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5 Future Prospects and Policy Considerations for the United States BILATERAL ISSUES From the point of view of many emerging U.S. biotechnology companies, the length of time taken for patent examination in Japan and the narrow claims granted by the JPO are the two aspects of the Japanese patent system that constitute significant obstacles to entry into the Japanese market.73 The American govern- ment has highlighted these issues for some time, through formal and informal mechanisms. What are the prospects that the Japanese will adjust their policies? The long wait for a patent grant is also a target of criticism within Japan, although the argument sometimes relies heavily on the notion that reducing the backlog is something Japan should do to avert criticism from the United States and other countries.74 The Japanese Patent Office is introducing an electronic filing '30ther non-patent factors also have an impact, including the approval process and the pricing of pharmaceuticals by the Ministry of Health and Welfare, and the distribution system. In the pharmaceutical field, there are indications that at least for large foreign pharmaceutical companies with the resources to establish a significant presence in Japan the system does not discriminate against foreign companies. See A.T. Kearney and Company, Trade and Investment in Japan: The Current Environment (Tokyo: The American Chamber of Commerce in Japan and A.T. Kearney, 1 99 1 ), pp. 84-87. '4See "Tokken Shinsa Kikan no Tanshuku o" (Shorten the Time for Patent Examination-editorial), Nihon Keizai Shimbun, December 2, 1990, p. 2. 34

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35 system which it touts as a way of reducing the backlog, but it is unclear whether the system will have the opposite effect by making it easier for large companies to file patents.75 The basic problem, as mentioned earlier, is that the number of applications has increased dramatically and the number of examiners has not kept pace. It might also be useful to note here that the U.S. PTO is under pressure to decrease its examination time as well, and biotechnology has been singled out as an area in which delays are particularly serious.76 PTO also has personnel problems, particularly in retaining examiners with expertise in biotechnology who can train new examiners.77 PTO is, however, making considerable efforts at holding the backlog of biotechnology applications constant and hopes to be able to begin cutting the time within the next several years. TABLE 5 Trends in Japanese Patent Applications and Japan Patent Office Staff Foreign Total Total Patent Patent Year Staff Applications Applications 1980 2,367 25,290 191,020 1981 2,362 26,616 218,261 1982 2,352 24,275 237,513 1983 2,342 27,213 254,956 1 984 2,335 28,562 284,767 1985 2,329 28,622 302,995 1986 2,325 29,887 320,089 1987 2,323 30,089 341,095 1988 2,321 30,491 339,399 1989 2,336 33,641 351,207 Source: Japanese Patent Office, Annual Report 1989. 75See "Kyo Kara Tokkencho no Denshi Shutsugan Seido Sutato" (The JPO's Electronic Filing System Starts Today), Nihon Keizai Shimbun, December 1, 1990, p. 12. 76See U.S. Congress, General Accounting Office, Biotechnology: Processing Delays Continuefor Growing Backlog of Patent Applications, 1990. "See Thayer, op. cit., p. 34.

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36 INTERNATIONAL PATENT HARMONIZATION The harmonization of the national European patent systems in the late 1970s has been a great help to U.S. firms seeking to protect their inventions in Europe and gave impetus to efforts to extend patent harmonization to the entire world. Negotiations to that end have been ongoing for a number of years under the auspices of the World Intellectual Property Organization (WIPO), and a draft treaty was published in December 1990. A diplomatic conference to conclude the treaty was held in June 1991 at The Hague, but the results were inconclusive.78 Some international patent attorneys believe that harmonization will make the Japanese system more "user-friendly" for foreign innovators, thereby helping American companies protect their IPR in Japan. To the extent that the problems of American firms in Japan result from unfamiliarity with the system, harmoniza- tion will lead to a more level playing field. Many involved in the harmonization talks believe that some of the features of the Japanese system that cause the most problems for U.S. companies can be improved as well, and that Japanese innovators outside of the large companies will also benefit from harmonization. The WIPO draft treaty contains provisions addressing the doctrine of equivalents and the time taken for exarnination.79 Other American observers, however, urge 78According to Japanese press reports, the main stumbling block to harmonization is the reluctance of the United States to give up "first to invent." See, for example, "Bed no sengan tekkai de ansho ni" (Hitting a reef over U.S. rejection of first to file), Nihon Keizai Shimbun, April 29, 1991, p. 37. 79See World Intellectual Property Organization, Diplomatic Conference for the Conclusion of a Treaty Supplementing the Paris Convention As Far As Patents Are Concerned: The "Basic Prr~nn.`nl" friar the Treats and the Regulations. December 21. 1990. The language concerning the -I-- - - ~ ~ ~ ---Out 7 ~ extent of protection appears in Article 21 (p. 21): "...a claim shall be considered to cover not only all the elements expressed in the claim but also equivalents. (b) An element ("the equivalent element") shall generally be considered as being equivalent to an element as expresses in a claim if, at the time of any alleged infringement, either of the following conditions is fulfilled in regard to the invention as claimed: (i) the equivalent element performs substantially the same function in substantially the same way and produces substantially the same result as the element as expressed in the claim, or (ii) it is obvious to a person skilled in the art that the same result as that achieved by means of the element as expressed in the claim can be achieved by means of the equivalent element." With regard to time limits for search and examination, Article 16 (p. 30) states that the patent office in question "shall start the substantive examination not later than three years from the filing date of the application..." and "...shall, wherever possible, reach a final decision on the application not later than two years after the start of substantive examination."

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37 caution regarding harmonization because even under a harmonized patent law the interpretations of that law by the patent offices and courts of individual countries are likely to differ. Some American companies object to harmonization on substantial grounds as well. A major factor is the fact that the treaty endorses the "first to file" principle over "first to invent."~ Combined with the exclusion of information about foreign activity prior to application in interference proceedings, "first to invent" gives U.S. companies a powerful weapon against rival foreign claimants, even in cases where they are not "first to invent." Universities also seem to be leaning against harmonization because they see risks in going to "first to file." Academic researchers have incentives to publish as quickly as they can, but in some cases the university files a patent application, particularly a foreign application, only after a licensee is found. This practice might leave universities vulnerable under a "first to file" system. However, others argue that universities must learn to think globally in their technology transfer activities because the end product will be marketed globally. Since the rest of the world (with the exception of the Philippines) takes the "first to file" approach, and licensees are interested in worldwide rights, universities need to adjust to the pressures and incentives of that system whether the United States adopts it or not.8' Other features of the American patent system that might have to be altered in order to enter a harmonized world system include the length of coverage, starting dates, and the mandatory publication of applications after a given period of time, similar to the Japanese kokai. Though pre-grant publication is standard practice for most of the world, many Americans argue that it is inconsistent with the "quid pro quo" behind the patent system that an inventor discloses the invention to the public in return for a period of monopoly. Besides the general objection to disclosure with no guarantee of eventual protection, biotechnology companies have special concerns about publication. An applicant for a biotechnology patent often must decide whether or not to make a public deposit of the organism that constitutes the "factory" for his or her product. Under a pre-grant disclosure system, even if the patent claim is not upheld the application and the "factory" might become freely available to competitors. U.S. patent law allows an applicant to wait to deposit biological materials until it is clear that a patent will issue, but there is a strong possibility that in this area harmonization will not make life easier for U.S. biotechnology companies. 80See World Intellectual Property Rights Organization, op. cit., Article 9, p. 18. 8'Marvin Guthrie, op. c

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38 In light of the harmonization efforts, the Commerce Department has estab- lished a commission to study possible changes in the U.S. patent system from the viewpoint of industry.82 TRADE-RELATED ISSUES We have pointed out the role of the ITC in intellectual property disputes in the U.S.-Japan context. Under Section 337 of the Tariff Act of 1930, the ITC holds hearings to determine whether imported products infringe on U.S. patents, and can order the Customs Service to exclude infringing articles. ITC decisions in these cases are reviewed by the Federal Circuit, as in the Amgen-Chugai case. In 1987 the European Community, later joined by Japan, Korea, Canada, and Switzerland, made a formal complaint to the GATT that Section 337 procedures violate GATT principles mandating national treatment. The United States allowed the release of the 1988 panel report, which was in basic agreement with the European charges, and for the last several years the United States Trade Representative (USTR) has informally explored several possible changes in the system. One solution would be to remove patent jurisdiction from the ITC and establish a Court of International Trade with the attributes of ITC proceedings. A second possibility would be to give foreign defendants the right to transfer out of ITC proceedings and into a district court at specified points in the litigation process.83 As of this writing nothing has been settled, and the United States has indicated that it expects to deal with the panel report within the context of the Uruguay Round. The situation is complicated by an outstanding panel finding of GATE violations against the European Community's soybean subsidies, as well as by the uncertainty over the future of the Uruguay Round as this is being written. Further complicating the issue of the ITC's IPR powers were the provisions of the 1988 Omnibus Trade Bill, which strengthened the Commission's power to act against imports that infringe on U.S. patents. Before the 1988 Trade Bill, the ITC had to find that the offending import injured the plaintiff as well as infringed on the plaintiff's patent before granting relief by excluding the product. Congress eliminated the requirement for a finding of injury, a change which had very strong bipartisan support.84 82Charles Van Horn, from his presentation at "The Roundtable on Future Prospects" at the Workshop on IPR and U.S.-Japan Competition in Biotechnology. 83See Epstein and Jones, op. cit., p. 78. Wayne Herrington, from the "Roundtable on Future Prospects," at the Workshop on IPR and U.S.-Japan Competition in Biotechnology.

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39 Legislation first proposed in 1990 would have allowed the ITC to go further to protect U.S. biotechnology in international disputes. One section of the original bill introduced by Representative Rick Boucher (D-Va.) would have authorized the ITC to "exclude products made abroad through the use of biotechnological material covered by U.S. patents."85 This section was drafted in response to the ITC's ruling in the Amgen-Chugai case that it did not have subject matter jurisdiction. The Administration opposed making changes in ITC procedures at the same time that they are subject to GATT negotiations. The more recent version of the legislation, introduced in the 102nd Congress by Rep. Boucher and Senator Dennis DeConcini (D-Ariz.), eliminates the refer- ence to the ITC. It does keep language from the earlier bill that would strengthen domestic IPR protection for biotechnology inventions by closing a "loophole" in the law opened by the Federal Circuit's ruling in In re Durden. In that case, the court ruled that "the use of a novel starting material does not render an otherwise obvious chemical process patentable."86 If In re Durden stands it will make process patents increasingly difficult to obtain in biotechnology. Proponents of legislative change argue that the decision runs counter to the practice in most countries of allowing patents on "analogy processes" where the product itself is patentable. The revised bill, if passed, will have an impact on trade as well, because the ITC can only exclude products on the basis of process patents.87 "The Biotechnology Patent Protection Act of 1991," which essentially overturns Durden, has the support of the PTO. Some opponents of the legislation, including the Intellectual Property Owners, Inc., assert that it "would require the PTO to issue process claims without examination for novelty or nonobviousness when the related product claims are held patentable, . . .(resulting) in great uncertainty over the validity and scope of the process claims after the patent is issued." As is the case with the international harmonization treaty, it is unclear how the role of the ITC in international IPR disputes will eventually be resolved in light of forces on the international and domestic scenes pulling in opposite directions. Some American companies, including biotechnology companies, would like to see the ITC and provisions of domestic law used as leverage to achieve favorable changes in Japanese patent law and in the administration of the system. 85See "Patent Protection Legislation Weighed By Congressional Panel," BNA Pharmaceutical Standards Review, October, 1990, p. 7. X6Ibid. 87Thayer, op. cit., p. 38 X8Statement of William F. Marsh, on behalf of the Intellectual Property Owners, Inc., Before the Subcommittee on Patents, Copyrights and Trademarks' Committee of the Judiciary, U.S. Senate, on S. 654, "Biotechnology Patent Protection Act of 1991," Washington, D.C., June 12, 1991.

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40 But domestic debate over the "Boucher bill" also illustrates the difficulty of characterizing a "biotechnology industry position" on policy questions, including those related to IPR, that have an impact on U.S. biotechnology companies. The Industrial Biotechnology Association (IBA) supports changing patent law, a position which was partly responsible for Cetus and Genetics Institute leaving the trade association.89 REGULATION Though the recent effort by the U.S.-Japan Business Conference to harmonize the scientific databases underlying the regulation of biotechnology products is not directly related to IPR, it does illustrate that IPR is not the only area where government policy directly influences the competitive playing field. The effort is also a reminder that there are some areas in which the American and Japanese business communities may be able to work together to their mutual benefit in a policy-related area, rather than setting their governments against one another. In the Ernst and Young poll results shown in Figure 1, inadequate patent protection was not as high on the list of factors blocking U.S. companies trying to enter the Japanese market as were the Ministry of Health and Welfare's regulatory procedures. Regulatory difficulties were identified as a problem by half the companies. In order to protect the public from ineffective or dangerous drugs, the regula- tory process for approving pharmaceutical products is stringent and time consum- ing in most countries. Overseeing the process is a fundamental part of managing a pharmaceutical company. The regulatory requirements are also stringent for biotechnology-derived products targeted at markets other than human health care, including agriculture. American companies in Japan are not alone in their complaints; Japanese pharmaceutical firms find the FDA approval process vexing as well.90 Two bilateral subcommittees of biotechnology company executives, one dealing with pharmaceuticals, the other with agriculture, environment, and food, drafted reports "intended to serve as a basis for future regulations or guidelines 89See Thayer, op. cit., p. 38. Besides the IBA, the Association of Biotechnology Companies (ABC) and the Pharmaceutical Manufacturers Association (PMA) also speak for biotechnology companies. 90See Masao Okui, "Fujisawa Yakuhin Kogyo Intanashonaru Kenkyu Kaihatsu Nettowaku no Jissai" (Fujisawa Pharmaceutical Toward the Realization of an International R&D Network), Business Research, March, 1989, p. 36-40.

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41 relating to biotechnology."9' Those involved in the process are hopeful that the Europeans can be brought on board as well, resulting in agreement on the scientific principles underlying regulation.92 Harmonization of the regulations themselves is probably not feasible at this point. A similar effort more closely related to intellectual property is under way, as the U.S. PTO is studying the possibility of exchanging information with the JPO and the European Patent Office (EPO) on nucleotide and amino acid sequences available on patent applications and granted patents. Such exchange would help all three patent offices ensure the integrity of their files and improve the reliability of the examination process.93 COMPETITIVE IMPLICATIONS FOR U.S. BIOTECHNOLOGY The international aspects of intellectual property protection have a major impact on the growth prospects for U.S. biotechnology companies~isparities between the Japanese and American systems influence the timing and character of U.S. entry into the Japanese market as well as the globalization strategies of Japanese companies active in biotechnology. In general, U.S. companies are dissatisfied with the protection, or lack of it, afforded by the Japanese patent system. They assert that with better patent protection in Japan, they would be able to make more favorable deals with both Japanese companies and other large pharmaceutical houses. They would also have more control over the development of second and third generation products, and would be in a better position to attract the capital necessary to make long-term commitments to product development. The top-tier companies would find it easier to widen their horizons to the global market and vertical integration. If we accept that biotechnology is likely to develop into a major high value- added employer and a "strategic industry" in the twenty-first century, and that Japanese industry-government efforts in biopharmaceuticals constitute a formi 9'Japan-U.S. Business Conference, "Bilateral Forum on the Harmonization of the Scientific Principles and Procedures Underlying the Regulations Related to Biotechnology," July 1990, p. 1. The Japan-U.S. Business Conference is an annual meeting of the U.S.-Japan Business Council, which consists of executives of American companies that do business in Japan, and the counterpart Japan- U.S. Business Council, which consists of Japanese executives. 92Leonard Guarraia, from his presentation on "The Experience of U.S. Firms in Japan," from the Workshop on IPR and U.S.-Japan Competition in Biotechnology. 93Charles Van Horn, op. cit.

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42 cable challenge to U.S. companies, then U.S. policy directed toward improving the international prospects of American biotechnology companies might be a legitimate course.94 We have identified a number of avenues where U.S. government efforts might aid emerging biotechnology companies on the international IPR front. In several of these arenas, such as GATT and ITC procedures, some of the companies themselves see only limited potential benefits in the near term. For biotechnology firms, gaining a timely and meaningful patent grant in Japan is more important than whether or not every GATT signatory has a functioning patent system.95 Yet the policy avenues most likely to lead to changes in the Japanese system carry risks and present their own difficulties. For example, is it a good bargain for U.S. firms to give up "first to file" in exchange for Japanese adherence to time limits for examining applications? Biotechnology industry associations have not yet given a clear answer. The consistency with which bilateral pressure can be applied on Japan within the Structural Impediments or Super 301 contexts may also be limited. The needs of U.S. firms in biotechnology and other high technology industries on IPR matters compete for attention and resources with other U.S.-Japan economic and political issues. A unified and forcefully pre- sented industry position on these matters, perhaps in conjunction with other industry groups concerned with IPR protection in Japan, might help in the competition for the attention and efforts of government officials. In the meantime, there may also be much to gain through a more systematic effort by American firms and their industry associations to improve their skills in working within the present Japanese system. Some question the capability of the emerging companies to "work" the Japanese system in light of their size, but others point to examples of small, U.S. biotechnology companies that did "everything right" and still faced obstacles because of delay and the narrowness of the patent that eventually issued. Efforts by Japanese companies to gain the rights to biotechnology innovations developed by U.S. emerging companies and universities underscore the larger context. Intellectual property rights issues are important, but other questions deserve consideration as well. For example, U.S. policy toward international competitiveness in biotechnology must take into account regulatory and other factors that affect the ability of American firms to enter the Japanese market. 94Hubert Schoemaker, from his Closing Remarks at the Workshop on IPR and U.S.-Japan Competition in Biotechnology. 9sGeorge Rathmann' op. cit.

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43 Formulating policies that will encourage domestic activity in human resource development, capital formation, and collaboration between American companies may also deserve attention, but these subjects are beyond the scope of this report. Technology can be bought and sold. Stronger IPR protection in Japan and the United States will allow U.S. companies to demand a higher price for marketing and licensing rights in the short-term, but will not prevent Japanese firms from legitimately using technology developed in the United States to improve their own long-term competitiveness. Some question the long-term viability of the present structure of the U.S. biotechnology industry, arguing that capital scarcity and outward technology flow will continue to characterize U.S. commercial biotech- nology even if changes are made in IPR policies. Industry and government leaders will need to consider these issues, in conjunc- tion with intellectual property rights, in their efforts to ensure that the United States remains the leader in commercial biotechnology and receives the commer- cial benefits of its innovations.