GlaxoSmithKline, the second-largest pharmaceutical company in the world, recently managed to block the United States Patent Office's efforts to substantially alter the patent-application process.
Thankfully so.
The so-called claims and continuations rules were to take effect Nov. 1, 2007.They would have watered down patent rights for inventors and corporations, thereby making it easier for those who do not innovate to simply copy the inventions of others.
The U.S. Federal District Court for the Eastern District of Virginia effectively has called a time-out and preserved the status quo until a complete review of the proposed rules is done. The argument against these rules is that the Patent Office lacks the authority to make these changes because they conflict with patent laws enacted by Congress.
Had the patent rules gone into effect, large corporations would have felt the brunt of the pain. The value of patent portfolios would have decreased, thus causing significant loss of value for many of the largest corporations key engines that drive the U.S. economy and the stock market.
The Patent Office ignored a loud cry from industry. But the Office of Management and Budget (OMB) also dropped the ball. It failed to carry out its duties pursuant to Executive Order 12866, which was amended by President Bush in January 2007. It requires agencies, including the Patent Office, to conduct an analysis to determine whether the costs associated with the rule-making significantly outweighs any benefit to the system.
In completing its review and signing off on the regulations on July 9, 2007, OMB simply took the Patent Office's word that the regulations were not significant, which is simply not true.
On June 14, 2007, the Innovation Alliance - a collection of major pharmaceutical, technology and other companies - sent a memorandum to Susan Dudley, the administrator of the Office of Information and Regulatory Affairs at OMB. This memo explained that a financial review must take place when it can be reasonably anticipated that agency rule-making will have "an annual effect of $100 million or more or adversely affect the economy in a material way."
This memo also explained that the cost associated with complying with these rules would have an impact of no less than $500 million on users of the U.S. patent system, an extremely conservative estimate.
The Innovation Alliance also explained that the burden of the new Patent Office rules is being thrust upon all users of the patent system in an attempt to address some 2 percent to 3 percent of patent applications filed annually. This seems to suggest that any benefits the rules would have are significantly outweighed by the associated cost to the economy.
Furthermore, the memo noted that the Patent Office did not consider the significant additional costs that it would face if the rules were implemented. In short, OMB should have at the very least sent these rules back to the Patent Office for a more detailed analysis of the financial costs associated with implementation. The Innovation Alliance wasn't the only organization to challenge OMB. David Boundy, vice president for intellectual property at Cantor Fitzgerald LP, pointed out:
By the USPTO's own estimates, the rules will cause a 4-5 percent decrease in USPTO revenue, which corresponds to a loss of about $70 million by fi scal year 2010, and thereafter growing at a rate of about 10 percent a year.
Continuation applications are the least expensive for the USPTO to examine because continuation applications tend to sail through the examination process as a result of the fact that many of the most contentious issues already have been resolved in prior applications.
The single-largest factor in whether maintenance fees are paid is the number of claims in the issued patent. By limiting the number of claims in a patent, it is unquestionable that patent owners would be less willing to pay maintenance fees. This is significant because maintenance fees make up more than 75 percent of the fees generated by the USPTO, while maintenancefee administration costs are minimal.
So, in addition to the cost to users to comply with the new proposed rules, the Patent Office would suffer significant losses of revenue, easily approaching $100 million a year. Why didn't OMB act to prevent the rules from becoming final? It would appear that the agency rubber-stamped these rules without any independent thought or analysis. Had there been any such consideration, OMB would have at the very least asked the Patent Office to respond.
What they should have done is require the Patent Office to provide a meaningful financial analysis and submit that analysis for public comment.
