BRAD SMITH: I'm pleased to be here today to participate on behalf of Microsoft in this discussion on the future of the patent system. Let me preface my remarks by stating right up front that I am not a patent attorney. But then again, I've always been sympathetic to the general view that law is too important to be left solely to lawyers. Like the law in general, patent law today is having a broad impact on our economy and society. Especially in a period of rapid technological change, there is a strong need for a broad dialogue regarding those aspects of our patent system that are working well and those that need to change. There is plainly a new generation of patent issues arising, and it merits attention from a broad cross-section of the technology community, the legal profession, and the public at large.
Let me be clear about one other thing at the outset. We at Microsoft believe that important improvements should be made in the U.S. patent system. We have benefited substantially as an industry and a country from patent protection. But the combination of technological change and a globalizing economy are creating new challenges for the U.S. patent system. Our patent system is being flooded with new patent applications and an explosion of sometimes-abusive litigation. Although the roots of our patent system are strong, its long-term health is threatened unless we take this opportunity to reform it. Now is the time to act.
I'd like to talk today about reform in four areas:
Ensuring high patent quality amidst increasing patent quantity;
Curbing excessive litigation and litigation abuse;
Promoting international patent law harmonization; and
Increasing accessibility for individual inventors and small companies around the world.
In our view, this is the foundation for a good patent reform plan in the United States -- a plan that will ensure that our 200 year-old-system continues to shine in the future.
As we at Microsoft consider these issues, we try to look at them with a comprehensive point of view. On one side, we are among the nation's largest investors in research and development, spending over $7 billion per year. This makes us one of the nation's largest holders of intellectual property rights, filing more than 3,000 patent applications at the Patent and Trademark Office (PTO) this year alone.
On the other side, our popular products and strong balance sheet perennially make us among the largest targets of patent litigation in the country. We typically spend close to $100 million annually to defend against an average of 35-40 patent lawsuits simultaneously.
While it's hard to be excited about life as a perennial patent defendant, there is typically some virtue in being forced to think through each issue from both sides. It creates little room for easy answers and pithy slogans that would benefit only one side while sacrificing the legitimate needs of the other. Instead we're forced to work through the tough problems in a thorough-going way. And more than anything, our experience on both sides provides first-hand experience and often some insight into how a properly functioning patent system needs to strike a balance that serves innovation, economic growth, and the needs of consumers.
In part, all this makes it important to consider some of the vital but sometimes overlooked aspects of patent law. For example, patents make it easier for inventors to share innovations with competitors instead of locking them away as trade secrets. In December 2003, we announced a corporate-wide policy to license our innovations to all comers on commercially reasonable terms. Some of you may have seen last month our deal to share our music file technology with Nokia. Patent licensing provided the framework for cooperation between our two companies. Or as the Financial Times put it, "technology rivals prepare to march to the same tune."
More broadly, because we are active participants in the patent system, we hear most all the criticisms of it. Because such a large share of global research and development is done in the U.S. -- and because so much of the world's economy depends on it -- we believe we have a special obligation, as an American company, to try to help ensure that the U.S. system remains healthy and productive.
And finally, because we sell our products around the world, we believe international commercial laws -- including patent laws -- often benefit from harmonization. Lack of harmonization builds inefficiency into the global economy. But we are also aware that harmonizing our laws with those of our trading partners will require some changes to our own system. The world is not, after all, lining up to adopt the American system chapter and verse.
The U.S. Patent System as an Engine for Economic Growth
As we think about the patent system, our views are grounded in two tenets. First, on the whole the patent system born of our Constitution has worked extremely well. It has been fundamental to our economy since the first three patents were awarded in 1790 -- for among other things, the manufacturing of candles. It's hard to imagine that when Thomas Jefferson received those first applications, even his creative mind could have predicted the twists and turns technological innovation would take in the more than six million U.S. patents that have been granted in the 215 years that have followed. The patent system has been instrumental in moving technology from candle light to electricity; from the postal communications of the 1700s to the railroad and then the telephone in the 1800s; to the automobile and then the airplane in the twentieth century; and to computing hardware, software, and Internet-based communications today.
As the U.S. patent system approached its first centennial, it began to attract broadening attention outside the United States. In 1886 the Japanese Government sent Korekiyo Takahashi, soon to be the country's first Commissioner of Patents, to spend several months interviewing employees at the U.S. Patent Office. He was fluent in English and spent several months working diligently. As he concluded his work and was preparing to depart, one of the design examiners at the Patent Office asked him why he had come. Takahashi explained that Japan was in the process of opening up its economy to the world and it had studied the success of other countries. Its experts had noted the economic miracle in the United States, as the country had transformed itself from an agricultural economy to an industrial leader in less than a century, and they asked themselves what had made the United States so successful. The Japanese Government, he explained, had concluded that it was patents, and hence it would adopt a patent system as well. It did, and as we all know, the Japanese economic miracle unfolded in the century that followed.
Today the U.S. incentive system is as productive as any in the world. In 2004 the U.S. Patent and Trademark Office approved patents for 187,000 new inventions, from inventors working across the country and around the world. The PTO approved nearly that many the year before as well. Currently there are about 1.9 million inventions under active patent in the United States. By any objective measure, the U.S. patent system has been an extraordinary success for our economy and our citizens. It has engendered more breakthroughs in technology, and has contributed more to the material progress of mankind, than any intellectual property system in human history.
Periodic Need for Reform
There is also a second tenet in our thinking. This is recognition that broad discussion and periodic reform are a natural, important, and healthy part of our patent system. This need for discussion and potential change is especially pronounced amidst periods of rapid technological innovation and social change. Indeed, periodic review and reform is a large part of the reason our patent system has remained so successful for so long.
For example, it's worth noting that just a few years before Mr. Takahashi was seeking to emulate U.S. patent rules, the Granger movement in the 1870s was mobilizing farmers across the nation's heartland through criticisms of it, with many calling for the abolition or dramatic scaling back of our patent system. The lighting rods for this criticism, much of which made the front pages of the nation's newspapers, were the variety of new technologies that were reshaping American society, including the railroad and telephone. The issue became even more heated when Montgomery Ward offered consumers a cheaper alternative to Isaac Singer's patented sewing machine, even though it infringed Singer's patent and paid him no royalty. Some argued that the nation's patents had little influence on actual invention, but instead were simply driving up costs for consumers and entrenching established interests in the industrial northeast.
These issues forced the Congress and the public to grapple with the economic implications of the patent system in an industrial age that was far different from the country's agrarian roots. Ultimately Congress and the courts concluded that the answer was neither the abolition of the patent system nor the exclusion of new technologies from it. Instead a series of important patent reforms were needed to adapt the system to a new technological era and economic climate. These reforms, supported in part by sustained attention and editorials in the New York Times, called for procedural improvements in the courts and in the patent examination process, including the expansion of resources at the Patent Office to ensure higher quality patent review.
As we meet here 130 years later, it is easy to look at recent technological advances and suppose that the issues they pose for our patent system are entirely novel. Indeed, much academic commentary seems to reflect this premise. In reality, however, the issues and arguments being debated today have close parallels in the debates that preceded us as long ago as in the latter 1800s.
This is not simply a coincidence. We're living in an era of technological change that rivals the societal impact of many of the changes of the First Industrial Revolution. New inventions, including computer hardware and software, are transforming the ways we live and work. These changes are fueling our economy and generating widespread social impact. Just as they are generating new discussion in other legal fields, such as privacy, contract, and competition law, it is natural that they are raising new questions and challenges for intellectual property rules as well.
Unlike prior periods of rapid technological change, however, we live in a world that today is far more global in character. As a result, any discussion of patent issues is by definition a discussion that is important to the world, and not just to our own country. This reflects both the huge number of foreign inventors that file patent applications in the United States, as well as the ongoing patent debates that are unfolding in Europe, Asia, Latin America, and elsewhere.
The Opportunity for Improvements Today
Let there be no mistake about it. We need to take important steps as a country to improve our patent system. Only by doing so will we continue to ensure that our patent system strikes the right balance in promoting technology innovation and economic growth. Many of the new challenges for our patent system can be traced to a discrete number of root causes. In particular we need to focus on four areas.
. The first challenge is the rapid increase in the quantity of patent applications, resulting from the combination of globalization and the rapid pace of innovation in new technologies. Of course, there is nothing inherently wrong with an increase in quantity by itself. The challenge, however, is that in many areas of life a large increase in quantity often creates new challenges for quality. This is plainly the case for our patent system.
The Patent and Trademark Office has witnessed a tripling of patent applications since the 1980s, with more than 350,000 applications now filed each year. This dramatic increase has strained the resources of the PTO and imposed unreasonable demands on the PTO examiners as they labor mightily to keep pace with the influx. Given these extreme demands, the onus for ensuring patent quality is not the PTO's alone, but instead should be borne by those companies like Microsoft and others in the private sector that are dependent on an effective patent system. With proper governmental resourcing for the PTO and an opportunity for expanded private sector submission of information, based on appropriate incentives and checks, we can better ensure that our patent system sustains the high quality standards needed by the public.
. A second phenomenon is a large increase in litigation. Recent estimates show that the number of patent lawsuits filed annually in the United States has risen from under 1,000 in the early 1980s to over 2,500 today.
As in other areas of life, we confront a patent system in the U.S. that is excessively litigious. It is too easy for a litigant to manipulate the U.S. system and look to a patent lawsuit as the ultimate lottery ticket, hoping to confuse jurors with technical jargon that will yield the payment of a lifetime. The availability of triple damages and injunctive relief multiply this further. As a result, the American system, which has historically encouraged innovation so effectively, can be used too easily to stifle the innovation of others through litigation. If we don't act quickly to put the system right, we risk undermining the technological advances that patent laws are designed to encourage in the first place.
. Third, the globalizing economy is raising new challenges of patent accessibility, especially for small start-up firms and individual inventors. The U.S., of course, is not alone in its belief in the power of patents. WIPO, the World Intellectual Property Organization, now boasts a participating membership of 182 nations. Despite their differences on a host of other global issues, all of these countries share a fundamental belief in the profound importance of technological progress to their societies and in the power of patent laws to help achieve it. However, this agreement does not extend to the specific 'nuts and bolts' of how good patent systems should work. Like the U.S., every WIPO nation must build a patent regime, often with its own language requirements and legal idiosyncrasies. These regimes are similar in most important ways, but differ on the details. This makes the filing of multiple patent applications across borders not only increasingly important, but also an expensive and complex endeavor for all concerned.
The multiplicity of national patent regimes -- all sharing the same basic goal, but each imposing disparate administrative burdens on inventors -- is something that we in the United States should care deeply about. This is the case not only because of the importance of foreign patent protection for U.S. inventors, but also because of the enormous importance of the U.S. patent system for inventors all over the world, both international and domestic. To illustrate this, consider the following statistic: according to the U.S. Patent and Trademark Office, of the top ten recipients of U.S. patents last year, only four are based in the United States. Remarkably, that number is actually higher than in years past. In the 1990s it was not uncommon for only two, or even only one, U.S. firm to make the PTO's top ten list.
These figures are significant for at least three reasons:
First, they tell us that the impact of patents in spurring innovation is by no means a U.S.-only phenomenon. Inventors everywhere recognize the value of patents.
Second, these figures tell us that inventors the world over rely on the U.S. patent system to protect their innovations in this, the largest market in the world. That makes it all the more imperative that the U.S. patent system get it right and that we have the courage to reform the system to address clear problems.
Third, these figures demonstrate that, at least as far as technology innovation is concerned, we already live in a truly global economy, and indeed have for many years. National patent systems cannot succeed in promoting innovation and consumer welfare if they fail to take account of this fact. And with one of the world's most utilized patent systems, it is vital that the United States ensures that its own rules and procedures keep pace and do not fall behind commercial reality.
. Finally, the issue of accessibility is undoubtedly the most pronounced for individual inventors and small companies. Although there are thousands of examples around the world of individual inventors and small companies building a successful business on the basis of their patented inventions, the lack of international harmonization means that one needs to employ and pay for an army of lawyers in order to patent an invention throughout the world. And as we all know, this doesn't come cheap. For large companies like Microsoft or General Electric, the problem is surmountable. We've got the resources to deal with it. But it can be a challenge for smaller companies and individual innovators who can't afford to sort through the complexities of dozens of disparate national systems.
The world today cannot afford to discourage important advances in knowledge and understanding by maintaining an impenetrable network of discordant patent regimes. We need to reward innovation, not stymie it. To that end we suggest eliminating filing fees at the PTO for individual inventors and small businesses.
Proposals to Strengthen the U.S. Patent System
Given where we are today and the need to provide inventors everywhere with an effective, accessible patent system, the question naturally arises: how do we get there from here?
The first step, it seems to us, is to ensure that our own house in order -- to ensure that the U.S. system continues to promote innovation and offer robust yet balanced protections that are equally available to all innovators regardless of nationality, size, or financial resources. We need patent reform that is based on simple and clear goals, including maintaining high quality standards, eliminating litigation abuse, reducing barriers for small companies, and promoting greater international cooperation.
Let me take a moment to add some substance to these ideas and to mention briefly a few specific proposals that, in our view, would help address many of the current problems with the U.S. patent system.
1. . First, to address patent quality, a top priority should be to ensure that the PTO has the resources it needs to give every patent application the deliberate, expert review it deserves. As a consequence of the recent increase in patent user fees approved by Congress, the PTO stands to receive fees adequate to enable it to provide consistently high quality examinations. But for many years Congress has diverted a significant portion of user fees to other government uses. This practice should stop. Microsoft strongly supports Congress's move toward eliminating this practice, but urges that steps be taken to put a permanent end to all fee diversion from the PTO. This, more than any other proposal, offers the best hope for addressing patent quality.
Second, we need to ensure that interested parties have sufficient opportunities to alert the PTO about questionable patents within the PTO review process itself. Under current law, parties have no effective means to raise such concerns during the examination process. They instead can only raise concerns after patent issuance by filing a reexamination request or by filing a lawsuit -- an obvious disincentive, given the costs of patent litigation. One proposal that has been suggested is to allow third parties to submit information regarding "prior art" to patent examiners during the patent examination process itself, rather than only after a patent has been issued. This is a constructive step, because it effectively harnesses private-sector resources and incentives to promote the public's interest in improving patent quality.
Another important proposal is to establish a post-grant patent opposition procedure, which would allow third parties to challenge patents administratively, rather than through litigation. Such a procedure already exists in the European system and could help weed out questionable patents before they become the subject of costly and time-consuming litigation. With both of these procedures, of course, safeguards will be needed to ensure that they are not used as a "nuisance" tactic to delay the issuance of valid patents.
Finally, business method patents have received much attention in the last few years and are often called out as a leading candidate for strengthened review. The PTO should be commended for having already taken steps to improve its review of such patents through its second tier review process and internal training efforts that have significantly reduced the number of business method patent issuances. Microsoft supports further progress in this area to ensure that patents are not awarded for "obvious" well-known business practices.
2. . Next, we need to eliminate the abuse of lawsuits and the patent litigation lottery it fosters. One big step in the right direction would come from the creation of a special court that would consolidate and hear all patent cases at the federal district level. This, combined with clearer standards, would improve the consistency and predictability of patent litigation. Many critical evidentiary issues are decided at the trial level. An expert court could benefit litigants on both sides of the courtroom, and would make the litigation process substantially less expensive for all involved -- large companies, small companies, and individual inventors alike.
Second, we should revise the standard for "willful" infringement -- which, if established, can subject defendants to treble damages. The current situation forces companies large and small to devote considerable resources to obtain opinions of counsel for no purpose other than developing a defense to threatened litigation. While large companies like Microsoft can afford this expense, the burden placed on smaller companies is onerous. Moreover, the current law creates an incentive for inventors not to review patents at all -- a result that is directly contradictory to patent system's core goal of promoting the broad dissemination and understanding of new inventions. A more reasonable standard, in our view, would be to limit "willfulness" determinations to truly egregious behavior, as explained by Judge Dyk in his opinion dissenting-in-part in the recent decision.
Third, the standard for obtaining injunctions should be returned to its roots as an equitable remedy. This means that a litigant should be required to establish irreparable harm that cannot be compensated by monetary damages before a court takes the far reaching step of enjoining a product. Such reform would serve the dual goals of encouraging patent owners to commercially develop or license their innovations and of ensuring that injunctions are not used simply as a litigation tactic, which is basically the reality today.
3. . In addition, greater harmonization between patent offices is critical to ensuring broader access for all inventors across national borders. While discussions on harmonizing patent laws have been ongoing at some level for many years, there is a new urgency to take steps now given the increasing importance of patent protection to inventors around the world. Right now the nations of Europe are wrestling with harmonization across the EU. The EU Common Position on the draft directive on the patentability of computer-implemented inventions -- supported by many small and large European companies as important to protect innovation, local research and development, and thousands of jobs -- is an important step in the right direction and preserves the uniqueness of the European system.
International harmonization requires two things, first, increased collaboration among patent offices, and second, legal reform. As to the former, both Congress and U.S. industry should support the PTO's ongoing efforts to strengthen cooperation and information sharing among national and regional patent offices. For instance, the PTO has been urging cooperation toward building international consensus among patent offices on what constitutes "prior art." While this may sound like a fairly modest, esoteric undertaking, it would, if successful, substantially increase predictability for inventors and promote consistency of outcomes across jurisdictions. A parallel goal should be the creation of opportunities for mutual recognition of patent office reviews, at least among the three largest patent offices: the PTO, the European Patent Office, and the Japanese Patent Office.
More comprehensive harmonization will, however, require legal reform, and here too the United States needs to act. The United States is the only country in the world that applies a "first-to-invent" standard for awarding patents. Every other country applies a "first-to-file" standard. A growing number of U.S. stakeholders -- including the National Association of Manufacturers, the Intellectual Property Owners Association, and the American Intellectual Property Law Association -- have recently come out in support of the United States moving towards a first-to-file system. Doing so would not only earn us goodwill internationally, but would also make the U.S. system substantially clearer, simpler, and more predictable. Indeed, one recent study found that the median cost for determining patent priority under the current U.S. system is $300,000 -- a figure that clearly tilts the playing field against inventors with smaller financial resources.
The United States should also follow the practice of our major trading partners in requiring the publication of all patents 18 months after filing. U.S. patent law already requires 18-month publication where the invention is also the subject of a foreign patent application. As a result, a significant percentage of U.S. patent applications are already published 18 months after filing. Applying this requirement to all U.S. patents would not only promote uniformity and international harmonization, but would help avoid duplication of effort by later inventors and discourage "submarine" patents -- namely, patent claims that become known only after later inventors have invested in commercializing the technology at issue.
4. . Finally, while we should fix the system to remove obstacles inherent with many disparate systems, we also need to deal with the cost burden of obtaining patents for individual inventors and small businesses. To that end, we are proposing a "zero filing fee system" for those inventors that qualify for small entity filing status under PTO regulations to better encourage these inventors to obtain their patents.
Several nations, including the United States, already address this concern by reducing patent filing fees for such applicants. However, we believe that more should be done to relieve this cost burden. Instituting such a reform in the U.S. would promote the ability of a range of small entities -- defined to include certain small businesses, non-profits, universities and independent inventors -- to file their patent application at no cost, and to avoid PTO fees until such time as it became clear whether or not the patent would be granted. The proposal would reduce "barriers to entry" to the patent system for these sometimes resource-constrained inventors.
Charting a Middle Course
At the end of the day, we need to recognize that the ongoing consideration of improvements has always been a vital part of our patent system. Indeed, healthy debate and even criticism have always been a part of our system.
In Thomas Edison's day, I am told, there were those who argued passionately that no invention dependent on electricity should be eligible for a patent -- because electricity is a force of nature and should not be owned. Just imagine where we'd be today if Edison had lost that debate.
Even Thomas Jefferson -- one of the principal architects of the American patent system and a patent holder himself -- was sometimes ambivalent about the role of exclusive marketing rights in a free society. I think Jefferson saw then what we still see today: that an economically productive patent system requires trade-offs. It forces society to make tough decisions about the value of technological innovation versus the costs of market exclusivity. There were no easy answers in Jefferson's day, and there are none today.
The key to keeping our patent system right, it seems to us -- the key to balancing these competing interests wisely -- is to steer a middle course. Our challenge and shared responsibility is to continue to draw the line that Jefferson described -- that line that runs down the middle of the road. The U.S. patent system had contributed more to technological innovation than any system in the world. But as the world has changed, the patent system needs to change with it. We need to create a 21st-century patent system that is right for the information age and the expanding global economy.