FTC Report Recommends Improvements in Patent System to Promote Innovation and Benefit Consumers

A new Federal Trade Commission report recommends improvements to two areas of patent law: policies affecting how well a patent gives notice to the public of what technology is protected and remedies for patent infringement. The report, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition, emphasizes that the patent system and competition policy share the goal of promoting innovation that benefits consumers.

“When the patent system incorporates the principles of competition policy, the patent and antitrust laws work together to achieve their common goal. The recommended changes would benefit consumers by encouraging investments in innovation and promoting competition among patented technologies,” said FTC Commissioner Edith Ramirez.

The report continues the Commission’s policy engagement with the patent system that began with its 2003 report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy by highlighting the role of courts and the U.S. Patent and Trademark Office in notice and remedies issues.

“This new report provides valuable insights on how courts can reform the patent system to best serve consumers, and it complements the Commission’s 2003 report on improving patent quality. These reports, combined with the hard work by many leaders in Congress to improve a troubled system, will help ensure that patents continue to serve America’s innovators and consumers,” said FTC Chairman Jon Leibowitz.

The new report recognizes that patents play a critical role in encouraging innovation. At the same time, it observes that some strategies by patent holders risk distorting competition and deterring innovation. This is especially true, the report concludes, for activity driven by poor patent notice, and by remedies that do not align the compensation received by patent holders for infringement with the economic value of their patented inventions.

To address these issues, the report first recommends improving policies relevant to the patent notice function through actions by the courts and the Patent and Trademark Office. Clear notice of what a patent covers promotes innovation by encouraging collaboration, technology transfer, and design-around. But poor notice undermines these benefits if potential licensees cannot find relevant patents, or if companies hesitate to invest in technology because the scope of others’ patents are unclear. Poor patent notice also can distort competition by forcing firms to design products and make investments with incomplete knowledge of the cost and availability of different technologies. The report suggests mechanisms to improve the public’s ability to identify relevant patents, to understand the scope of patent claims, and to predict the breadth of claims that are likely to emerge from patent applications.

The FTC’s recommendations to improve patent notice include:

• making patent claims more definite and improving the utility of descriptions in patents for delineating their boundaries;
• enhancing the patent examination record as a source for interpreting claim scope; and
• more fully incorporating consideration of third parties’ ability to predict the potential breadth of evolving claims into the administrative and judicial review of the written descriptions of patent applications.

The report also explains that patent remedies that align compensation of patent holders with the economic value of their patented inventions are important for both innovation and competition. Patent damages that under-compensate patentees for infringement can deter innovation. But overcompensation can lead to higher prices and encourage speculation in patent rights, which also deters innovation.

The report makes recommendations to courts that would ground damages calculations and injunction analysis in economic principles that recognize competition among patented technologies.

The FTC’s recommendations to courts to improve patent remedies law include:

• capping reasonable royalty damages at the amount a willing licensee would pay, which may be determined by the value of the invention over alternative technologies;
• increasing the role of district courts in excluding unreliable expert testimony on damages from trial; and
• incorporating concerns into the injunction analysis about the leverage that an injunction may give a patentee to obtain royalties exceeding the economic value of an invention.

The report is based on eight days of hearings, public comments, and independent research.

The Commission vote approving the report was 5-0. It can be found here on the FTC website.