PATENTS IN THE KNOWLEDGE-BASED ECONOMY

Wesley M. Cohen and Stephen A. Merrill, Editors

Committee on Intellectual Property Rights in the Knowledge-Based Economy

Board on Science, Technology, and Economic Policy

Policy and Global Affairs

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
Washington, D.C. www.nap.edu



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Patents in the Knowledge-Based Economy PATENTS IN THE KNOWLEDGE-BASED ECONOMY Wesley M. Cohen and Stephen A. Merrill, Editors Committee on Intellectual Property Rights in the Knowledge-Based Economy Board on Science, Technology, and Economic Policy Policy and Global Affairs NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Patents in the Knowledge-Based Economy THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract No. NASW-99037, Task Order 103, between the National Academy of Sciences and the National Aeronautics and Space Administration, the Department of Commerce, Andrew W. Mellon Foundation, Center for Public Domain, Pharmacia Corporation, Merck & Company, Procter & Gamble, and IBM. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 0-309-08636-1 (Book) International Standard Book Number 0-309-50941-6 (PDF) Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 500 Fifth Street, N.W. Washington, D.C. 20001 Phone: 202-334-2200 Fax: 202-334-1505 Additional copies of this report are available from the National Academies Press, 2101 Constitution Avenue, N.W., Lockbox 285, Washington, D.C. 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu Copyright 2003 by the National Academy of Sciences. All rights reserved. Printed in the United States of America The cover design incorporates original illustration from the following U.S. patents issued over a nearly 160-year period: U.S. Patent 6,506,554; Core structure of gp41 from the HIV envelope glycoprotein; Chan, David C. (Brookline, MA); Fass, Deborah (Cambridge, MA); Lu, Min (New York, NY); Berger, James M., (Cambridge, MA); Kim, Peter S. (Lexington, MA); Granted January 14, 2003. U.S. Patent 6,423,583; Methodology for electrically induced selective breakdown of nanotubes; Avouris, Phaedon (Yorktown Heights, NY); Collins, Philip G. (Ossining, NY); Martel, Richard (Peekskill, NY); Granted July 23, 2003. U.S. Patent 6,313,562; Microelectromechanical ratcheting apparatus; Barnes, Stephen M. (Albuquerque, NM); Miller, Samuel L. (Albuquerque, NM); Jensen, Brian D. (Albuquerque, NM); Rodgers, M. Steven (Albuquerque, NM); Burg, Michael S., (Albuquerque, NM); Granted November 6, 2001. U.S. Patent 821,393; Flying machine; Wright , Orville (Dayton, OH) and Wright, Wilbur (Dayton, OH); Granted May 22, 1906. U.S. Patent 223,898; Electric lamp; Edison, Thomas A. (Menlo Park, NJ); Granted January 27, 1880. U.S. Patent 4750; Improvement in sewing machines; Howe, Jr., Elias, (Cambridge, MA); Granted September 10, 1846.

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Patents in the Knowledge-Based Economy THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Patents in the Knowledge-Based Economy Committee on Intellectual Property Rights in the Knowledge-Based Economy Board on Science, Technology, and Economic Policy National Research Council Richard Levin (Co-chair) President Yale University Mark Myers (Co-chair) Visiting Executive Professor of Management The Wharton School University of Pennsylvania John Barton George E. Osborne Professor of Law Stanford University Robert Blackburn Vice President and Chief Patent Counsel Chiron Corporation and Distinguished Scholar Berkeley Center for Law and Technology Wesley Cohen Professor of Economics and Management Fuqua School of Business Duke University Frank Collins Senior Vice President for Research ZymoGenetics Rochelle Dreyfuss Pauline Newman Professor of Law New York University Bronwyn Hall Professor of Economics University of California, Berkeley Eugene Lynch Judge (retired) Federal District Court of Northern California Daniel McCurdy President & CEO ThinkFire, Ltd. Gerald J. Mossinghoff Senior Counsel Oblon, Spivak, McClelland, Maier & Neustadt, P.C. Gail Naughton Dean, School of Business San Diego State University Richard Nelson George Blumenthal Professor of International and Public Affairs Columbia University James Pooley Partner Milbank, Tweed, Hadley & McCloy LLP William Raduchel Great Falls, Virginia Pamela Samuelson Professor of Law and Information Management University of California, Berkeley

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Patents in the Knowledge-Based Economy LIAISONS WITH OTHER NRC PROGRAMS Science, Technology, and Law Program David Korn Senior Vice President for Biomedical and Health Science Association of American Medical Colleges National Cancer Policy Board Pilar Ossorio Assistant Professor of Law and Medical Affairs University of Wisconsin Law School STAFF Stephen A. Merrill Project Director Craig Schultz Research Associate Camille Collett Project Associate (until September 2002) George Elliott Commerce Science and Technology Fellow (until September 2001)

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Patents in the Knowledge-Based Economy Board on Science, Technology, and Economic Policy National Research Council Chairman Dale Jorgenson Samuel W. Morris University Professor Harvard University Vice Chairman Bill Spencer Chairman Emeritus International Sematech M. Kathy Behrens Managing Partner RS Investments Bronwyn Hall Professor of Economics University of California, Berkeley James Heckman Henry Schultz Distinguished Service Professor of Economics University of Chicago Ralph Landau Senior Fellow Stanford Institute for Economic Policy Research Stanford University Richard Levin President Yale University David Morgenthaler Founding Partner Morgenthaler Ventures Mark Myers Visiting Executive Professor of Management The Wharton School University of Pennsylvania Roger Noll Morris M. Doyle Centennial Professor of Economics and Director, Public Policy Program Stanford University Edward E. Penhoet Director, Science and Higher Education Programs Gordon and Betty Moore Foundation William Raduchel Great Falls, Virginia Alan Wm. Wolff Managing Partner Dewey Ballantine, DC Staff Stephen A. Merrill Executive Director Charles Wessner Deputy Director Russell Moy Senior Program Officer Sujai Shivakumar Program Officer Craig Schultz Research Associate Tabitha Benney Program Associate David Dierksheide Program Associate Chris Hayter Program Associate

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Patents in the Knowledge-Based Economy Preface Over the past 25 years a series of court decisions, legislative and administrative actions, and international agreements has extended and strengthened intellectual property rights (IPRs) in the United States and elsewhere. In turn these policy changes contributed to more zealous acquisition and vigorous exercise and defense of IPRs. Curiosity about the effects of these developments on innovation and economic performance led the National Academies’ Board on Science, Technology, and Economic Policy (STEP) in 2000 to embark on an extended inquiry that encompassed workshops, conferences, commissioned research, and committee deliberations focused on the operation of the patent system, especially in two areas, information technology (IT) and biotechnology. The need for specialized legal and technical expertise to carry out a study leading to policy recommendations in these areas led the STEP Board to propose to the Academies the creation of the Committee on Intellectual Property Rights in the Knowledge-Based Economy, composed of economists specializing in intellectual property and technology development, legal scholars, practitioners from corporations and private law practice, a former federal judge and a former Commissioner of the U.S. Patent and Trademark Office (USPTO), biomedical scientists, and managers of research and business development in the IT sector. We were asked to co-chair this committee, whose report, A Patent System for the 21st Century, accompanies this volume. At the same time the need for additional analysis and data to inform recommendations in these areas led the STEP Board to commission eight research projects. With one additional chapter, the results of this work comprise this volume, edited by Wesley Cohen, professor of economics and management at Duke and a member of the study committee, and Stephen Merrill, executive director of the STEP program and director of the project. The process of selecting the topics and authors of this collection was unusual for STEP and for the Academies. We decided to solicit proposals via a formal

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Patents in the Knowledge-Based Economy request for proposals that in March 2000 was widely circulated to the academic, consulting, and legal communities. The solicitation specified four policy-related areas of interest—the patent examination process and its bearing on patent quality, the incidence of patent litigation and its costs, and patent acquisition and use in two technologies—software and biotechnology. It further stipulated that the work involve original empirical research or data analysis, that it fall within a narrow range of costs, and that it be completed within approximately12 months. We received more than 80 proposals, necessitating a more elaborate review and selection process than we had originally planned. After an initial screening by staff we recruited a group of economists and legal scholars to help review more than 60 proposals. The reviewers included Bronwyn Hall, Berkeley economist and member of the STEP Board, Wesley Cohen, then at Carnegie Mellon University; John Barton, Stanford professor of law; and Robert Merges, professor of intellectual property law at Boalt Hall, Berkeley. Each proposal was read by at least one economist and one legal scholar. Three reviewers recused themselves from considering proposals on which they were listed as principal or co-investigator. The evaluation criteria included 1) policy relevance and conformity to the issues discussed in the request for proposals, 2) quality of issue framing and methodology, and 3) feasibility of the research. As co-leaders of the project for the STEP Board, we assumed responsibility for the final selection from among 25 highly ranked proposals. Although the final selection included proposals by Hall and Cohen, other proposals by these two investigators were not selected. Negotiations with individuals and their institutions consumed several weeks so that the work commenced in the late summer of 2000. Preliminary results were presented at a Washington conference in October 2001, where attorneys, judges and former PTO officials, and corporate managers were able to comment on the methodology and the findings. Audio tracks, slide presentations, and transcripts of this and two other STEP conferences are available on a CD accompanying this volume. Following the meeting, papers were reviewed by the editors and in most cases by the external reviewers listed below and were in all cases revised before publication in this volume. In the meantime they were available at various stages on the project website and to the Committee on Intellectual Property Rights in the Knowledge-Based Economy. The Committee has found them useful and in a few cases directly relevant to its findings and recommendations but in no way has been constrained from considering other research and commentary. The generosity of two foundations made the research element of the project possible. The Andrew W. Mellon Foundation supported the February 2000 STEP conference, Intellectual Property Rights: How Far Should They Be Extended?, at which many of these ideas germinated as well as the subsequent preparation of the papers and their publication. In addition to supporting the research, The Center

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Patents in the Knowledge-Based Economy for the Public Domain enabled us to develop a dedicated website that has been indispensable to our efforts to keep a wide community of interested people informed of our progress and enabled them to express their views. Naturally, most of the contributions to this volume represent parts of larger and longer research projects supported by other sources, including the National Science Foundation, Brookings Institution, and the Wharton School’s Reginald H. Jones Center for Management Policy, Strategy, and Organization. These organizations’ sponsorship of work in this important area deserves to be highlighted and commended. Two contributions to this volume received no funding from the STEP Board. Jonathan King’s chapter, although selected as a result of the solicitation and review described above, is part of important ongoing analytical work on intellectual property policy at the Economic Research Service of the U.S. Department of Agriculture. We are grateful to the Service for making it available to us. The chapter exploring the theoretical benefits of a patent opposition process by Rich-ard Levin and Jonathan Levin evolved independently of the STEP project but is included here because of its close relevance to the empirical comparison of European oppositions and U.S. patent re-examinations by Graham, Harhoff, Hall, and Mowery. Both papers were nevertheless subject to the Academy review process. Individual chapters in this volume have been reviewed in draft form by people chosen for their technical expertise, in accordance with procedures approved by the National Research Council’s (NRC) Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for quality. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of selected papers: Mildred Cho, Stanford University; Robert Cook-Deegan, Duke University; Jeffrey Kushan, Sidley, Austin, Brown, and Wood LLC; Joshua Lerner, Harvard Business School; Arti Rai, University of Pennsylvania Law School; F.M Scherer, Harvard University (emeritus); and Brian Wright, University of California, Berkeley. Although the reviewers listed above have provided constructive comments and suggestions, they were not asked to endorse the content of the papers. Responsibility for the final content of the papers rests with the authors, and statements made in them do not necessarily represent positions of the National Research Council or the Committee. Finally, we want to thank all of the authors and the editors, who worked successfully to produce these results under rather severe constraints of time and limited budgets. Their collective work not only aided the Committee but, more importantly, advances our common knowledge of the patent system and demonstrates the value of continuing efforts to understand its operation and effects. We

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Patents in the Knowledge-Based Economy are grateful to Craig Schultz, who administered the contracts for these papers and oversaw the review process and the production of this volume. Richard Levin President Yale University Mark B. Myers Visiting Executive Professor of Management University of Pennsylvania

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Patents in the Knowledge-Based Economy Contents Introduction Wesley M. Cohen and Stephen A. Merrill   1 Patent Quality         Are All Patent Examiners Equal? Examiners, Patent Characteristics, and Litigation Outcomes Iain M. Cockburn, Samuel Kortum, and Scott Stern   19     Patent Examination Procedures and Patent Quality John L. King   54     Patent Quality Control: A Comparison of U.S. Patent Re-examinations and European Patent Oppositions Stuart J.H. Graham, Bronwyn H. Hall, Dietmar Harhoff, and David C. Mowery   74     Benefits and Costs of an Opposition Process Jonathan Levin and Richard Levin   120 Patent Litigation         Enforcement of Patent Rights in the United States Jean O. Lanjouw and Mark Schankerman   145

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Patents in the Knowledge-Based Economy     Patent Litigation in the U.S. Semiconductor Industry Rosemarie Ham Ziedonis   180 Patents in Software and Biotechnology         Intellectual Property Protection in the U.S. Software Industry Stuart J.H. Graham and David C. Mowery   219     Internet Business Method Patents John R. Allison and Emerson H. Tiller   259     Effects of Research Tool Patents and Licensing on Biomedical Innovation John P. Walsh, Ashish Arora, and Wesley M. Cohen   285