Are Changes to the U.S. Patent System Objectively Killing Innovation?

NICK CORNOR

I. Introduction

Mankind often uses significant events in history to divide time. In the late sixth century, a monk named Dionysius Exiguus developed the concept of separating time before and after the birth of Jesus of Nazareth which has been incorporated into both the Julian and Gregorian calendars.1 Additionally, scholars have divided eras by using great wars to show the significant economic and cultural shifts various societies experienced afterwards.2 Most recently, actress Reese Witherspoon called for dividing time before and after Oprah Winfrey’s 2018 speech at the Golden Globes.3 If one were to use the same approach for U.S. patent law, they would likely pick the year 2012, as it was the year that both the Leahy-Smith America Invents Act (AIA) went into effect and the U.S. Supreme Court began to severely restrict the scope of patentable subject matter.4 As a result of these changes, the U.S. patent system has seen a precipitous drop in the U.S. Chamber of Commerce’s (Chamber) annual Intellectual Property Index’s patent protection ranking.5 The Chamber suggests that these changes to the U.S. patent system are causing inventors to view the U.S. as a less favorable forum to seek patent protection, but a closer look at the Index shows a largely subjective methodology was used which poses the question: does an objective analysis of the evidence show that the U.S. patent system is killing innovation?

This Comment will analyze global economic and patent statistics to answer this question. Part I will present the justification the Chamber used to downgrade the U.S. patent protection rankings, focusing on the Chamber’s scoring methodology. Part II will look at the history of the U.S. patent system, its economic justification, and the step-bystep process an inventor uses to apply and obtain a U.S. patent. Part III will present the criticisms of the post-2012 changes in the U.S. patent system, focusing on those specific changes that the Chamber highlights as their justification for downgrading the U.S. patent protection rankings. Part IV will analyze statistics from the World Intellectual Property Organization (WIPO) and the International Monetary Fund (IMF) to determine whether the Chamber’s downgrade can be justified objectively.

II. U.S. Chamber of Commerce’s Global Innovation Policy Center’s Index

Each year, the Global Innovation Policy Center’s (GIPC) Index publishes an International Intellectual Property Index (Index) which it describes as “a blueprint for countries seeking to become true knowledgebased economies through an effective intellectual property (IP) architecture.”6 The Index benchmarks economies using forty indicators in eitght categories which include: (i) Patents, Related Rights, and Limitations; (ii) Copyrights, Related Rights, and Limitations; (iii) Trademarks, Related Rights, and Limitations; (iv) Trade Secrets and Related Rights; (v) Commercialization of Intellectual Property Assets; (vi) Enforcement; (vii) Systematic Efficiency; and (viii) Membership in and Ratification of International Treaties.7 Each category is then subdivided into anywhere from two to eight indicators.8 Each indicator is scored between "0" and "1" with cumulative scores ranging from a minimum of 0 to a maximum of "40."9 The indicators can be scored using one of three distinct methods: binary, numerical, or mixed.10 The binary measurement is very simple, either a particular IP component exists or it does not and will receive a corresponding 0 or 1 score.11 While this scoring method does not take into account possible nuances and complexities of the individual indicators, as it is applied uniformly, this scoring method is relatively objective.

Numerical scores measure terms of exclusivity or are based on a quantitative score.12 For example, indicator 9, measures the term of protection for a copyright and has historically used the U.S. term of ninety-

five years as its baseline.13 So, the numerical formula for this indicator is “n years of basic copyright term/95.”14 Because the U.S. has a 95 year term for copyright protection, it receives a value of 1 while countries with copyright terms that are less than ninetyfive years will receive a value of less than 1.15 Countries with copyright protection exceeding ninety-five years will also receive a 1 as the methodology only allows for scores ranging from 0 to 1 in each indicator.16 Aside from arguments about whether or not the ninety-five year term is the gold standard for copyright protection, because of the historic uniformity, this scoring method is relatively objective.

Mixed indicators account for the majority of indicators used in the Index with thirty-one of the forty indicators being mixed.17 This method is used when there is no adequate baseline and the legislative or regulatory existence of an indicator is not sufficient to determine its actual use or application.18 Here, a final score will be based on an even split between the following: (i) primary and/or secondary legislation (regulation) in place; and (ii) the actual application and enforcement of that primary and/or secondary legislation.19 Only five possible scores are available within a mixed indicator: 0, 0.25, 0.5, 0.75, and 1.20

The U.S. received a score of "1" in all indicators within category 1: Patents, Related Rights, and Limitations, with the exception of indicator 2, Patentability Requirements, where it scored 0.75, and indicator 8, Patent Opposition, where it received a score of 0.5.21

Indicator 2 is defined as “[t]he extent to which patentability requirements are in line with international standards of novelty, inventive step, and industrial applicability.”22 This definition is based on Article 27 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).23 The Index further explains that this indicator is “[m]easured by (1) existing de jure patentability guidelines and regulations and (2) de facto standards established through the application of these guidelines and regulations through the examination process and judicial review.”24 While measuring a country’s patentability requirements against international guidelines, regulations, and patentability standards can be a useful measurement in determining where a country ranks amongst other countries and how the country abides by these international norms. It cannot be said that this is a dispositive method for measuring whether or not the patentability requirements of a given country’s patent system either stifles or encourages innovation. In other words, this method is largely subjective because it presumes that patentability requirements in Article 27 of TRIPS is the ideal standard for patent protection. A more objective standard would be to see whether a deviation from this standard—, which the U.S. arguably has done since 2012—, has led to less inventors seeking patent protection in the U.S.

For indicator 8, the Index explains that this indicator is “[m]easured by the availability of mechanisms for opposing patents in a manner that does not delay the granting of a patent (in contrast to a right of opposition before the patent is granted) and ensures fair and transparent opposition proceedings.”25 This is a subjective measurement, without a definition based on TRIPS or other international norms on what would be considered fair and transparent opposition proceedings. An objective measurement would look at the number of patent applications filed before and after the implementation of fair and transparent opposition proceedings, according tot he Index, and then determines any changes to the number of applications.

While many commentators have criticized decisions by the U.S. Supreme Court restricting patentable subject matter and the AIA’s patent opposition proceedings as stifling innovation in the U.S., as Part II of this Comment will show, the debate on the degree to which the patent system encourages or stifles innovation is far from dispositive. As such, these criticisms are subjective speculation. As will be explored in Part IV of this Comment, analysis of global patent statistics will show that while the U.S. has seen a decrease in patent filings post-2012, the Index’s ranking may not be entirely justified.

III. Background of the U.S. Patent System

A. History of the U.S. Patent System

Patent law in the U.S. has a long history, going back to the period in which the States lived under the Articles of Confederation.26 Eventually, patent law was federalized with what is widely known as the Copyright and Patent Clause which states that “Congress shall have power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”27 The terms in the clause are archaic and often cause confusion among modern readers.28 For example, “useful Arts”

refers to the work of artisans or people skilled in a manufacturing craft, while “Sciences” refers to all forms of knowledge not restricted solely to the fields of modern science.29 As a result, “useful Arts” actually applies to the patent powers of Congress, while “Sciences” actually applies to the copyright powers of Congress.30

A patent is an exclusive right, given either to the inventor or to an assignee,31 that allows the patent owner the “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States . . . .”32 Allowing the patent owners to exclude others from making, selling, or importing their inventions effectively allows the patent owner to have a monopoly for their invention. A basic underlying economic principle is that rational decision makers seek to maximize utility.33 For those involved in a product for profit (firms) enterprise, the firm’s utility will be maximized by selling their products in a way that will maximize their profits.34 This is accomplished by charging a particular price for the product and producing a particular quantity of the good, along the market demand curve, that corresponds to where the firm’s marginal cost and marginal revenue intersect.35 For competitive markets, characterized as many firms producing the same product, the price will be close to or equal to the firm’s marginal cost.36 However, a monopolist, as the sole producer of the product, faces the entire market demand curve for the product.37 By also charging a price that maximizes profits at the price and output point where the monopolist’s marginal cost is equal to their marginal revenue, a monopolist will charge a higher price and produce less of the product than the firms in a competitive market, even though the product charged in both market structures is the same.38 A classic example of monopoly pricing is a gas station. If you live in a big city, the next time you take a road trip, take note of the price difference for gas in the city as compared to the prices in more rural areas. The gas stations in rural areas effectively act as monopolies because there is not as much competition from other gas stations as there is in a more heavily populated city. As such, the rural gas stations will charge a higher price, and most likely will hold less gasoline in their tanks than the gas stations in the more densely populated areas.

B. Economic Justification of the U.S. Patent System

This of course would seem to run afoul of federal antitrust law, namely the Sherman Act, which expressly states that “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire any other person or persons, to monopolize any part of the trade or commerce . . . shall be deemed guilty of a felony . . . .”39 However, § 1 of the Sherman Act gives Congress the power to regulate anticompetitive behavior that results in a “restraint of trade.”40 Courts have long held that public policy determines the common law usage of that term, and, because patents are created by federal statute, it follows that the exclusive property right given to patents is not diminished or restricted by the Sherman Act.41[

The tension between protecting inventors and protecting the public against high prices has a long history of debate among economists. While opponents of patents favor clearly defined property rights that ensure inventors will be able to profit from their inventions, they believe that the current patent system creates many social costs that outweigh the benefits.42 Proponents of patents, however, argue that the purpose of a patent is to encourage inventors to produce socially valuable goods that would not otherwise be produced.43 The argument goes that if the cost of copying someone else’s invention is less than the cost of inventing, inventors are not incentivized to invent, because they are unable to recover the costs of inventing.44

In response to the debate, Congress commissioned economist Fritz Machlup to study the U.S. patent system and determine if the social costs associated with patents outweighed their benefits.45 Machlup concluded that

No economists, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society. The best he can do is to state assumptions and make guesses about the extent to which reality corresponds to the assumptions.46

While Machlup argued that “[i]f we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one[,]” he also stated that “since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.”47 In other words, to borrow an old proverb, “if it ain’t broke, don’t fix it.” Whether or not the justification of the U.S. patent system is warranted, it is

unlikely that Congress will abolish it anytime soon, if ever. As such, inventors must contend with this reality when determining whether or not to protect their inventions with a patent.

C. Cost of Obtaining a U.S. Patent

When facing the question of whether or not to obtain a patent, an inventor must consider where they intend to sell their product. If a foreign inventor only intends to sell their product in their own country, then they will only have to consider obtaining patent protection in that country. However, if the foreign inventor intends or has aspirations to sell their product abroad, because patents are territorial, they must consider whether or not to obtain a U.S. patent.48

As previously discussed, a patent grants the patent holder a monopoly for the sale and production of their invention.49 Again, assuming that rational decision makers seek to maximize their utility, it is unquestionable that an inventor who holds a patent for their invention has the opportunity to maximize their profits over an inventor that does not.50 Still, with only 2 to 3% of all patented products ever making it to market, the gamble that an inventor takes when determining whether or not to obtain a patent should not be underscored.51 This would not be true if obtaining a patent had no transaction costs associated with it, but as will be explained, the transaction costs and risks associated with obtaining a patent can be high.

1. Patent Prosecution Costs

Patent prosecution refers to the process applying for a patent.52 While filing, search, and examination fees can be as low as $430.00 for a micro entity,53 that number does not account for the patent attorney fees associated with preparing the patent application which average $252.00 per hour nationwide.54 While it is possible to obtain a patent pro se, the chances of a pro se applicant obtaining a patent are incredibly low.55 These costs also do not include the likely possibility that the United States Patent and Trademark Office (USPTO) will reject a patent application based on the invention not being patentable subject matter,56 for not being novel,57 for the patent being obvious,58 or for the application being improperly written.59 While some believe that the USPTO grants nearly 100% of patent applications, a recent study showed that the probability that a patent will issue has actually declined from 70% in 1996 to 40% in 2005.60 However, an initial rejection by the USPTO does not necessarily mean that the patent application is dead in the water. Once the patent examiner has rejected the patent application, the examiner will issue what is commonly referred to as an office action.61 At this point, a patent applicant has up to six months to argue that the examiner has erroneously rejected the claims, or more often, amend the patent claims to the examiner’s satisfaction.62 It should be noted that a first office action is expected and actually desired. If the USPTO does not issue an office action, that could either mean that the application was written in a way that conferred the maximum amount of protection possible for the invention, or more likely, that the claims were written too narrowly and that the inventors could have obtained greater protection for their invention. As such, inventors should hope for an office action so that they may work with their patent attorney to narrow the scope of protection only so slightly as to obtain a patent with the broadest amount of protection. If the examiner is satisfied with the patent attorney’s amendments, the patent will issue.63 However, if the examiner is not satisfied, they will typically issue a second, or final office action, usually finalizing the examiner’s position and limiting any reply by the patent applicant to an appeal.64 The process then repeats.65 While a third office action is possible, it is rare, and often, a rejection from a second office action will result in a final rejection.66 However, this term is somewhat of a misnomer as the applicant still has six months to continue to amend their application and try to convince the examiner to grant the application.67

Once six months have expired, the inventor has few options available.68 First, the inventor may have his attorney file a Request for Continued Examination (RCE), which resets the examiner’s previous office actions and, essentially allows the applicant to start over.69 The downside is that an RCE is not free, costing anywhere from $325.00 for a micro-entity to $1300.00 for a regular filer.70 If the RCE is not successful, the inventor may request an appeal to the Patent Trial and Appeals Board (PTAB), which, incurs fees anywhere from $600.00 to $1200.00,71 including the cost of attorney's fees on appeal, unless the inventor has a flat fee arrangement with their attorney.

2. Post-Grant Review Proceedings

Assuming the examiner eventually issues a patent, the inventor now has an opportunity to enforce their patent rights. Here, the inventors have a variety of options, such as the assignment or sale of the patent rights. The inventor does not

have the capital required for the production of their invention, or the inventor only wants to create the invention and not handle the business side. Oftentimes as well, an assignment of patent rights may be part of an inventor’s employment contract, especially with larger companies that frequently have their employees developing inventions.72 the inventor may also desire to license their invention to those already engaged in selling similar products. Licenses may be exclusive or non-exclusive and are accompanied by a variety of legal implications.73 Engaging in license negotiations can be very complicated as it may expose the patent holder to litigation.74

Patent owners also must contend with the possibility that their patent’s validity will be challenged at the USPTO via a variety of post-grant proceedings. These risks are especially high with the AIA’s new post-grant proceedings: post-grant review (PGR) and inter partes review (IPR).75

PGR is a trial proceeding conducted by the USPTO’s PTAB, which reviews the patentability of one or more claims that could have been raised during the prosecution phase.76 The process begins with a third party filing a petition, on or within nine months after the grant of the patent.77 Often, these third-party filers are competitors in the market that have either been sued or anticipate being sued by the patent owner.78 The PGR proceeding offers these competitors a quick (lasting no longer than twelve to eighteen months) and cost-effective tool for invalidating a patent and thereby negating further litigation.79 Also, in response to the decisions by the U.S. Supreme Court on what is colloquially termed business method patents, the USPTO has created the transitional program for covered business method patents (TPCBM) which employs the standards and procedures of the PGR, with certain exceptions tailored to business method patents.80

Like the PGR, the IPR is also a trial proceeding conducted by the PTAB to review the patentability of one or more claims in a patent, but only on the grounds of novelty and nonobviousness.81 Also, third parties are able to file IPRs and often are competitors that have been sued or anticipate being sued by the patent holder for infringement.82 Unlike the PGR, an IPR may be filed nine months after the patent has been issued, or in the case where a PGR has been instituted, after the post-grant review has been terminated.83 “The IPR was designed as a more efficient and cost-effective way for potential infringers to challenge a patent’s validity” as opposed to costly litigation in federal district courts.84 Upon a third party filing an IPR85 and the patent owner filing a preliminary response, the Director of the USPTO, sitting on the PTAB, will make a determination if the petitioner has shown a “reasonable likelihood [of prevailing] with respect to one of the claims challenged.”86 If so, the Director, through the PTAB, then institutes the IPR and proceeds to trial.87 Unless the parties settle in the interim, three members of the PTAB, designated by the Director, will issue a final determination regarding patentability of the challenged claim within one year.88 Often times, an IPR is initiated once a defendant is sued for patent infringement in a federal district court.89 This usually results in a stay in the district court, pending the outcome of the IPR which fulfills Congress’ purpose of establishing “a more efficient and streamlined patent system that [would] improve patent quality and limit unnecessary and counterproductive litigation costs.”90

IV. Criticisms of the U.S. Patent System Post-2012

A. The AIA’s Post-Grant Opposition Proceedings

Despite the AIA’s best intentions, many have criticized IPR proceedings as having led to a high volume of trials with a disproportionate rate of rejections, due to patent owners having reduced opportunities to amend claims in the IPR and the lower burden of proof (preponderance of the evidence) for opposing parties than in district court proceedings (clear and convincing evidence).91 It is one of the main reasons that the Chamber decided to downgrade the U.S. patent ranking in indictor 8.92

1. U.S. Supreme Court Cases on PostGrant Proceedings

It was for these reasons that many commentators hoped that the U.S. Supreme Court would take action to restrict the power of these post-grant proceedings in 2016 when it heard Cuozzo Speed Techs., LLC v. Lee. In Cuozzo, the Court addressed the disparate approach that the PTAB and federal district courts took in construing patent claim language.93 In that case, Garmin International, Inc. filed an IPR against Cuozzo Speed Technologies, LLC for their patent that covered a speedometer that would show a driver when he is driving above the speed limit, asserting that it was obvious in light of three prior patents.94 After the PTAB invalidated the patent,

concluding that the claims were obvious, Cuozzo appealed to the United States Federal Circuit Court of Appeals (Federal Circuit), the appeals court having exclusive appellate jurisdiction for appeals from decisions by the PTAB.95 Cuozzo argued that the PTAB had improperly used the “broadest reasonable construction” standard to interpret the patent claims as opposed to the “ordinary meaning . . . as understood by a person of skill in the art” standard used by federal district courts.96 After a divided panel of the Federal Circuit rejected Cuozzo’s argument, Cuozzo appealed to the U.S. Supreme Court.97 Cuozzo argued first that there was a “critical difference between the Patent Office’s initial examination of an application, to determine if a patent should issue, and [the IPR] proceeding . . . .”98 Because the USPTO had a broad construction system, with a chance to amend claims during the prosecution process, the public was protected from overly broad claims and the applicant had a fair chance to draft a precise claim that would qualify for patent protection.99 The Court rejected this argument stating that it was not unfair as Cuozzo could have made a motion during the IPR to amend or narrow the claim.100 While Cuozzo pointed out that only five out of eighty-six motions to amend had been granted by the PTAB since the AIA’s post-grant opposition proceedings had been created, the Court refused to address the issue; that question was not at issue, but, in dicta, the court said the “numbers may reflect the fact that no amendment could save the inventions at issue, i.e., that the patent should have never issued at all.”101 Second, Cuozzo argued that the disparate construction standards used by the IPR and federal district courts could “produce inconsistent results and cause added confusion” as a district court could find a claim valid while the IPR could later cancel that claim in its own review.102 The Court rejected this argument, stating that the different evidentiary burdens were “inherent to Congress’ regulatory design.”103 In short, the PTAB’s claim interpretation standard was a reasonable exercise of the USPTO’s rulemaking authority, which Congress properly left to the particular expertise of the USPTO to make.104

While patent practitioners were disappointed with the Cuozzo decision, there was hope that the Court would reverse course in 2017 when it heard Oil States Energy Services, LLC v. Greene’s Energy Group, LLC. 105 In that case, Oil States Energy Services, LLC had obtained a patent relating to an apparatus and method for protecting wellhead equipment used in hydraulic fracturing.106 In 2012, Oil States sued Greene’s Energy in federal district court for patent infringement which prompted Greene’s Energy to petition the PTAB to institute an IPR, stating that Oil State’s patent was invalid because it was anticipated by prior art (similar inventions existed at the time Oil States had applied for their patent). As the petitioner in Cuozzo warned, the district court and the IPR proceeded in parallel, resulting in the district court issuing a claim-construction order that “construed the challenged claims in a way that foreclosed Greene’s Energy’s arguments about the prior art,” while the PTAB, a few months later, issued a final written decision concluding that the claims were unpatentable.107 Oil States appealed to the Federal Circuit challenging the constitutionality of the IPR, arguing that “actions to revoke a patent must be tried in an Article III court before a jury.”108 At the heart of the issue was whether patent rights were the private property of the patentee or a public right.109 The Court determined that a patent right was a public right and as such, the IPR did not violate Article III.110 In dissent, Justice Gorsuch, joined by Chief Justice Roberts seemed to echo the concerns of many commentators:

After much hard work and no little investment you devise something you think truly novel. Then you endure the further cost and effort of applying for a patent, devoting maybe $30,000 and two years to that process alone. At the end of it all, the Patent Office agrees your invention is novel and issues a patent. The patent affords you exclusive rights to the fruits of your labor for two decades. But what happens if someone later emerges from the woodwork, arguing that it was all a mistake and your patent should be canceled? Can a political appointee and his administrative agents, instead of an independent judge, resolve the dispute? The Court says yes. Respectfully, I disagree.111

2. Post-Grant Review Proceeding Used as Leverage in Settlement Negotiations

Aside from the fairness arguments, IPRs are often used by defendants to increase the chances of earlier and less costly settlements, as part of their overall litigation strategy.112 In 2015, for intellectual property litigation where the amount at risk was less than $1 million, the average litigation costs were $400,000.00 after discovery and $600,000.00 for all costs.113 For amounts at risk over $25

million, average litigation costs were $3 million at the end of discovery and $5 million for all costs.114 The median costs for IPRs were dramatically lower: $80,000.00 through filing a petition, $200,000.00 through end of motion practice, $275,000.00 through the PTAB hearing the IPR, and $350,000.00 through an appeal.115 In addition to the pure dollar figures, time is also an important consideration.116 The average time it takes for a patent infringement case to go to trial can be two and a half years.117 Even with a twenty-year patent term, there have been cases that have taken almost twenty years to adjudicate with multiple trips to multiple appellate courts.118 Conversely, the average time for an IPR is thirty-six months.119 With a relatively low bar to instituting an IPR120 and the lower burden of proof required to invalidate the patent than needed in federal district courts,121 it is no accident that defendants are willing to fork over, on average, $100,000.00, for a patent attorney, expert witnesses, and the USPTO filing fee.122 Increasingly more common, patent owners who wish to enforce their patent rights will enter into a contingency fee arrangement with a patent attorney.123 Because the IPR has the possibility of lengthening litigation, as the district court will often stay litigation pending the outcome of the IPR process, patent attorneys operating on a contingent fee have an incentive to push harder on their clients to settle earlier and oftentimes for less money than they otherwise would if they had remained in the litigation longer.124 As such, patent owners must consider this risk when calculating whether or not protecting their inventions with a patent will be economically advantageous. Narrowing Patentable Subject Matter

In addition to changes to the postgrant proceedings set forth in the AIA, since 2012, the U.S. Supreme Court has decided a number of cases that have severely narrowed what is considered patentable subject matter.125 According to the Patent Act, an invention must consist of a “process, machine, manufacture, or composition of matter” in order to be patented.126 Courts have consistently held that laws of nature, natural phenomena, and abstract ideas fall outside the area of patentable subject matter127 and the AIA explicitly states that “no patent may issue on a claim directed to or encompassing a human organism.”128 However, even with these restrictions, the courts and the USPTO had generally interpreted § 101 of the Patent Act broadly, rarely using it to invalidate a patent.129 Since 2010, the U.S. Supreme Court began to do just for (i) business methods, (ii) software, and (iii) biomedical technology.

1. Business Methods

Broadly speaking, a business method is defined as “a method of operating any aspect of an economic enterprise.”130 In 2010, the U.S. Supreme Court addressed the question of whether or not business methods could be patented in Bilski v Kappos. 131 In that case, the USPTO had rejected Bilski’s application, stating that Bilski was claiming subject matter that was ineligible for patenting under 35 U.S.C. § 101, as it was not “implemented on a specific apparatus and merely manipulate[d] an abstract idea and solved a purely mathematical problem without any limitation to a practical application” and was therefore “not directed to the technological arts.”132 Bilski appealed to the Federal Circuit which, sitting en banc, affirmed the USPTO’s decision but produced five different opinions on why.133 The majority held that “a claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”134 Applying this standard, the Federal Circuit agreed that Bilski’s application did not claim patentable subject matter.135

Bilski again appealed, this time to the U.S. Supreme Court, which issued three opinions, consisting of a plurality opinion for the Court and two concurring opinions.136 While refusing to state that socalled business methods patents were entirely outside the scope of § 101, the Court did say that “business method patents raise special problems in terms of vagueness and suspect validity.”137

While this decision was not seen as imposing any radical new requirements on patentability under § 101, some commentators criticized the decision for its lack of clarity on the question of what constitutes an “abstract idea” and is therefore not patentable.138 The real concern was that because many business methods were implemented via computer software, the court would find that an abstract idea was otherwise made patentable by being tied to a computer. This issue would be addressed three years later in the much more controversial decision of Alice Corp. Pty. Ltd. v. CLS Bank Int’l. 139

2. Software

In Alice, the Court was tasked with determining whether a patent, designed to mitigate settlement risk by using a third-party

intermediary, implemented by a computer, was patentable under 35 U.S.C. § 101.140 In that case, CLS Bank International sought a declaratory judgment that claims in the patent held by Alice were invalid, arguing that pursuant to Bilski, the claims were directed to the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.”141 The Court determined that the patents were invalid because the claims were drawn to an abstract idea and that implementing those ideas via a computer was not enough to transform the abstract ideas into patentable subject matter.142 Justice Sotomayor filed a concurring opinion, with whom Justices Ginsburg and Breyer joined, that simply stated, “I adhere to the view that any claim that merely describes a method of doing business does not qualify as a process under § 101 . . . . I further believe that the method claims at issue are drawn to an abstract idea . . . . I therefore join the opinion of the Court.”143 This seemed to suggest that these three Justices would favor a bright line rule against business methods altogether.

The case prompted fifty-two amicus curiae briefs by leaders in the software industry and patent professionals, generating consensus that the patents in Alice should be invalidated, but difered as to why.144 The tech giants Google, Amazon, Facebook, and other tech companies argued that patents which merely recite “abstract ideas implemented on computers or over the Internet” should be held invalid as “the significant work comes later, when others undertake the innovative task of developing specific applications.”145 Microsoft and Hewlett-Packard agreed with the bright line rule held by Sotomayor’s concurrence that business methods are per se unpatentable.146 The Electronic Frontier Foundation argued that limits on patentability of software innovations would more likely help than harm the U.S. software industry.147 IBM argued that while “[t]here should be no serious question that computerimplemented inventions such as software constitute patent-eligible subject matter under § 101[,]” obviousness under § 103 was the more appropriate way to find that the present patents were invalid.148

While experts in the patent industry agreed that the patents in Alice were improvidently granted and needed to be invalidated, many criticized the Court’s decision as not giving much guidance on what kinds of patent software should be patentable.149 Many also criticized the decision for not providing clear guidance on when a patent transforms an abstract idea into a patent-eligible invention.150 To this question, the Court stated that “the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. Stating an abstract idea while adding the words ‘apply it’ is not enough for patent eligibility.”151 Professor John Duffy of the University of Virginia School of Law lamented having to teach the Alice decision to his students, stating that he was not convinced that “the enough test [would] give much guidance to [his] students, or to the lawyers, judges, and Patent Office officials who will have to apply it to numerous other situations.”152 Professor Duffy also expressed concerns for international prosecution, stating:

While these cases involve only U.S. law, other countries often look to U.S. doctrine in fashioning their own patent law. Some of those countries may not be predisposed to supporting patent rights, especially patent rights held by foreign patentees. Those countries might be quite willing to embrace, vigorously, a judgemade exclusionary principle that has the acknowledged capability to “swallow all of patent law” if judges and other decision-makers do not “tread carefully” in applying it.153

It seems that Professor Duffy’s concern was warranted. Less than one year after Alice, the case had been cited 109 times by lower courts in cases involving the validity of software patents.154 The district court found that twenty-eight of the software patents were invalid at the pleadings stage without first holding a Markman hearing where the claim language is construed. Twenty-two district courts had invalidated patents on summary judgment, and only eighteen district courts had rejected Alice challenges on the merits or for procedural reasons, such as the prematurity of the Alice motion.155 Additionally, in that time period, the Federal Circuit only upheld one software-related patent.156

[Finally, statistics from the USPTO show a large drop off in the issuance of business method patents, issuing fewer than half the number that they had issued in the months prior to Alice. 157 This is in line with Judge Newman’s concurrence in part and dissent in part when the Alice decision came before the Federal Circuit where she stated that “[t] he uncertainty of administrative and judicial outcome and the high cost of resolution are a disincentive to both innovators and

competitors.”158 Articles with titles such as “Business Methods (and Software) Are Still Patentable!”159 do not encourage inventors to invest in patent protection for their business methods and software patents. The fear is that their applications will be rejected by the USPTO.

3. Biomedical Technology

Business methods and software are not the only technology areas that the U.S. Supreme Court has scrutinized under 35 U.S.C. § 101. In Mayo Collaborative Services v. Prometheus Laboratories, Inc., the Supreme Court invalidated patents for “[a] method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder . . . .”160 Because people metabolized the drug 6-thioguanine differently, the patents set out thresholds for administering the drug based on a patient’s red blood cell count.161 Prometheus, the patent owner, sold diagnostic tests that embodied the processes that the patents described.162 When Mayo, a buyer of the diagnostic tests, announced that they intended to begin using and selling their own test, Prometheus sued Mayo in a federal district court for patent infringement.163 While finding that Mayo’s test infringed Prometheus’ patent, the federal district court nevertheless granted a motion for summary judgement in Mayo’s favor reasoning that “the patents effectively claim natural laws or natural phenomena— namely the correlations between thiopurine metabolite levels and the toxicity and efficacy of thiopurine drug dosages—and so are not patentable.”164 On appeal, the Federal Circuit found that the steps in the patents “involve[d] the transformation of the human body or of blood taken from the body” and thus satisfied the Federal Circuit’s “machine or transformation test.”165 The Supreme Court reversed, holding that “Prometheus’ patents set forth laws of nature—namely, relationships between concentrations of certain metabolites in the blood and the likelihood that a dosage of a thiopurine drug will prove ineffective or cause harm.”166 The Court went on to say that if Prometheus’ patents claims did significantly more than simply describe these natural correlations, it might be enough for the patents to qualify as patent eligible.167 In explaining the test, the Court analogized Einstein patenting his General Theory of Relativity “by claiming a process consisting of simply telling linear accelerator operators to refer to the law to determine how much energy an amount of mass has produced (or vice versa).”168 Based on this analogy, the Court determined that the process simply told doctors interested in these correlations to perform a series of steps that, while not being natural laws themselves, were not “sufficient to transform the nature of the claim.”169

Critics of the decision did not hold back, stating that “[t]hose in the biotech, medical diagnostics and pharmaceutical industries have . . . been taken behind the woodshed and summarily executed by the Supreme Court . . . .”170 The big concern was that the Court’s decision would invalidate thousands of diagnostic patents and would cause investors in personalized medicine to reevaluate their current investments and possibly redirect future investments to other projects, thereby resulting in less research and development in the area of untreated diseases.171 Amidst the criticism, there were those who agreed with the decision.172 While conceding that the decision could create troublesome problems in pharmaceutical and biopharmaceutical companies, Professor Richard H. Stern at George Washington University Law School praised the decision for “masterfully harmoniz[ing] difficult-toreconcile precedents.”173

A year later, the Court again took up the issue of biotechnology patents in Association for Molecular Pathology v. Myriad Genetics, Inc. 174 In that case, Myriad, a molecular diagnostic company, had discovered the precise location and sequence of gene mutations that dramatically increased the risk of breast and ovarian cancer.175 With this knowledge, Myriad developed medical tests that could detect these mutations in the genes in order to assess the patient’s risk for cancer.176 Years later, medical patients, advocacy groups, and other doctors filed a lawsuit seeking a declaration that Myriad’s patents were invalid under 35 U.S.C. § 101.177 The district court granted summary judgement against Myriad, which the Federal Circuit reversed, holding that the method was patent eligible under § 101.178 The Supreme Court then reversed the Federal Circuit, stating that because Myriad had sought to patent a naturally occurring DNA segment, as opposed to a method for manipulating genes, it had sought to patent a product of nature which was not patent eligible merely because it had been isolated.179 However, the Court did find that where the patent concerned complementary DNA (cDNA), which is synthetic, the cDNA was not a product of nature and therefore patent eligible under § 101.180

Many commentators supported the Supreme Court’s decision stating that “for many people, it is impossible to understand

how genes—the traits we inherit from our parents and pass along to our children—could become a company’s intellectual property.”181 Still, many argued “that without the revenue streaming from their intellectual property protection, biotechnology companies will not be able to create the medical biotechnology products that have so much positive potential for public health.”182

The U.S. Supreme Court decisions discussed above, as well as the AIA’s implementation of the post-grant opposition proceedings were used by the GIPC to justify the U.S. downgrade in the patent protection rankings.183 However, as previously stated in Part II of this Comment, the GIPC utilized a largely subjective methodology to make this determination. A better way to assess the effects of these changes to the U.S. patent system would be to develop an objective methodology, which looks at how inventors have responded to these changes in the patent system.

V. Analysis

The GIPC’s Index lists the U.S. as first in overall IP rankings, but a breakdown of the countries rankings in category 1: Patents, Related Rights, and Limitations, shows that the U.S. ranks 13th as shown in Figure 1 (page 99).184

As previously explained, these rankings are based primarily on the subjective mixed scoring method.185 The following analysis will seek to determine, using statistics from both the IMF and WIPO, whether the GIPC’s Index ranking shows that the changes to the U.S. patent system have objectively caused inventors to be less inclined to seek patent protection in the U.S.

For this analysis, only the top thirteen countries from Figure 1 were analyzed. While other countries might have economic and patent data that would challenge their rankings by the Index, the goal of this Comment is to test the accuracy of the GIPC’s ranking of the U.S. In addition, because WIPO only has patent statistics from 2008 to 2017, all GDP data from the IMF also is constrained to those years.

A. Economic Strength as Measured by Gross Domestic Product

Gross Domestic Product (GDP) is defined as a monetary measurement of all final goods and services produced in a given period of time, usually annually.186 A country’s GDP is composed of all goods and services produced for sale in the market as well as nonmarket production such as defense and education spending provided by government.187 While other productive activity, such as unpaid work by volunteers and black-market activities, are not included in GDP measurements, economists routinely use GDP as a way to measure the health of a country’s economy.188 With regards to an inventor deciding where to sell their inventions and thereby seek patent protection, countries with higher GDPs usually have greater capital available to the inventor as opposed to countries with lower GDPs. If GDP was the sole measurement that determined an inventor’s desirability to seek patent protection, the U.S., which boasts the highest nominal GDP of any other country in the world,189 would be far and away the top choice of inventors. This can be shown in Figure 2 (page 100) which compares each countries’ relative average nominal GDP to the average number of all patent applications between the years 2008 to 2017.190

As Figure 2 shows, there is a strong correlation between a country’s GDP and the number of patent applications, with the two outliers being Japan and South Korea, which is most likely attributable to the fact that both countries have a large high-technology industry, with 25% of all manufactured exports from those countries being classified as high-technology.191 While there may be a strong correlation between a country’s GDP and the number of patent applications, the correlation has more to do with an inventors desire to tap into a wealthy market than it does about the ease of navigating the country’s patent system due to increased costs in obtaining and defending a patent. In other words, as long as these countries continue to maintain higher GDPs (as all thirteen countries GDPs rank in the top quintile of all countries in the world), it is safe to say that they will also receive the largest number of patent applications.192

Another way to measure a country’s economic vitality is to measure its economic growth rate,193 which is obtained by calculating the percentage change in GDP from one year to the next.194 While a country such as the U.S. may continually have the highest GDP, during a recession, GDP will decrease, and unemployment will increase. Increased unemployment equates to a smaller market for inventors to sell their inventions, which will cause inventors to be less likely to seek patent protection for their inventions. If this theory holds, countries experiencing negative GDP growth should also experience a corresponding decrease in the percentage

change of patent applications, and vice versa. Figure 3 (page 100) shows the average growth rate as compared to the average percentage change in patent applications in each country between the years of 2008 to 2017.195

Unlike Figure 3, there is much less correlation between a country’s growth rate and the change in patent applications, if any at all. In fact, while Japan experienced a small average growth rate during this time period of 0.24%, it also saw a significant decrease, 0.99%, in the percentage change of patent applications.196 Conversely, while Italy experienced a negative growth rate of 0.67% (one of the lowest growth rates in the entire world, ranking 186 out of 196 countries), it saw an increase of 1.41% in the percentage change of patent applications.197 Therefore, it is reasonable to conclude that there is very little if any connection between a country’s growth rate and an inventor’s decision to seek patent protection.

The likely reason is that the duration of the patent term is twenty years in the U.S. and Europe.198 With the average business cycle’s contractionary period being eleven months for the past seventy-five years, inventors can safely assume that any country experiencing a recession will most likely reach recovery within a year or two.199 Therefore, inventors will most likely view a country experiencing negative GDP growth as only temporary, which will not significantly discourage them from seeking patent protection, if other factors in that country show a possible market for selling their invention. In addition, for those inventors seeking to invent products that might be classified as inferior goods, negative GDP growth may actually be a positive factor. An inferior good is one where demand decreases when a consumer’s income rises.200 Conversely, when a consumer’s income decreases (as a collective country’s income decreases during a recession), demand increases.201 Therefore, inventors of products that can be classified as inferior goods may seek countries with lower GDPs or even seek out countries

experiencing recessions.

As these economic statistics show, their effect on an inventor’s decision to choose one country over another based upon the costs associated with obtaining and enforcing a patent will be negligible. As such, these economic variables can be excluded from the analysis in an attempt to isolate other variables that may shed light on whether inventors are swayed by the changes to the U.S. patent system when deciding which country to seek patent protection.

B. Percent of Patent Applications Granted

Another way to gauge how favorable inventors view a particular country’s patent system is to look at the percentage of patent applications that eventually result in the grant of a patent (patent grant rate). In theory, inventors should be less likely to seek patent protection in a country with a lower patent grant rate than a country with a higher grant rate. Additionally, historic analysis of the patent grant rate in the U.S. should show a decrease after the year 2012 according to the GIPC Index as decisions by the U.S. Supreme Court restricting patentability should mean that the USPTO rejects more patent applications. Figure 4 (page 101) shows the historic patent grant rate for all thirteen countries.202

Surprisingly, the average U.S. patent grant rate actually increased from 42.54% to 51.40% after the year 2012.203 This would seem to contradict the GIPC Index’s predictions. Furthermore, by ranking each country based upon their average patent grant rate, the U.S. ranking actually increased from 10th, before the year 2012, to 8th after the year 2012.204 However, all countries, with the exception of Italy, also saw an increase in their average patent grant rate after the year 2012.205

A note of caution should be exercised when analyzing this measurement as it does not take into account whether inventors, after seeing the changes to the U.S. patent system post-2012, may have been discouraged entirely from applying for a U.S. patent. In other words, the increased patent grant rate may largely be attributed to less patent applications that contained patentable subject matter than was likely to be rejected by the USPTO in light of the Supreme Court’s decisions. Therefore, a large portion of the patents being granted were subject matter not likely to be rejected by the USPTO. In addition, these numbers do not take into account how many applications were pro se, which account for the bulk of rejections by the USPTO,206 and there is no readily available data to show how pro se applications are treated in other countries. Still, the ranking of the U.S. among these thirteen countries, with respect to patent grant rate, seems at odds with the GIPC Index’s ranking.207

C. Percent Change in Patent Applications

Finally, the most dispositive statistic to look at is the percentage change in patent applications in each country. If the GIPC

Index’s findings are correct, inventors seeking patent protection in the U.S. should be discouraged after the changes to the U.S. patent system were implemented in 2012 (and should look to countries that have a better patent system). As such, the percentage change in patent applications in the U.S. should decrease after 2012, while the percentage change in patent applications in other countries should increase. WIPO classifies patent applications as being filed either by a resident, non-resident, or abroad filer.208 A resident filing is one made by applicants at their home office, which may be a national or regional office.209 The terms “non-resident” and “abroad” are used for filings in a foreign office, but a non-resident filing occurs when an office receives an application by a foreigner, while an abroad filing occurs when an applicant files an application from a foreign office.210 While WIPO has reasons for differentiating between the two terms, for this analysis, the terms can be used interchangeably. Figures 5 (page 101) and 6 (page 102) show the average rate of change of patent applications across all thirteen countries.211

From the outset, it should be noted that Switzerland, Sweden, and Ireland seem to have outliers that may be attributable to factors specific to those countries which are unknown. Those three countries have been removed from Figure 6 for readability purposes.212

The U.S. experienced a decrease of 2.05% among resident filings and a decrease of 2.40% among non-resident filings but experienced a 1.26% increase among abroad filings.213 By averaging all three categories of filers, the U.S. saw an overall decrease of 1.06%.214 The only other countries that experienced a greater average decrease than the U.S. were Switzerland, France, and Spain, with decreases of 26.85%, 4.01%, and 3.96%, respectively.215 Therefore, it is reasonable to conclude that the changes to the U.S. patent system in 2012 have resulted in at least some inventors being discouraged from seeking patent protection in the U.S.

VI. Conclusion

The analysis presented supports the GIPC Index’s conclusion that changes made to the U.S. patent system since 2012 have led some inventors to be discouraged from seeking patent protection in the U.S., but it is unclear whether the analysis supports the Index’s ranking of the U.S. or any of the other top fourteen countries. In order to more definitively determine the answer to these questions, further econometric analysis will need to be done. In addition, the dataset from the years 2008 to 2017 is probably too small. As time goes on, an expanded dataset should be able to yield better results and paint a more adequate picture of the damage that the changes to the U.S. patent system since 2012 has had on U.S. innovation.

Figure 3

Figure 4

Figure 5

Figure 6

1. See Dick Teresi, Zero, The Atlantic, July 1997, https:// www.theatlantic.com/magazine/ archive/1997/07/zero/376900. 2. Robert A. Margo & Georgia C. Villaflor, The Growth of

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end notes

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Major Change, New Chapter: How

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