U.S. Patent Imperialism Hurts American Interests

Ben Klemens
Ben Klemens Senior Statistician - Office of Tax Analysts, U.S. Department of Treasury

August 25, 2006

The Patent Reform Act of 2006 (S.3818), introduced to the Senate floor on August 8, will entirely fail to reform patents. The bill makes important modifications to rules on filing and review of paperwork, but the Senate has chosen to overlook many serious problems with patents that cost consumers billions of dollars and embarrass the U.S. internationally.

Much of this excess cost and embarrassment comes as a result of a double standard between imports and domestic goods. All patent disputes may be tried in U.S. District Courts, but disputes over imports may also be tried at the International Trade Commission (ITC), a branch of the Department of Commerce. The ITC uses a broader definition of patent infringement than the district courts, meaning that an import may be found to infringe on a patent that it would not infringe upon if it were produced in the U.S. Such a double standard affects U.S. taxpayers and consumers, who have fewer choices and more monopolies with which to contend.

Over the past decade, there have been abundant examples of how patent law has been stretched too far to the detriment of U.S. consumers and manufacturers. The reader may recall the problems faced by the makers of the Blackberry, who faced a lengthy patent battle in domestic courts over software on its Canadian email servers. In hearing that case, the Court of Appeals for the Federal Circuit (CAFC) declared that if “control and beneficial use” of a device is in the U.S., then it is beholden to U.S. patent law. With this simple declaration, millions of web sites all around the world suddenly had liability exposure in U.S. courts.

In another example, Creative, Inc., claims that the iPod violates its patent on organizing songs by artist, album, and genre (U.S. patent #6,928,433). Since the iPod is made abroad, Creative sued Apple in domestic courts and petitioned the ITC to block their U.S. sale. On Wednesday, with the threat of an iPod ban looming, Apple paid Creative $100 million to withdraw its complaints.

And the dueling standards collide at a cost to the government, too. For example, Amgen, Inc., has a patent on Epogen, a drug that treats anemia in patients who are on dialysis for end-stage renal disease. Thanks to its patent, Amgen is the monopolist vendor of a life-saving drug—and it sets its price accordingly. Every year, Medicare pays over $1 billion for this drug alone.

A Swiss pharmaceutical company, Roche, has a drug that would compete head-to-head with Epogen, and thus force down Epogen’s price and possibly improve patient outcomes—except the drug is produced abroad. Roche’s product is likely to be found to be a valid, non-infringing competitor to Amgen’s patents and products in U.S. District Courts, but will have a harder time getting past the ITC’s broader definition of patent infringement. As a result, Amgen may continue to bill Medicare at the full monopoly price.

Maintaining a separate definition of patentability for imports directly violates WTO treaties mandating non-discrimination. Other court-invented innovations in patent law also create a growing rift between the U.S. and the rest of the world that will be a liability for the U.S. in negotiations over trade and tariffs.

All of the rulings that have shaped patent law in the last few decades have come from the CAFC, a court founded in the early 1980s to resolve patent and trade disputes. It is heavily stocked with former prominent patent attorneys, so it no surprise that the CAFC has actively expanded the powers of patents well beyond pre-1980 limits.

Rather than striving to maximize innovation and economic benefits, the CAFC tends to rule via tortuously close readings of statute. Its ruling that established the separate ITC standard for patent infringement is based almost entirely upon a reading of the boilerplate phrase “for purposes of this title.” Its statement regarding “control and beneficial use” is nowhere to be found in statute, but did build upon a prior CAFC divination—that the Congress of 1952 intended that software would one day be patentable.

Patent law has been expanded and forcefully exported by a single court, without oversight by Congress. Internationally, the courts’ favoring of domestic producers over importers, and the CAFC’s self-declaration that it has jurisdiction over any Internet-enabled computer in the world, has put U.S. trade negotiators in a weaker position and will hurt Americans in the long run. Domestically, it has created the usual problems associated with unfettered monopolies: prices rise, choices diminish, and consumers suffer.

Congress needs to take real action to explicitly establish a single standard for patent infringement regardless of the manufacturer’s address, and to restore the scope of patents to where it was before the CAFC’s unilateral expansions. The Patent Reform Act of 2006 is not enough.