851 (1999) (claims reciting method of doing business are statutory subject matter, and should be subjected to the same legal requirements for patentability as applied to any other type of method or process claim). © 2001 COVINGTON & BURLING. All rights reserved. — 61 — are litigating over Amazon.com ’s patented “one-click ” technology (U.S. Patent No. 5,960,411) for on-line sales transactions. Amazon.com won the first round of the battle, obtaining a preliminary injunction that required Barnesandnoble.com to re design its “Express Lane” feature during the Christmas buying season of 1999. Barnesandnoble.com appealed the propriety of the preliminary injunction to the Federal Circuit. On February 14, 2001, the Federal Circuit reversed the preliminary injunction on the grounds that Barnesandnoble.com had cast enough doubt on the validity of the patent to avoid a preliminary injunction, and that the validity issue should be resolved at trial.11 This result appears to reaffirm the Federal Circuit’s position with respect to business method patents as stated in the State Street Bank case - business method inventions are proper subject matter for patents, but all statutory requirements - including novelty and nonobviousness - must be met.1112 The trial on the infringement and validity issues will take place later this year. As Amazon.com and Barnesandnoble.com continue their patent battle, Priceline.com and DoubleClick have settled their patent infringement litigations. Priceline.com battled with Microsoft ’s Internet travel company, Expedia, over “on-line reverse auction ” technology. Priceline.com settled its patent dispute with Expedia in January 2001. DoubleClick, a leading Internet advertising company, sued two of its rivals, L90 and Sabela Media. The infringement suit involved Double Click’s patent directed to delivering, targeting, and measuring advertising over the Internet. A settlement was reached in November 2000. The interesting battles continue in 2001, this time relating to “hyperlinking. ” British Telecom (“BT”) has filed a patent infringement action against the Internet Service Provider (“ISp ”) prodigy. BT is seeking royalty payments for its 1989 patent directed to hyperlink technology (U.S. Patent No. 4,873,662). The BT litigation will be an important case for E- commerce companies to follow because almost all World Wide Web sites include hyperlinks to allow an Internet user to view the contents of a second page by selecting a hyperlink provided on the original page 11 Amazon.com Inc. v. Barnesandnoble.com Inc., No. 00*1109 (Fed. Cir. February 14, 2001). 12 State Street, 149 F.3d at 1375. The court cited the analysis of Judge Newman’s dissent in In re Schrader, 22 F.3d 290, 298 (Fed. Cir. 1994) (“[the business method exception] is. . .an unwarranted encumbrance to the definition of statutory subject matter in Section 101 ...Patentability does not turn on whether the claimed method does ‘business ’ instead of something else, but on whether the method, viewed as a whole, meets the requirements of patentability as set forth in Sections 102, 103, and 112 of the Patent Act.”). © 2001 Covington & Burling . All rights reserved. -62- Company Company Competitor Technology Expiration IP Category License Cost Value Use Product Product Category Maintenance Company Patents Applications Invention Disclosures Competitor Patents Published Applications Licensed In Royalty Patents Payment Field of Use Exclusivity Expiration Licensed" Royalty Out Patents Income Field of Use Exclusivity Expiration F igure 1 IP Matrix © 2001 Covington & Burling . All rights reserved. 6 $ 3 3/ kf ZL — :S; tirw-' u> -T X A-->a Xtgffi^eCMT-SHMSXj £*»£;: i«ST»5.ffflSWT/’!U*», pct, tripsise&^tsisaitTviS/it, tiifsetoXVcMVTii, 2 o©g%*BT'$ 21 tSKfflslCjoVt. 1S«K#tt®feMS&*#©—Otti-oT^Z,, #IC, H >X-*y hs»©»s««^ifffi?i*Brtgcu, t’v^xcioits^a. AiixEtoWs- *A"-Snoofc-5„ nW^lfcOWHf CZH'TH 1998 fOXf- h • X h 'J — h • AXX* tt©fl»(CAFC)t:J;D. W^Sft ti>nii ^frts.%%(o-T;h-DXbmi,cttMiit£Z>cc©»p©#;fmmn ^tlK5teIRBtolCt8*LTt>5. USPTO t JPO ti:H f> l:n > Ha-X-MSSS^oS^gqi £*ffi@ClTU/z„ c©#n%, Ha Ufcl)l=]£8tj"T, 3>Ha-X-M**#l:30T, 0 * C45 SiH&'lt H # §BJ3tt (it#H4) 0*frStt®-r-Sfe©T'feSo tolfMSsiifSttUoloTti:, XETOt, 3 >Ha —X —6IBlo&0H;X^X<05?£T$>aT XT- h • X h V - h • A’>Xfl|«0, r*flj-eMfrWTWS ®rg*J Hzi>Ua-X-**l]fflLTA& tAi*cti:, H-XX'XcoA&ttiiSEPil H& 6&I/X L- ^LAA*6, E»M711/3*U X'AHMLTtt, ^SnTU!S^fc**HTtt B*Ttt-en£Jg3Sf R^xTSiKrtti'ro.kSicfflu 6nT057)^SMIXX ly-AlxSB®t"tltf?i$±g|H/j:i3 55. Sot, VX h’XxTMl SBtSIlTB, %W&H0J; 5 CIH«Ufc 6 J; B*TA# -64- Comparative Study of Examination Guidelines for Computer-Related Inventions between United States and Japan Huan-Yi LIN* 1. Introduction Since the interplay of patent systems between United States and Japan has been tremendously increased under the tread of economical globalization, the need of comparative study is obvious. In particular, computer-related inventions and business method patents are brand new and controversial topics. The different approaches taken by United States and Japan to certain extent would effect the development of information technology. This article compares criteria for patent eligibility and nonobviousness (“inventive step ” in Japan) of computer-related inventions. As to patent eligibility, a business method which is not implemented by computers is statutory subject matter in the United States, according its “useful, concrete, and tangible result” standard. By contrast, Japan emphasizes technology application. Thus, business method is patentable subject matter only when it is implemented by computers, which is a utilization of technology. On the other hand, mathematical algorithm is not patentable subject matter in the United States because it is regarded as either an abstract fact or a mathematical representation of natural law. A practical application is required for a process to be patent eligible. However, mathematical algorithm may be statutory subject matter in Japan if the claim describes in detail how hardware resources are used to implement it. Accordingly, as far as statutory subject matter concerns, the way you describe an invention does make a big difference in particular when it comes to software-related inventions. With respect to inventive step, Japanese examination guideline has a similar procedure and criteria to the United States’ counterpart. Generally speaking, it seems in theory that Japanese hurdle of inventive step is higher than United States’ nonobviousness standard. Japanese guideline makes it clear that for a software-related invention, people with ordinary skill in the art means people with ordinary creative abilities in both computer technology and the applied industry such as business transaction, financial management, and insurance. In addition, systematization of human transaction and supplement or replacement by a commonly known means for systematization do not meet the requirement of inventive step. The recently published examples of rejection under obviousness by USPTO also illustrates that mere automation of a known manual process on the internet is obvious. Notwithstanding, in the United States, people with ordinary skills in the art are not required to possess knowledge from both industries. Moreover, in Japan, real word activities such as commercial success of patented product, copying of competitors, and skepticism of experts, are seldom considered in favor of inferring inventive step. Finally, reasonable expectation of success to combine teachings from several prior art references is not part of the criteria in Japan to establish an obviousness rejection. Therefore, it — 65 — would be easier for Japanese patent examinators to reject patent application under obviousness. 2. Patent Eligibility (“Statutory Invention” in Japan) Patent eligibility is the most basic requirement for an invention to be granted a patent. It relates to a country ’s patent policy. Nonetheless, patent eligible subject matter still has to meet all other requirements such as novelty, nonobviousness, and enablement for a patent to be issued. a. United States From Gottschalk v. Benson, 1 the United Stated Supreme Court make it clear that mathematical algorithms are not patentable. Pure mathematical algorithms are not patentable because they are merely abstract ideas.*2 1 However, when a mathematical algorithm is implemented by a specific machine to produce “a useful, concrete, and tangible result”, it is as a whole patentable. 3 Before the State Street Bank4, it is perceived that some kind of pre-computer or post-computer process activity is required to render a mathematical algorithm implemented by a general-purpose computer patent eligible. However, in State Street Bank, the Federal Circuit held that the transformation of data by a general-purpose computer alone constitutes “a practical application of a mathematical algorithm, formula, or calculation, ” because it produces “a useful, concrete, and tangible result.”5 It opens the gate for computer-implemented business methods like internet-based electronic commerce. The court also takes the opportunity to clarify that there is no principle called “business method exception. ”6 Claims involved business methods should be treated like any other process claims. The court stated that ‘whether the claims are directed to subject matter within 101 should not turn on whether the claimed subject matter does “business” instead of something else.’ Therefore, a business method not implemented by computer can be patentable subject matter as long as it had some specific application which produces a useful, concrete, and tangible result. On the other hand, mathematical algorithms are either the mathematical representation of natural laws like E=mc2, or abstract ideas. Accordingly, a mathematical algorithm without any limitation to a practical application, even if it is performed on a computer, is not patentable. 7 . A specific machine or manufacture, which can not be replaced by a general-purpose computer, * The S.J.D. candidate of The George Washington University Law School. I would like to thank Professor Aida from Tokyo University and Mr. Inoue, an Associate Managing Examiner from Japanese Patent Office for spending precious time to discuss related issues with me as well as providing valuable materials. 1 Gottschalk v. Benson, 409 U.S. 63 (1972). 2 Diamond v. Die hr, 450 U.S. 175, at 185 (1981). 3 In re Alappat, 33 F.3d 1526 (Fed. Cir 1994) (“the claimed invention as a whole is directed to a combination of interrelated elements which combine to form a machine for converting discrete waveform data samples into anti-pixel illumination intensity data to be displayed on a display means”). 4 State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.Cir. 1998). 5 Id. at 1373. 6 Id. at 1375. 7 Examination Guidelines for Computer-Related Invention, United States Patent and Trademark Office, at 19, Feb. 28, 1996. — 66 — performing a process is traditionally patent eligible. If, in addition to internal computer information processing, an independent physical act (post computer process activity) and/or a manipulation of data representing physical objects or activities (pre computer process activity) is recited as a further restriction, the claimed invention would fall into the safe harbors of statutory process claims.8 A general-purpose computer programmed with a process does not become a specific machine or manufacture. The patent eligibility of a process which can be implemented by a general-purpose computer must be judged by the process, although a machine or manufacture such as a computer is involved. In order to be a statutory subject matter, the information processing of a mathematical algorithm must limit to a practical application which produces a useful, concrete, and tangible result. b.Japan According to Article 1 Section 2 of Japanese Patent Law, in order to qualify statutory subject matter, an invention shall be a creation of technical ideas utilizing nature laws. Japanese Patent Office (“JPO”) observes the software-related invention from the angle of applying computer technology. Thus, business method, which is not implemented by computers is not statutory subject matter. By the same token, inventions which primarily describe human behaviors using some pre existing equipment to achieve the desired result are not patentable. 9 Therefore, if a claim directly involves human being ’s decision making, it is not patentable. 10 11Notwithstanding, when a claim tries to describe the same invention from the perspective of how devices are arranged to receive human’s decision, such as an input storage means to receive input of variable X, it might be patent eligible because it is a technical idea utilizing natural law. On the other hand, mathematical algorithm can be patent eligible if the claim describes in detail how the hardware resources are used to accomplish the said function. A mathematical algorithm such as calculating the sum of natural numbers from ‘n’ to ‘n+k’ by using the equation, S=(k+l)(2n+k)/2;n or multiplying natural number m with n by using the equation, S=[(m+n)2-(nrn)2]/4,12 can be statutory subject matter if the apparatus claim describes in detail how to use hardware resources like memory device, registers, arithmetic/logic unit, central processing unit, and so forth. Restriction to certain specific application is not necessary. Apparently, the foresaid two mathematical algorithms are not novel. However, theoretically, it is possible that a new and nonobvious mathematical algorithm solving an integration equation is patented in Japan. Besides, utility of an invention is presumed as long as it does not fall into medical treatment exception. 13 8 Id. at 15. 9 International Comparison of Examination Guidelines, Aita Yoshiaki, Jursit Journal No. 1189, at 34-35, Nov. 15, 2000. 10 "Implementation Guidelines for Examinations in Specific Fields• Chapter 1 - Computer Software-related Inventions," Japanese version, Example 2 2 claim 1 at page 33. 11 "Implementation Guidelines for Examinations in Specific Fields: Chapter 1 - Computer Software-related Inventions," English version, Example 3 at page 15, published by Japanese Patent Office on February 27, 1997. 12 "Implementation Guidelines for Examinations in Specific Fields: Chapter 1 - Computer Software-related Inventions," Japanese version, Example 21 at page 28. 13 Interview with Tadashi Inoue, Associate Managing Examiner in Computer Applied Technology 67- In addition, JPO expanded the scope of patent eligibility by allowing “a storage medium having a program recorded thereon ” and “a storage medium having structured data recorded thereon ” to be patent eligible subject matter. 3. Nonobviousness (“Inventive Step” in Japan) New itself is not enough to qualify a patent since any minor modification of the prior art can make it new. Patent is a very strong power granted by the government to exclude others from using and making the claimed invention. A minor modification or variation does not deserve such a strong protection. Prior arts are techniques in the public domain shared by the whole society. If any minor modification of the prior art may infringe other people ’s patent right, public interest will be seriously hurt. Therefore, the requirement of nonobviousness was created to demand a higher level of inventive step. a. United States After United Stated lowered the requirement for being patentable subject matter, nonobviousness has become the most important hurdle for patent applicant of computer-related invention to overcome. In other words, obviousness becomes the aimed target for competitors to challenge the validity of claimed patent. In Amazon.com, Inc. v. Barnesandnoble.com, Inc., the Court of Appeals for the Federal Circuit reversed the district court ’s order of preliminary injunction. *14 The court concludes that Barnesandnoble.com (BN) has raised substantial questions as to the validity of patent at issue because a reasonable jury may find that several prior arts provided by BN could render the Amazon ’s patent anticipated and/or obvious. 15 However, it is more difficult to challenge the novelty because to establishment anticipation all elements in the claim have to be found in one piece of prior art. As to obviousness, elements of the patent can be found in several prior arts so that it may be easier to establish. The test for obviousness is that whether the subject matter sought to be patented, in light of the prior art as a whole, would have been obvious at the time the invention was made to a person with ordinary skill in the pertinent art.16 i . Prima Facie case The procedure for evaluating a prima facie case of obviousness was articulated in Graham v. John Deere by the United States Supreme Court in 1966. 17 First, determine the scope the content of the prior art. Second, ascertain the differences between the prior art and the claims at issue. Moreover, resolve the level of ordinary skill in the pertinent art.18 In determining the level of ordinary skill in the art, some factors should be considered such as “(l) the educational level of the inventor, (2) type of problems encountered in the art, (3) prior Division of 4th Examination Department, March 14th, 2001. 14 Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d 1343 (Fed.Cir. 2001). 15 Id. at 1363-1366. 16 35 U.S.C. § 103. 17 Graham v. John Deere Co., 383 U.S. 1, 1966. 18 Id. at 68 - art solutions to those problems, (4) rapidity with which innovations are made, (5) sophistication of the technology, and (6) educational level of active workers in the field.”19 When level of ordinary skill in the art is in dispute, the patent owner always asserts for a lower level. By contrast, accused infringer will contend a higher level of skills which will render the invention obvious. After gathering the above factual information, the legal conclusion of prima facie obviousness should be evaluated by the following three criteria. First, there must be some suggestion or motivation, found in the prior art references or knowledge possessed by people with ordinary skill in the art, to combine teachings from prior art references. Second, a reasonable expectation of success is required. Lastly, all the claim limitations must be found in the prior art references.20 The requirement of suggestion to combine is to prevent examiners from using hindsight while evaluating obviousness. From the inventor ’s application, it would be easy for examiners to say that restructuring and putting together teachings from several prior arts to derive claimed invention is obvious. Thus, suggestion or motivation to combine has to come from the prior art references, or prior arts such as well-known substitution, and common knowledge for people with ordinary skill in the art. In addition, some common practices held by courts, such as changes of size, shape or color of an article or reversal of mechanical parts in an apparatus, can be used to back up the rationale for combining prior arts. It is not allowed to use the inventor ’s disclosure as an instruction on how to combine prior art teachings together. 21 The Court of Appeals for the Federal Circuit in O’Farrell announced that reasonable expectation of success is required to reach obviousness under section 103.22 In some cases, although prior art references predict the possibility of an invention, they do not teach specific values of various parameters which are critical or a new technology is necessary to overcome the difficulty. Under those circumstances, the inventor has to add some flash of genius to sort out the problem, which rendered the invention nonobvious. Therefore, apart from suggestion or motivation to combine, reasonable expectation of success is required to establish obviousness. In other words, the court seems to lower the hurdle of nonobviousness by adding one more condition to conclude a prima facie case of obviousness. Finally, prior art references together should teach every single claim limitation. Examiners have initial burden of proof to establish prima facie case of obviousness. Once it is proved, the burden will shift to the applicant to come up with secondary considerations. 23 ii. Secondary Considerations (also called “Objective Tests”) Secondary considerations can be divided into two categories. One is unexpected or superior 19 Environmental Designs, Ltd. v. Union Oil Co., 713 F.2d 693, 696 (Fed.Cir. 1983). 20 Formulating and Communicating Rejections under 35 U.S.C. 103 for Applications Directed to Computer-Implemented Business Method Inventions, at 6. (downloadable from www.uspto.gov ). 21 Panduit Corp. v. Dennison Mfg. Co., 810 F.2d 1561 (Fed.Cir. 1987). 22 In re O’Farrell, 853 F.2d 894 (Fed.Cir. 1988). 23 In re Oetiker, 977 F.2d 1443 (Fed.Cir. 1992). — 69 — properties or advantages as compared with the closest prior art.24 The other is real world activities such as commercial success of the claimed invention, long felt need in the art for a solution to a known problem, prior failures to solve the problem, skepticism of experts, copying by the accused infringer, and licenses. Unexpected result is a persuasive argument if it is demonstrated by factual evidence in the form of “comparative examples ” in which properties of claimed invention are compared with those of prior arts one by one. 25 Commercial success is the most criticized one among those secondary considerations because it might be attributed to sales promotion ability, manufacturing technique, and ready access to markets, rather than some innovative features in the claimed invention. 26 Thus, when commercial success is used to support the contention of nonobviousness, a sufficient relationship between the commercial success and the patented invention must be found. 27 Since hindsight is very difficult to completely avoided after examiners read the application, secondary considerations to certain extents may give applicants more chances to succeed. A final decision as to obviousness should be made after all kinds of factual evidences are gathered. b. Japan In Japan, the procedure and criteria used to evaluate inventive step are very similar to counterparts of the United Stated. However, there is only one step to judge the inventive step, instead of establishing a prima facie case first, considering the rebuttal of secondary considerations, and reaching a final legal decision on obviousness. The procedure also begins from identifying differences between claimed invention and related prior arts, searching the motivation to combine, and then taking into account invention ’s advantageous effects over cited prior arts. Whether the invention would have been easy to make must be evaluated from a person with ordinary creative ability in the art at the time of filing. Some practices, such as mere selection of an optimal known material, determination of an optimal or preferred numerical value range, and replacement of means with a well-known equivalent, are presumed to be within ordinary creative ability of a skilled person in the art.28 The reasonable expectation of success is missing in the Japanese examination guideline. When prior art references suggest a combination which takes tremendous amount of time and efforts to try and experiment to achieve, the claimed invention may still be rejected due to the lack of inventive step. Therefore, it means to be a little bit easier to reach no inventive step conclusion. 24 Formulating and Communicating Rejections under 35 U.S.C. 103 for Applications Directed to Computer-Implemented Business Method Inventions, at 7. United States v. Adams, 383 U.S. 39, 1966. 25 Id. at 7. 26 Edmund Kitch, Graham v. John Deere Co.: New Standards for Patents, 1966 Supreme Court Review 293. 27 Demaco Corp. v. F. Von Langsdroff Licensing Ltd., 851 F.2d 1387 (Fed.Cir. 1988). 28 "Implementation Guidelines for Examinations in Specific Fields: Chapter 1 - Computer Software-related Inventions," English version, Example 3 at page 7, published by Japanese Patent Office on February 27, 1997 -70- Although the unexpected result or superior property is taking into account, real world activities such as commercial success, long felt need, skepticism of experts, copying, and licenses, are seldom considered in judging the inventive step. Japanese Patent Office stresses on the development and application of technology from the perspective of which inventive step should be evaluated. Moreover, problem orientation is another feature. Accordingly, it is important to describe problems to be solved by the invention, how the same or similar problems were solved before (prior art), means for solving problems in the claimed invention, and advantageous effects of the invention. One of the most important clarifications in the Implementation Guideline amended Dec. 2000 is that pertinent arts concerning software implemented business method should include both computer technology and the applied field like finance, insurance, and business management. 29 In other words, pertinent arts can be more than one. Accordingly, systematization of an existing human transaction does not meet the requirement of inventive step. Software engineering has developed rules for system analysis and system design to computerize human transaction and business management. Therefore, for example, it would be easy for people who are both familiar with software development methodology and inventory management to come out a computerized inventory management system. Besides, modern research and development usually is usually composed of a team of engineers with different disciplines. The person with ordinary skill in the art is not necessary limited to a hypothetical single individual.30 In other words, the level of skills should consider the real research environment. It is in fact a hypothetical pool of knowledge possessed by the research team. It seems that JPO has not had a set of factors, like the educational level of the inventor, used to evaluate the level of ordinary skills in the art. Instead, JPO will look into engineers who really conduct research and development in the industry to decide what knowledge they should possess. The more uncommonly known knowledge is needed to come up the invention, the more likely the invention possesses inventive step. Therefore, the usage of knowledge and/or technology from an industry different from the pertinent art of the claimed invention would be more likely to have inventive step. Likewise, if the same means and/or material are used in a new way to achieve unexpected result, the more likely the invention meets the requirement of inventive step. In addition, mere supplement or replacement by a commonly known means or equivalents does not meet the requirement of inventive step. 4. Conclusion While the economy is globalized, the legal system also moves toward harmonization gradually because of the close interaction among countries. Although there are some differences between United States and Japan as far as examination guidelines for computer-related inventions concern, the result of patentibility evaluation would be very 29 "Implementation Guidelines for Examinations in Specific Fields: Chapter 1 * Computer Software-related Inventions," Japanese version, 2.3.3, at page 16. 30 The Inventive Step, Aita Yoshiaki, at page 3, written in October 2, 2000. 71- similar. At the time United States Court of Appeals for the Federal Circuit ruled on State Street Bank, the remain of the world did not accept the conception of business method patents. Within less than three years, through many conference and discussion, the outcomes of patent examination in United States and Japan are converging although the approaches are still different. Although examination guidelines have given applicants clearer rule to follow, it takes time to observe courts ’ opinions and eventually settle down some important issues. 72 7 M A: /W ^7^ y I 5> U 3 >Xk'-y7 h;i/miKT^, *ynix%/7 1. Mr. Roland L. Hjorth (Dean,University of Washington, School of Law) : 7y>h >y;#(D 9 5/>h>y#TkL 1995 ^cLO, B^(D^#±(D #^i:^u^,^/7y ns;-(Dm^#^ %a#^T&Ti#s&3T#TW6. B^iau^UT, ^-(Dft#^"7 i>7HI/T%mL^:A#^LTilC0#l:, Mvh3A(#il#10 U7;i/^v W —^ 250 9y>L>± #^6 507<;|/J^F^l:t, C3L%:/J\A#/^ 200ll&6. 73- CASRIP (^^%#fjg##^i:>^-) ^^;C^LT,#^^#TL/Wyo^^A^i@LTW^.CASRIP 2m##&5C £ISo T^S&tAo 2. 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(^#^#(Df#m^^a) fomcmmmaLT, #f#^m#$mBr'rn-/7^-/7aLT#v^o, A #(D^^(Dt)aT##±aMCA3^m#Tf# (#B^#±^) aB*§wn-x/7-;i/ wf#KDAm^a6(:LTt 3caT&5„ #g;w^;i/T#A%^#m^#t)cTW6ca^ 7^6(7)T, #(D< >t>A-Y ^< C^:a5ck^;%aa#%w T&„ ^@(7)n—X^7—%^SW(Dn—X/7 — 0, H A n< #TW^v^ a h>A#(D CASRIP^n-A^-;i/(:^7 M/'^-tf u- - ^OASAI/^&IA ^T#Wyo//^A^m/uTW6. ^#^C^m#^aLTeTt)6 W, ##^fT3TW6, 9>/>h>A#(DLL.M.yD^^AT^, ^mmu^y[]//9A^m&^n:w6. #mmfw#m±kL ^ #(:MT6%^^gT&6, ^a6(Df/ -83 r#«± • U+3.7AJ At'v*x 8*liA©j:5lcVT. ###©%-x"l:&o fcAW»*lilSffi5tl/tl'5. *BI©n-Xi'-;MiB«a^UT43 0. #o-XX-;W^ilffl#A&mf otLT©-5. *H©n-xX-Jl/£©oTW®&©fflti;-fi6"mAm — 84 — 8$ s IT- U — • XxXXlFX F \tz. 85- Patents and Biotech Inventions — the Law and R & D Contracts Li Westerlund There is no denying that biotechnological inventions in some ways have challenged the legal system of providing market exclusivity by patents. Not only has their patentability been questioned, the scope of protection conferred to these inventions is obscured because of the difficulty of applying existing legal concepts to complex biological phenomena. Whether the legal solutions embedded in the patent system correctly reflect inventors contribution to the art in an aggressive market, thus balancing the conflicting interests in appropriate manner, is a recurrent query. Specifically for inventions in the biotechnological field the requirements for the grant of a patent to disclose the invention and the protection against equivalent solutions provoke practical problems, making the clash between technological reality and the legal frameworks evident. The license climate and the occurrence of R & D Contracts 1 within the research environment thus becomes crucial for the free flow of knowledge and possibilities of conducting further research to continue the development in the biotech field of technology. 1. The Law of Patent In my research12 is discussed the patent legal inquiries regarding inventions in this field. The scope of a patent is of central concern, although being different considerations in both time and in compass, thus putting the focus on the requirements for disclosure and infringement. Eligibility issues are touched upon, although from more of an explanatory perspective since the law is settled in this respect. For the analysis the European practices under the EPC are specifically studied those of the United Kingdom and Germany, and that of the U.S. The mandated exclusions from patentability under the European patent laws, of categories of plant and animal subject matter and certain biological processes, are also those analysed. Claim interpretation has been the common theme and the challenge has been to present a comprehensive basis for grasping the substantive law for the field of biotechnology. The differences between practices and the consequences of those differences for the possibility of having an invention granted a patent and the infringement doctrines effects for a patent ’s ‘after-life’ so to speak, that is its scope of protection, are thoroughly examined. As for the exclusions from patentability in Europe, the study reveals an inherent inconsistency in article 53(b) EPC, warranting an adjusted and more patent-legal understanding of the 1 That is, research and development contracts. 2 Westerlund, Li, Biotech Inventions - Equivalency and Exclusions under European and U.S. Patent law, Jure Stockholm 2001. -86 - concepts as are proposed. The principal message recognised in this dissertation is the import of relying on the policy arguments of uniformity and predictability to preserve a fair balance between an inventor and third parties, since in reality much of the controversy in this field turns on the proper protection. 2. Institutions Rules the Game From the basis of this more substantive patent law research it must further be acknowledged the important part of the innovation system approach and that is the role of institutions. These institutions, which function as the rules of the game, could be of a formal kind, i.e. laws and regulations, or of an informal kind, e.g. the public opinion of new areas, for instance GMOs. Examples of formal institutions are the regulatory process, the role of patents, and the protection of intellectual property. Intellectual property law is important to the biotechnology industry, but the national systems are seldom adapted to biotechnology, as shown by, for example, the difficulty of patenting biotechnological inventions. As an example the fact that European patent law has not been particularly integrated has also hampered the development of the European biotechnology industry. Other regulations regarding, for example, food and pharmaceuticals, are also important for innovations. Here national authorities, including the FDA (the Federal Drug Administration) in the USA, EMEA (the European Medicines Evaluation Agency) and MHW (the Japanese Ministry of Health and Welfare) are of importance. In a study by Greis et al. (1995) 3 on innovation barriers for US companies, it was found that the highest rated barrier to commercialisation was the FDA, followed by US patent decisions and management expertise. A study by Senker & Sharp (1997) 4 on how European companies have used co operative alliances in their learning process shows that a clear account of intellectual property rights is important, as in most cases a collaboration of this kind functions as a transfer of technology and not of proprietary knowledge. A number of policy measures have been taken on different levels to tackle dysfunction in the subjects identified above. Key targets are strengthening of the science base, facilitating technology transfer, making it easier for biotech firms to find venture capital, and developing the patent system. For example, as mentioned above the EU Parliament has passed a biotechnology directive, through which the member countries will have a set of common rules for what can be protected by biotechnological patents. 5 3 Greis, N. P., Dibner, M. D., Bean, A. S. (1995) External partnering as a response to innovation barriers and global competition in biotechnology. Research Policy 24 (4). 4 Senker, J. and Sharp, M. (1997) Organisational Learning in Cooperative Alliances- Some studies in Biotechnology. Technology Analysis & Strategic Management 9(l), pp. 35-51. 5 Directive 98/44/EG on the legal protection of biotechnological inventions of the European Parliament and the Council of 6 July 1998, OJ L213/13. -87 - 3. R & D Collaboration The more early work on insulin is a good example of collaboration between companies through R & D Contracts. For specific work on human insulin was also used recDNA technology to produce human proinsulin, the insulin precursor. The successful expression on human insulin (recombinant DNA) in E.coli., was announced in September 6 1978. Yet this was only a first step 6 the announcement of the ‘successful expression of human insulin’ was based on Genentech research, whose expression system at this time made A and B chains of insulin separately. After purification, these two chains were combined to make human insulin. Later, Genentech introduced and provided Eli Lilly with a second bacteria expression-system to make human proinsulin. 7 The researchers within Eli Lilly apparently also worked on the techniques and biological material for proinsulin, although a functioning expression system arrived from Genentech. In short we can see that based on an R & D contract with Genentech, Eli Lilly received the initial and then upgraded bacteria expression system. In parallel the Lillyresearchers also developed their own competencies to grow the bacteria, purify it, modify genetic engineering techniques and biological materials, and so forth in order to facilitate commercial production of the insulin product. 8 This is but one successful collaboration within the research community, in this case progressing the medical science further. The research involving genetic engineering in the following years at Genentech was, however, not confined to insulin and hGH, their commercially well known products. Their specialised scientific competence in genetic engineering was used for a multitude of projects, including interferon alpha and beta for Hoffman-LaRoche and a vaccine for hepatitis. What is more the close connection with official institutions shows in theirs work on a vaccine against hoof-and-mouth disease, conducted in cooperation with the US department of Agriculture. 4. Different Abilities Warrant Different Approaches In that Genentech’s specific ability was to generate new products potentially profitable for themselves or for another firm this became also the main purpose behind their scientific and technological activities. This approach warranted research into quite path-breaking scientific activities and thus explains their approach for R & D collaboration with other companies world wide and again Eli Lilly will show as an example. 9 Under the contract signed with Eli Lilly in 1978 Genentech agreed to provide recombinant DNA micro-organisms, including plasmids (recombinant DNA containing material) capable 6 Johnson (1983:633-4). 7 Yansura (1993b), Kleid (1994). 8 McKelvey, Maureen, Evolutionary Innovations, The Business of Biotechnology, Oxford University Press, 1996, p. 130. 9 Ibid. p. 137. -88 - of producing insulin, related to patent rights, trade secrets, technology and knowhow in return for research fees and continuing roayalty payments of 8% of Lilly ’s insulin sales.10 11 Genentech thus agreed to transfer all the knowledge, techniques and secrets that was needed to know about the insulin-preducing bacteria in order for Lilly to produce insulin. Quite importantly, the R&D contract stipulated that Genentech had to deliver micro organisms which could produce a commercially viable amount of protein at a certain level of purity. This condition was imperative and not until several years later, in 1980, this objective from Genentech’s side was actually reached. In reality this meant that even after scientific research, Genentech had to continue to engage in knowledge-seeking activities to solve such challenges, which entailed changing some of the genetic engineering techniques and biological materials. In this case the necessity of solving all the practical problems involved the translating of knowledge into practice being required for the expression of proteins at a sufficient quantity, quality and reliability. 11 Because the techniques and knowledge transferred by this contract concerned only insulin, to the other end it limited the extent to which Eli Lilly could use the said genetic engineering knowledge for purposes other than that.12 What Genentech thus did not want to do was to transmit knowledge, techniques, or biological material of public and general validity for this purpose, but solely they sold it for insulin. 5. Free Flow of Knowlege In today ’s business environment R&D Contracts is often vital for commercial success of, for instance, pharmaceutical companies. Pharmacia is one company with recent aggressive in-licensing of technology to complementing their ongoing research in areas such as oncology, arthritis/inflammation and others. 13 This touches the issue of freely given material, such as cell-lines, or if material is given with restrictions. The clash is between business-oriented research and the basic research community shows in fear of potentially being sued for ‘unauthorised use of materials,’ perhaps sent for testing, if those are not clearly sent without restrictions of use. The marketing of products derived from such material thus becomes questionable although the work in modifying the material, for instance with genetic engineering, is the novelty rather than the strains of cells per se. The challenge becomes who will win the race to publish first, or more often, to patent first. 10 Genentech (1987'-6), see McKelvey, p. 138. 11 McKelvey, p. 138. 12 The contract granted Lilly the exclusive right “to use Genentech Recombinant Microorganisms for the limited purpose of manufacturing, selling and using Recombinant Insulin . Genentech 1987^6). 13 According to ‘Pharmaprojects ’ - February 2001 league table Pharmacia has 127 R&D drugs, 52 under license and 75 own drugs. The top leader is GlaxoSmithKline with 174 R&D drugs, 86 under license and 88 own drugs. -89 - However, research groups are seldom in somewhat different races in that they were directing knowledge seeking activities and hence expected results to fit two different environments. The underlying experiments may well be similar in some ways but those are often different in orientation, directed towards scientific activities or more towards technological activities.14 Nevertheless, they can be considered close enough to be competing to some extent, particularly so if one or the other files for patents on the resulting invention. It is not unusual for research teams to use similar genetic engineering techniques and biological materials.15 One reason for similarity could be the result of, for instance, NIH regulations, such as those which stated that experiments must be performed on weakened strains of E.coli bacteria which can only live in very special conditions. The purpose of the regulations should be to reducing the risk of spreading the bacteria and shows how regulations in the public context induces similar research approaches. Another reason for similar research approaches lies in the context of the research community in which the work is done. If different groups draws upon experience and knowledge developed in the same scientific activities, their manner of attacking the particular problem they intend to solve quite naturally tend to become similar. As a matter of fact researchers often chose to work with well-understood and much-studied biological materials as the basis of new combinations. 6. Final Remarks Experiments may differ in their relative orientation towards scientific activities to develop knowledge or towards technological activities to develop control over nature. The purpose of the research within RCAST was to explore the complex world of patents, R & D contracts and licenses, issues interesting from patent law perspective and contract law both. The earlier ‘free flow of knowledge ’ becomes less frequent along with the more commercialised research endeavours. Changes in products may be minor. For instance FDA approved met- less hGH for Lilly - given Orphan Drug status - differed from the Genentech Orphan Drug hGH by the one amino acid, the methionine, still on Genentech’s brand name Protropin. Eli Lilly used a bacterium expression system essentially identical to Genentech’s, but then cut off the methionine using enzymes, yet the FDA ruled it a new product. 16 Besides from pure patent problems, whose legal state of affairs was considered in my main research, the courts are struggling with these types of related issues at this time. 14 See about these issues in McKelvey, p. 159. 15 For example, UCSF cloned cDNA ‘in the plasmid pBR322 and E.coli x 1776’ and Genentech report using the same plasmid and strain of E.coli to find the Correct DNA sequence which codes for hGH. See respectively Martial et al. (1979:603) and Goeddel et al. (1979:544). 16 Genentech had developed a metTess hGH earlier. 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A non-naturally occurring erythropoietin glycoprotein product having the in vivo biological activity of causing bone marrow cells to increase production of reticulocytes and red blood cells and having glycosylation which differs from that of human urinary erythropoietin. 2. The non-naturally occurring EPO glycoprotein product according to claim 1 wherein said product has a higher molecular weight than human urinary EPO as measured by SDS-PAGE. 9. A pharmaceutical composition comprising an effective amount a glycoprotein product effective for erythropoietin therapy according to claim 1, 2, 3, 4, 5, or 6 and a pharmaceutically acceptable diluent, adjuvant or carrier. The '698patent- 4. A process for the production of a glycosylated erythropoietin polypeptide having the in vivo biological property of causing bone marrow cells to increase production of reticulocytes and red blood cells comprising the steps ofi a) growing, under suitable nutrient conditions, vertebrate cells comprising promoter DNA, other than human erythropoietin promoter DNA, operatively linked to DNA encoding the mature erythropoietin amino acid sequence of FIG. 6; and b) isolating said glycosylated erythropoietin polypeptide expressed by said cells. 5. The process of claim 4 wherein said promoter DNA is viral promoter DNA. 6. A process for the production of a glycosylated erythropoietin polypeptide having the in vivo biological property of causing bone marrow cells to increase production of reticulocytes and red blood cells comprising the steps of- a) growing, under suitable nutrient conditions, vertebrate cells comprising amplified DNA encoding the mature erythropoietin amino acid sequence of FIG. 6; and b) isolating said glycosylated erythropoietin polypeptide expressed by said cells. 7. The process of claim 6 wherein said vertebrate cells further comprise amplified marker gene DNA. 8. The process of claim 7 wherein said amplified marker gene DNA is Dihydrofolate reductase (DHFR) gene DNA. -97- 9. The process according to claims 2, 4 and 6 wherein said cells are mammalian cells. The '080patent: 2. An isolated erythropoietin glycoprotein having the in vivo biological activity of causing bone marrow cells to increase production of reticulocytes and red blood cells, wherein said erythropoietin glycoprotein comprises the mature erythropoietin amino acid sequence of FIG. 6 and is not isolated from human urine. 3. A non naturally occurring erythropoietin glycoprotein having the in vivo biological activity of causing bone marrow cells to increase production of reticulocytes and red blood cells, wherein said erythropoietin glycoprotein comprises the mature erythropoietin amino acid sequence of FIG. 6. 4. A pharmaceutical composition comprising a therapeutically effective amount an erythropoietin glycoprotein product according to claim 1, 2, or 3. The '349patent: 1. Vertebrate cells which can be propagated in vitro and which are capable upon growth in culture of producing erythropoietin in the medium of their growth in excess of 100 U of erythropoietin per 10<6> cells in 48 [*66] hours as determined by radioimmunoassay, said cells comprising non-human DNA sequences that control transcription of DNA encoding human erythropoietin. 3. Vertebrate cells according to claim 1 capable of producing in excess of 1000 U erythropoietin per 10<6> cells in 48 hours. 4. Vertebrate cells which can be propagated in vitro which comprise transcription control DNA sequences, other than human erythropoietin transcription control sequences, for production of human erythropoietin, and which upon growth in culture are capable of producing in the medium of their growth in excess of 100 U of erythropoietin per 10<6> cells in 48 hours as determined by radioimmunoassay. 6. Vertebrate cells according to claim 4 capable of producing in excess of 1000 U erythropoietin per 10<6> cells in 48 hours. 7. A process for producing erythropoietin comprising the step of culturing, under suitable nutrient conditions, vertebrate cells according to claim 1, 2, 3, 4, 5, or 6. The '422patent: -98 - 1. A pharmaceutical composition comprising a therapeutically effective amount of human erythropoietin and a pharmaceutically acceptable diluent, adjuvant or carrier, wherein said erythropoietin is purified from mammalian cells grown in culture. -99- 10 $ $ (hi£> BLt©#glc*HT, inronmeeaicsigicH at"-5#J*tCOIoT, S4»S#7)'*S7SSnfc= $#TH. C^l6&B*ICj3M'64-#0&lMM E#eaic£©J;dlc6fflLTH< d 1. as i »-m. (trp ) B^tc^n^ SffiSGtoEettCtlSTIi. ##f#0 7d t>X#4-&Rri 2. 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