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The Science, Technology, and Economic Policy (STEP) Board is undertaking a study of intellectual property policy to address the following questions: What are the consequences of the series of legislative actions, judicial decisions, institutional changes, and international agreements that have marked IP policy over the past 20 years? What benefits have been derived? What problems may be emerging? Are there respects in which the extension of Intellectual Property Rights (IPRs) should proceed further to encourage technical advance, investment, and innovation or, in view of claims that in some circumstances IPRs may be inhibiting competition and discouraging research and its communication and use, are there respects in which the extension of IPRs has proceeded too far? The project is chaired by Richard Levin, President, Yale University, and Mark Myers, Senior Vice President (ret.), Xerox Corporation. Additional information about the Board’s membership and this project is available on its home page, ww.nationalacademies.org/step.

In the first phase of the project, the STEP Board has held workshops in Berkeley and New Haven and a two-day conference in Washington to refine these issues and hear the range of opinions about them. The sustained growth and technological dynamism of the economy suggest that IP protection has been beneficial. At the same time, there is growing concern about the operation of IP in some industries. There is, however, little systematic information on how IPRs are being acquired and exercised in most sectors, and especially in emerging technologies such us the Internet and human genomics. Little research has been done on the operation of the patent system or on costs and benefits associated with patent litigation or patent-related transactions (e.g., licensing and cross-licensing).

In the second phase of the project, focusing primarily on the patent system and trade secret protection, the Board will create a study committee composed of experts in law, economics, corporate management, biomedical research, software development, corporate finance, and government policymaking. The committee will hold workshops and conferences but will also oversee commissioned analysis and research designed to inform its deliberations, including original empirical research using patenting, licensing, litigation, securities, survey, and other data.

The project will consider several generic issues while recognizing that circumstances are likely to vary considerably from one class of technology to another and that problems in one arena may not be characteristic of all.

Administration: A commonly expressed concern is that that Patent and Trademark Office (PTO) lacks sufficient resources to conduct rigorous, thorough review of patent applications, especially in rapidly changing technologies. What are the facts regarding the relationship of human (encompassing numbers, qualifications, turnover, etc.), financial (fees available to the PTO), and information resources (prior art data bases) to the volume of applications, prior art search methods, adaptation to new technologies? What is the incentive structure or bureaucratic culture in the PTO and how does it affect performance?
Patent Quality: Another concern is that there may have been a lowering of standards, especially non-obviousness and utility, in reviewing and issuing patents, with the result that many more patents of “low quality” and broad scope are being issued. Are there ways to measure empirically changes in the application of these standards over time? Is the number of claims associated with a patent an empirical measure of breadth of scope in this sense? How are these related to observable characteristics of PTO administration and/or court decisions? How are these measures related if at all to the way economists measure patent importance or value – i.e., by the frequency of citations in subsequent patents? Has there been a demonstrable change over time across technologies or in particular sectors? What are the economic implications of more patents of poor quality and broad scope?
International Comparison: A related claim is that the German or another European patent system produces superior results – fewer, higher quality patents less subject to litigation, etc. How can systems be compared and the effects of particular system differences be isolated?
Litigation Costs: Some observers claim that the costs associated with litigating patents, including responses to threats of litigation that may never occur, are escalating and excessive. What is the best measure of the rate of litigation – e.g., the rate for all issued patents or the rate for all commercialized patents or some other measure? How does the incidence and cost of patent litigation compare with other areas of commercial law (e.g., tort liability)? To what extent does essentially defensive patenting contribute to these costs? What are the opportunity as distinct from out-of-pocket costs –e.g., the technical and managerial resources devoted to assessing patent validity and to negotiation? Finally, how do characteristics of patent administration (e.g., thoroughness of review, availability and frequency of reexamination, etc.) affect transaction costs?
Markets in Intellectual Property: It has been suggested that there has been a dramatic growth in patent-related transactions (e.g., licensing, cross-licensing, equity sales, etc.). The project will seek to document this trend and develop an understanding of its possible benefits and costs. How do the trends in these transactions and their benefits and costs vary across key technology areas—for example, in complex electronic versus more discrete chemical product technologies?

The project will also consider the functioning of IP in particular technologies and industries and the similarities and differences among them. According to many participants in the recent series of STEP meetings, the most problematic arenas are software, especially software-enabled business methods, and biotechnology, especially involving genetic sequences. The fact that extensive patenting of these technologies is quite recent precludes definitive conclusions. Moreover, there are striking differences in product cycles, industry structure and other economic characteristics. Nevertheless, the project will attempt to assess and compare trends for each of these two technology areas in

Patenting and licensing: Who is patenting what? What are the common licensing patterns in each industry?
Patents and investment: What are early stage (e.g., VC and angel) investors’ perceptions of the value of formal intellectual property in these technologies? How have these attitudes changed over time? What do IPO filings reveal about public investors’ view of the role of IP? Do investors perceive differences in the quality of patents? Do they take care to evaluate the validity of patents?
Patent litigation: What are the litigation trends in these areas?
Disclosure: How does the disclosure function of patents operate in software and biotechnology? Are issued patents (or, prospectively, patent applications available after 18 months) a source of useful technical information?

The controversies surrounding software and biotechnology patents also pose sharply different issues of concern to the Board. Although these are of recent origin, there may be instructive parallels in the evolution of other technologies, and the project will explore analogous historical cases.

Software-enabled business methods. Here the concern is that patents on elements of widespread software-based business practices and Internet services will enable hold-ups of routine operations, blocking of new entrants, and economic concentration with a consequent slowdown in innovation. The patenting issues relate to whether there are adequate searches of prior art and adherence to the non-obviousness and novelty standards. There are also post-issuance questions about whether reasonable licensing arrangements are being or can be worked out. Business methods software represents a technology in transition – either from the public domain to the patent domain or from copyright to patent protection – raising two questions: Are the alleged problems transitory rather than fundamental? Are they likely to arise in other technological areas that may become subject to patenting?

Biotechnology. Here there is controversy over whether genetic sequences should have patent protection and, if so, whether application of the standards of utility and non-obviousness and the written description requirement is sufficiently stringent. The latter issue has led to new guidelines for patent application review. One question, therefore, is how the new guidelines would have affected patents that have already been issued. A second question is whether existing gene patents have been put into practice, e.g. for the development commercial products anticipated by the utilities described in the applications or whether the patents on upstream research materials have reduced the incentives for downstream research and commercialization. Are suitable licensing arrangements being worked out to facilitate further research and commercialization or are the initial patents raising transaction costs to the point of impeding them? A related question is the effect of sequence patents on academic research and its communication. Are they, for example, creating obstacles to the exchange of research tools and delays in the publication of results? The role of universities in biotechnology patenting under the Bayh-Dole Act of 1980 is an important factor in considering the effects both on research and on commercial development.

The project will lead to concrete policy and administrative recommendations, Specific recommendations will in many cases require making an appropriate trade-off between the benefits of greater incentives and the benefits of more rapid diffusion of information. The potential areas for recommendations include