FTC Staff Testimony Before the Antitrust Modernization Commission Concerning Patent Law Reform

1 To Promote Innovation: The Proper Balance of Competition and Patent Law and
Policy, A Report by the Federal Trade Commission, Oct. 2003.
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Remarks of Susan S. DeSanti
FTC Deputy General Counsel for Policy Studies
Before the
ANTITRUST MODERNIZATION COMMISSION
HEARING on PATENT LAW REFORM
November 8, 2005 – 12:45-2:45pm
Thank you for inviting me to join this afternoon’s discussion of patent law reform, a topic
on which the Federal Trade Commission (FTC) has produced an extensive report.1 In these brief
remarks, I will discuss the FTC’s activities in this area, including follow up to the Commission’s
report. Rather than delve into the particular details of the FTC’s recommendations for patent
reform, however, I would like to share some of what we heard from business people about how
the patent system operates to promote or deter competition and innovation in their particular
industries. This broader context may best illustrate how patent law relates to the work of the
Antitrust Modernization Commission. The views I express are my own and do not necessarily
represent those of the FTC or of any Commissioner, although the Commission has authorized me
to appear and provide this statement.
A. The Relationship between Competition and Patent Law
Competition and patent law stand out among the federal policies that influence
innovation. Both competition and patents can foster innovation. Competition through free
enterprise and open markets is the organizing principle for most of the U.S. economy.

2 Bonito Boats, Inc. v. Thunder Craft Boats, 489 U.S. 141, 146 (1989).
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Competition among firms can spur the invention of new or better products or more efficient
processes. For example, firms may race to be the first to market an innovative technology.
Patent policy also can stimulate innovation. A patent can enable firms to increase their expected
profits from investments in research and development, and thus foster innovation that would not
occur but for the prospect of a patent. Because the patent system requires public disclosure, it
can promote a dissemination of scientific and technical information that would not occur but for
the prospect of a patent.
Despite the use of different methods to encourage innovation, competition and patents
are not inherently in conflict. Patent law plays an important role in the property rights regime
essential to a well-functioning competitive economy. Patents do not necessarily confer
monopoly power on their holders, and most business conduct with respect to patents does not
unreasonably restrain or serve to monopolize markets. Analogously, the Supreme Court has
recognized the importance of competition to the patent system. As stated in the Court’s decision
in Bonito Boats,2 “free competition” is “the baseline” on which “the patent system’s incentive to
creative effort depends.”
Thus, both competition and patent policy can foster innovation, but each requires a proper
balance with the other to do so. Errors or systematic biases in how one policy’s rules are
interpreted and applied can harm the other policy’s effectiveness. As antitrust practitioners have
learned, overzealous antitrust enforcement – such as that during the 1970's – can undermine the
innovation that patents can promote. Conversely, an invalid patent can harm competition. For
example, if patent law were to allow patents on “obvious” inventions, it could thwart the

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competition that might have developed based on the obvious technology. Poor patent quality and
legal standards and procedures that inadvertently may have anticompetitive effects can cause
unwarranted market power and can unjustifiably increase costs. Such efforts can hamper
competition that otherwise would stimulate innovation.
To examine the current balance of competition and patent law and policy, the FTC,
together with the Antitrust Division of the Department of Justice, undertook Joint Hearings in
2002. The FTC’s report, issued in 2003, discusses and makes recommendations for the patent
system to maintain a proper balance with competition law and policy. A second joint report, by
the FTC and the DOJ, will discuss and make recommendations for antitrust to maintain a proper
balance with the patent system. We are working with renewed vigor on completing that report.
B. The Joint Hearings
The Hearings took place over 24 days between February and November 2002. They
included testimony from more than 100 written submissions and 300 panelists, including
business representatives from large and small firms and independent inventors; leading patent
and antitrust organizations; leading antitrust and patent practitioners; and leading scholars in
economics and patent and antitrust law. Business representatives were mostly from high-tech
industries: pharmaceuticals, biotechnology, computer hardware and software, and the Internet.
Hearings participants found much to praise in the current patent system. Pharmaceutical
and biotechnology representatives, for example, testified that strong patent protection is essential
to innovation in their industries. Business representatives characterized innovation in these
industries as costly and unpredictable, requiring significant amounts of pioneering research to
discover and test new drug products. By preventing rival firms from free riding on discoveries,

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patents allow pharmaceutical firms to recoup the substantial capital investments made to
discover, test, and obtain regulatory approval of new drug products. Biotech representatives
emphasized that patent protection is critical to obtain the capital necessary to fund this high-risk
investment. Indeed, firms believed that the biotech industry would not exist but for patents.
Nonetheless, many participants in and observers of the patent system expressed
significant concerns that, in some ways, the patent system is out of balance with competition
policy. A global concern that representatives from each of the four industries described was that
poor patent quality (for example, a patent for which there is invalidating prior art, or a patent
broader than was enabled by the written description of the claimed invention) can blunt
incentives to innovate. A poor quality or questionable patent is one that is likely invalid or
contains claims that are likely overbroad. Hearings participants raised concerns about the
number of questionable patents issued.
Questionable patents can deter or raise the costs of innovation. Professor Jonathan Levin
identified three economic consequences that may flow from issuing patents of questionable
validity. First, such patents may slow follow-on innovation by discouraging firms from
conducting R&D in an area out of fear that they may be infringing. Indeed, firms in the biotech
industry reported that they avoid infringing questionable patents and therefore will refrain from
entering or continuing with a particular field of research that such patents appear to cover.
Second, if a competitor chooses instead to negotiate a license to and pay royalties on the
questionable patent, the costs of follow-on innovation and commercial development increase due
to unjustified royalties. A number of panelists indicated that small firms, unable to bear the costs
of litigation, are particularly likely to be forced to license if a questionable patent is asserted

3 Michael K. Kirk, Executive Director of the AIPLA, Written Statement before the
House Judiciary Committee, Subcommittee on Courts, the Internet, and Intellectual Property, on
Patent Quality Improvement: Post-Grant Opposition, June 24, 2004.
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against them, although some noted that large firms, with greater exposure, are also subject to in
terrorum effects. For example, a questionable patent that claims a single routine in a software
program may be asserted to hold up production of the entire software program. In either case, for
small or large firms, entering an unnecessary license reduces the licensees’ rewards and distorts
their incentives to innovate or compete. Third, if instead the patent is challenged in litigation, the
ensuing costs are a drain on the system. Let me note here that, in June 2004, the Executive
Director of the American Intellectual Property Law Association (AIPLA), Michael Kirk, testified
before Congress that the AIPLA’s most recent survey of its members revealed that the average
cost of patent litigation, including the costs of discovery, ranged between $500,000 and
$3,995,000 per party, depending on the amount at risk.3 The frequency with which such very
large costs are imposed could be reduced if fewer questionable patents were issued, and the size
of these amounts could be reduced if challengers could use speedier procedures for the resolution
of patent validity questions, such as the post-grant opposition procedures recommended by the
FTC, the NAS, and the PTO, that are included in pending patent reform legislation in the House
of Representatives.
These three economic consequences are not the only costs associated with questionable
patents, however. In some industries, such as computer hardware and software, firms can require
access to dozens, hundreds, or even thousands of patents to produce just one commercial
product. Indeed, Peter Detkin, speaking at our hearings as a representative of Intel, explained
that more than 90,000 patents generally related to microprocessors are held by more than 10,000

4 FTC IP Report, Ch. 3 at 35.
5 FTC IP Report, Ch. 3 at 37.
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parties. Much of this thicket of overlapping patent rights results from the nature of the
technology; computer hardware and software contain an incredible number of incremental
innovations.
Nonetheless, in industries with such incremental innovation, questionable patents can
increase “defensive patenting.” One panelist undertook a search to determine the patent
landscape surrounding a particular patent relevant to his business and in the process identified
120 patents that appeared to overlap each other, as well as to be infringed by his own product.
As another panelist acknowledged, “the only practical response to this problem of unintentional
and sometimes unavoidable patent infringement is to file hundreds of patents each year
ourselves.”4 In this way, the problem is self-perpetuating. The need to develop extensive patent
portfolios for defensive purposes diverts funding from R&D into the obtaining of patents; as one
business representative explained, “the time and money we spend on patent filings, prosecution,
maintenance, litigation and licensing could . . . be much better spent on product development and
research leading to more innovation.”5
In the context of a patent thicket, questionable patents also can increase licensing
difficulties, such as royalties stacked one on top of another. Moreover, questionable patents can
increase uncertainty about the patent landscape. Panelists identified numerous impacts of
uncertainty, reporting that uncertain patent rights: pose severe difficulties for business planning;
heighten investment risk and hinder the raising of capital; disrupt the working out of licenses;
and induce litigation that imposes costs and interferes with competition and innovation.

6 Teleflex, Inc. v. KSR Intl. Co., 119 F. App. 282, 288 (Fed. Cir. 2005), cert.
petition pending, No. 04-1350.
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C. The FTC’s Report and Follow-up Activities
In its report, the FTC made several recommendations for patent law. Some would require
legislation; some would require changes in the case law; and some would require practitioners to
adopt a broader policy perspective on patent law.
In terms of legislation, this past year has seen much activity. The FTC, together with the
NAS and the AIPLA, held a series of town hall meetings focused on possible specific patent law
reforms. These meetings provided a forum at which many stakeholders spoke; their remarks
were transcribed, and an FTC staff summary of the discussions is available on the FTC’s website.
At the final town meeting in June, a draft patent law reform bill was discussed, and that bill
contained 4 out of 6 legislative recommendations made by the FTC. The course of patent reform
legislation never does run smooth, however, and various versions of the bill have provoked much
discussion and debate. Nonetheless, the repeated concerns expressed about poor quality patents
and other issues seem to have provided a basis for a significant effort to achieve improvements in
the patent system.
In terms of the case law, I will simply note that a petition for certiorari has been filed in a
patent case6 that raises one of the issues addressed in an FTC recommendation. The Supreme
Court has requested the Solicitor General to provide the views of the United States government
on whether to grant certiorari in this case.
Finally, I will speak to the last area of FTC recommendations – a broader policy
perspective for patent law. It is this area that might be most fruitful for consideration by the

7 FTC IP Report, Ch. 1 at 3, citing 1 HOVENKAMP ET AL., IP AND ANTITRUST § 1.2
at 1-5.
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Antitrust Modernization Commission. All of you understand quite well how new economic
learning, most generally associated with “Chicago school thinkers,” brought an updated
economic framework to antitrust that, among other things, emphasized the importance of seeking
to understand efficiencies, as well as possible anticompetitive effects, associated with particular
business conduct. This new economic learning led to a more complex and pro-intellectual
property understanding of how antitrust should view conduct with respect to patents.
The FTC recommended that patent practitioners similarly expand their consideration of
economic learning and competition policy concerns in patent law decision making. The Supreme
Court has made clear in several decisions that there is room for policy-oriented interpretation of
the patent laws. Indeed, to find the proper balance between patent and competition law, the FTC
stated, such policy-oriented interpretations are essential. Over the past twenty-five years, the
incorporation of economic thinking into antitrust has provided significant insights that have
substantially improved the development of antitrust law and competition policy. The Federal
Circuit and the PTO may also benefit from much greater consideration and incorporation of
economic insights in their decisionmaking.
The statute that created the AMC charges it with examining “whether the need exists
to modernize the antitrust laws and to identify and study related issues,” among other things.
Antitrust law protects competition and the competitive process “by preventing certain types of
conduct that threaten a free market.”7 For the last twenty years, antitrust law has recognized
enhancing consumer welfare as the single unifying goal of competition policy. Antitrust’s focus

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on consumer welfare reveals that governmental impediments to competition can be as harmful to
consumers as private business restraints. As illustrated above by a wide variety of business
testimony, the prevalence of poor quality patents is an impediment to competition, and it is an
impediment that, by definition, is governmentally created and, like private business restraints,
harms consumer welfare. The AMC may wish to consider the issue of patent law reform in this
context.
Thank you for this opportunity to speak. I will be happy to respond to questions at the
appropriate time.