Intellectual Property in an Era of Intellectual Renaissance

Intellectual Property Practice Group Newsletter - Volume 3, Issue 1, Spring 1999

July 1, 1999

Gerald J. Mossinghoff

The remarks of the Hon. Gerald J. Mossinghoff to the Keio University International Extension Program in Numazu Japan on January 29, 1999 follow. We thank Mr. Mossinghoff for his invaluable service on the Intellectual Property Executive Committee and for allowing us to print his remarks.

Mr. President, Mr. Commissioner, Distinguished Guests, Ladies and Gentlemen:

I am greatly honored to participate in this very important conference on Intellectual Property in an Era of Intellectual Renaissance. Keio University is to be congratulated for their keen insight in organizing and hosting this program.

In 1776-the year of the United States Declaration of Independence - the international philosopher/economist Adam Smith tallght us that the wealth of any nation rested on three pillars: Labor, Capital and Natural Resources. Our generation has added a fourth pillar-Intellectual Property in all of its forms. Patents protect new technology. Copyrights protect literary and artistic works as well as computer software. Trademarks assure orderly commercial development and consumer protection. As we move into the twenty-first century-a century characterized in the 1997 high level Japanese Commission Report as the "Era of Intellectual Creation"[i]-the efficient protection of intellectual property will assume an entirely new dimension of importance. To underline the transition to a "knowledge-is wealth" society, Professor Lester C. Thoreall, writing in the Harvard Business Review, noted that "for more than a century, the world's wealthiest human being has been associated with oil; now he is a knowledge worker."[ii] And, in the global economy that will define the twenty-first century, an effective global system of intellectual property rights will be critically needed. Although that principle will apply to all forms of intellectual property, the most critical task-and in many ways the most challenging-will be to establish a truly global or world patent system, one that will serve the needs of multinational research-based industries as well as small and independent inventors at a cost that will promote, not hinder, the development of inventions.[iii] We are fortunate indeed that Japan has become a key leader in taking very specific actions to achieve that goal.

In the United States there is very deep appreciation of the critical importance of sound intellectual property protection to our national progress and well-being. That was not always so. As late as the early I950's a clear anti-patent philosophy was present among political and judicial leaders. This led United States Supreme Court Justice Robert H. Jackson to state in 1949 that "...the only U.S. patent that is valid is one which this Court has not been able to get its hands on."[iv]

The U.S. Congress reversed many of the anti-patent rulings of the Supreme Court when it codified the U.S. patent statute into Title 35 of the U.S. Code in 1952. Still, there was concern that the U.S. patent system was not serving industry as well as it should. This was a conclusion reached by President Johnson's Commission on the Patent System in 1966. That Commission strongly recommended major changes in the U.S. patent laws in the interest of international harmonization. These included a first to-file system of priority, and 18-month publication of applications.[v] Those and other recommendations-which I fully support-have not yet been enacted and remain controversial in the United States.

The current view of the importance of effective patent protection can be traced in large part to President Carter's Domestic Review of Industrial Innovation in 1980. Out of that review came the recommendation for the creation of the Court of Appeals for the Federal Circuit as a "vehicle for ensuring a more uniform interpretation of the patent laws."[vi] I was pleased as President Reagan's Commissioner of Patents and Trademarks to fully support and achieve enactment of that recommendation. The creation of the Federal Circuit has done more to restore faith among business leaders in the U.S. patent system than even its most enthusiastic supporters would have predicted.

The Reagan Administration undertook two other major intellectual property initiatives that are having a lasting effect:

(1) President Reagan, supported by his Cabinet Council on Commerce and Trade, proposed adding intellectual property to the GATT Uruguay Round. With the full support of Japan, that resulted in the landmark TRIPs accord.

(2) The second lasting contribution of the Reagan Administration in intellectual property-one that we can all be proud of-was the establishment at the U.S. State Department in 1983 of Trilateral Cooperation among the Japanese Patent Office, the European Patent Office and the U.S. Patent and Trademark Office.

These achievements laid a solid foundation for the keen appreciation among political leaders of both political parties of the importance of intellectual property. Ironically, that importance was recognized and appreciated by political leaders earlier and in greater depth than by U.S. financial leaders. In 1997, for example, the financial community was asking: What do Bill Gates, founder and CEO of Microsoft, and Andy Grove, CEO of Intel, know that we don't? That question was prompted by two seemingly inexplicable business decisions by Microsoft and Intel in 1997.

First came Microsoft's spring announcement that it would pay $425 million to acquire WebTV Networks, a struggling start-up offering Internet service over television. It was no secret, of course, that Microsoft was interested in the huge TV-watching market-the company would later invest $ 1 billion in Comcast, a cable TV giant with millions of subscribers and billions of dollars in cash flow. But why would Gates pay so dearly for a firm that was losing money and had attracted, at that time, fewer than 60,000 customers for its service?

Then there was Intel's curious decision to pay a staggering $1.5 billion to acquire Digital Equipment Corp's Alpha chip manufacturing plant. Why would Intel produce a competitor's chips, especially when it could barely meet demand for its Pentium chips and was lagging in development for its next-generation Merced processors? And stranger still, why would Intel pay nearly a quarter of its annual profits for such a dubious deal?

In both cases, the press and the pundits were at a loss to explain the economic logic behind these deals. But to those few in the know, the answer to both mysteries could be summed up in one world: patents. Or, more to the point, the secret driving force behind each deal was the growing economic and strategic importance of patents and other intellectual property in today's knowledge economy.

In Microsoft's case, for example, insiders disclosed that the company paid $425 million not so much to acquire WebTV's minuscule business as to gain its portfolio of 35 key patents relating to the delivery of Internet content over TV. And as for Intel, the fine print missed by most of the media at the time revealed that its $1.5 billion payment to Digital Equipment (since bought by Compaq) was in large part a settlement of a patent infringement suit that could have seriously undermined Intel's Pentium revenue flow.

What does it all mean? As Bill Gates told The Washington Post: "Patents are the new Gold Rush."

Indeed, in the last seven years alone, annual patent licensing revenues have skyrocketed a staggering 700%, from $15 billion in 1990 to $100 billion in 1997. And some experts speculate that today's $100 billion patent market may only represent 10% of the true value of the world's total patent assets. In other words, there may exist a $1 trillion market in latent patent values, just waiting to be tapped!

But the true economic value of patents goes far beyond the revenue streams that could be tapped from licensing. Across ever-broader sectors of the global landscape of business, more and more companies are discovering that patents are among their most valuable (albeit often hidden) assets. Accordingly to PriceWaterhouseCoopers, at least two-thirds of the $7 trillion market value of all publicly traded US companies lies not in their real estate or plant and equipment anymore, but rather in their intangible assets such as patents and other intellectual property.

That is two-thirds of the market value of corporate America-and it doesn't even show up on the balance sheet! No wonder, then, that patents that used to be regarded simply as dusty old artifacts to be kept under lock and key in some corporate legal office are now being viewed as "Rembrandts in the Closet"-key sources of profit and competitive advantage for businesses that know how to utilize them.

So it is perhaps not surprising, then, that patent strategy is emerging as the new Holy Grail of competitive advantage in corporate America. Smart managers are increasingly using patents as strategic business tools to leverage innovation, capture and defend markets, tap into new revenue sources, shape competitive strategies and marketing plans in order to outflank rivals, find and recruit top technical talent, and focus joint venture, merger and R&D activities more effectively on crucial corporate goals.

But as effective as patent systems are now, much more needs to be done. There is a debilitating redundancy built into the current national/regional patent search, examination and enforcement systems. With respect to any important invention, highly skilled patent examiners around the world-all of whom are scientists or engineers and many of whom in addition, particularly in the United States, have legal training analyze the same patent application, search the same prior art, and perform the same examination before granting virtually identical patents in their respective jurisdictions. Once granted, a patent must be enforced individually in each individual jurisdiction. This unnecessary redundancy drives up the costs of obtaining and enforcing worldwide patent protection to a level that can only be afforded by the largest multinational corporations. The senior patent counsel of one of the world's major research-based pharmaceutical companies estimates, for example, that it currently costs between $750,000 and $1,000,000 to obtain comprehensive worldwide patent protection for an important chemical compound. And that figure is growing at a rate of 10% each year! The costly duplication of efforts also adversely impacts the governments themselves, many of which are looking for ways to reduce the costs associated with patent protection within fixed or in many cases reduced resources.

Fortunately, in my view we are on the threshold of major new initiatives to achieve cost-effective international patent protection for new technology. The Japanese Commission on "Intellectual Property Rights in the Twenty-First Century" outlined a three step process that I and many others in the United States fully support: First, international efforts would include taking the lead in WIPO discussions on harmonizing legislation and office practices, and promoting efforts in the development of simple and swift international patent procurement procedures. The Commission recommended that Japan urge that the United States adopt automatic publication of patent applications eighteen months after they are filed, as well as a first-to-file patent system through bilateral agreements. I agree!

The second step would involve the mutual recognition of patents. In the Japanese Commission's view, the efforts involved with the mutual recognition of patent search results, the establishment of bilateral agreements, and greater harmonization of patent procurement process, will inevitably progress into the mutual recognition of patents.

These cooperative efforts, in turn, are intended to lead to the establishment of a Trilateral Patent, recognized in Europe, Japan and the United States. And, finally, within that framework, these efforts will ultimately lead to the creation of a global patent system.

Europe is moving toward that same goal, although in different, but compatible ways.

On June 24, 1997, the European Commission, acting through DGXV, released a "green paper" entitled "Promoting Innovation through Patents." The purpose of the green paper was to stimulate industry-wide debate on whether users' needs are currently being met and whether new measures are called for. The paper is structured in question form to encourage broad consultation with European industry.

A two day hearing was conducted in Luxembourg, November 25 and 26, 1997, in a major effort to solicit European industries' views on the questions posed in the green paper. At that hearing, European industry was remarkably united in the view that the current European patents systems were not serving industry as well as they should and that a new and revolutionary approach should be followed, not to improve the present systems but rather to replace them with a new unitary community patent covering the whole territory of the European Union.

We expect to see a European Commission Communication as early as next month-a "white paper"-followed by a legislative proposal later this year in the form of a regulation.

The European Parliament has voiced strong support for a full-fledged European patent system, noting that the idea from the European Commission merited "urgent consideration" with a view to implementation ahead of the enlargement of the European Union into Central and Eastern Europe.[vii]

Although not focused directly on the creation of a World Patent System, the United States government has moved effectively in two important areas with this long-range goal in mind.

First, the United States has taken the lead in the World Intellectual Property Organization to move toward the creation of a global secure high speed digital network to provide a common automated database of prior art - so-called "digital libraries"-to all of the patent offices of the world, as well as being available to the public at large worldwide via the Internet.

Secondly, the USPTO is pushing for significant improvements in the Patent Cooperation Treaty ("PCT") to make it far more "user friendly" than it is today. Although the United States specifically declined to support efforts to establish a first-to-file system of priority in the WIPO negotiations on a Patent Law Treaty ("PLT")-thus removing the centerpiece of the negotiations-it has remained actively engaged in those negotiations. For example, the United States is urging that, through the PLT, applicants be able to file the equivalent of provisional applications, in any language, with or without claims, to secure an international filing date in any patent office.

In mid-January I met with the new Acting Commission of Patents and Trademarks, Q. Todd Dickinson, and he assured me that he is as interested as his predecessor in enhancing international cooperation based on the strides we have already made. In my view, he will provide important and effective leadership in that regard.

In my opinion, the principles and rules governing the protection of new technology worldwide are-or should be-no less universal than the principles governing the design and building of a bridge. A solid foundation for an effective World Patent System has been laid. It is now time to complete the structure.[viii]

Again, I applaud the Keio University for sponsoring programs such as this one. Through these very important interactions, we will, I am sure, achieve effective worldwide protection for new technology. This, in turn, will stimulate human progress in the new millennium.

* Gerald J. Mossinghoff is Senior Counsel, Obion, Spivak, McClelland, Maier & Neustadt, P.C. A former Assistant Secretary of Commerce and Commissioner of Patents and Trademarks in the Reagan Administration, Mr. Mossinghoff teaches intellectual property law at the George Washington University Law School and the George Mason University School of Law. He is a Fellow in the National Academy of Public Administration, the author of many articles on patents and other forms of intellectual property, and serves as a Vice Chairman of the Federalist Society Intellectual Property Practice Group.



[i] Toward the Era of Intellectual Creation, Challenges for Breakthrough, Report of the Commission on Intellectual Property Rights in the Twenty-first Century to the Commissioner of the Japanese Patent Office (Apr. 7, 1997).

[ii] Lester C. Thoreau, Needed: A New System of Intellectual Property Rights, HARV. BUS. REV., Sept.-Oct. 1997 at 95, 96.

[iii] In these remarks, I will limit my comments to matters relating to patent systems: there is insufficient time to discuss copyrights, trademarks and other forms of intellectual property.

[iv] Jungasen v. Ostby & Barton Co., 335 U.S. 560 (1949) (dissenting opinion).

[v] "To Promote the Progress of...Useful Arts" in an Age of Exploding Technology, Report of the President's Commission on Patent System, Washington, D.C. (1966). This is not a partisan matter. The 1966 Commission Report was to President Johnson. In August 1992, the Advisory Commission on Patent Law Reform reached virtually identical conclusions in its report to the Secretary of Commerce in the Bush Administration. The Advisory Commission on Patent Law Reform, Report to the Secretary of Commerce (Aug. 1991).

[vi] Hearings on H.R. 6033, H.R. 6934, H.R. 3806 and H.R. 2414 before the Subcommittee on Courts, Civil Liberties and the Administration of Justice, House Committee on the Judiciary, page 797, 96th Cong., 2d Sess. (1980).

[vii] World Intellectual Property Report. Vol. 13. No.l, page 1 (January 1999).

[viii] A detailed version of what such a system would look like is outlined in my article "World Patent System Circa 20XX, A.D." 38 IDEA 529 (Franklin Pierce Law Center 1998), reprinted in 80 Journal of the Patent and Trademark Office Society 523 (1998).