Innovation Incentives in Danger from Congress

Published June 1, 2008

U.S. patents have fostered American innovation ever since George Washington signed the first one in 1790. By protecting the rights of inventors, the patent system has spurred the development of everything from the light bulb to lifesaving medicines.

You wouldn’t think Congress would want to mess with such a winning formula, but that’s exactly what lawmakers plan to do with the Patent Reform Act.

The bill proposes changes that could radically reduce innovation in the medical sciences. Research into everything from allergy medicines to new cancer treatments could come to a crashing halt.

Under current law, U.S. patent protection gives innovators the exclusive right to sell their new inventions for a set period, usually 17 years. After that, anyone can make and sell the same product. This short-term monopoly rewards inventors and gives them enough time to recoup their costs–while ensuring the new product eventually reaches a broader market.

Worth the Risk

Inventing new medicines is still fraught with risk. It takes, on average, 10 to 15 years to develop a drug from the time a new chemical compound is discovered to the time the Food & Drug Administration (FDA) grants approval. Most medicines have only 11.5 years left of patent protection by the time they hit pharmacy shelves.

Moreover, the cost of bringing a single new drug to market remains enormous–upwards of $800 million–and the failure rate is high. Only one in 5,000 compounds successfully makes it from discovery through to FDA review. Then, only one in three approved drugs earns enough to cover the cost of development.

These are tough odds, but patent protections make the reward worth the risk. Thanks to our current system, drug researchers keep inventing, and investors keep putting their money into biotech startups and pharmaceutical research firms.

Pipeline of Invention

Patents keep the pipeline of invention flowing.

How does that affect our collective health? Among the more than 300 new medicines approved by FDA in the past decade, we’ve seen the arrival of new treatments for heart disease, diabetes, cystic fibrosis, and cancer.

The Patent Reform Act weakens patent protections in several ways.

Today, when a patent has been violated, the patent holder may sue the copycat. If the patent holder wins, the court awards damages. The bill would make it harder to win much in damages, by changing the way they’re calculated.

Currently, the calculation takes the value of the whole invention into account. But the new bill stipulates the calculation of a “reasonable royalty” look only at the bit of the invention the patent holder truly created, leaving out the value of any previously existing technology that’s built in.

So, for example, in assessing the value of the automobile, courts would be required to subtract the value of the wheel. Not only is figuring out this sort of thing highly subjective, but it also discourages incremental innovation. Building on existing science is just as critical to our future health as creating out-of-the-blue inventions.

In short, the new “reasonable royalty” formula would mean smaller damage awards for violated companies. It would become cheaper to infringe on an existing patent and riskier to be an inventor.

Threatening to Innovation

Another clause in the new legislation is potentially even more damaging to innovation.

Since 1999 the U.S. Patent Office has been allowed to publish patent applications online 18 months after submission, but patent filers are allowed to request an exemption from the public dissemination of their applications.

The Patent Reform Act would eliminate this exemption. It requires the publication, online, of all patent applications 18 months after filing–even if no decision has been made on granting a patent.

Currently, the Patent Office takes an average of 31 months to make a determination. That means inventors big and small would see their precious creations exposed to the world, in all their scientific detail, with no certainty of ever gaining patent protection. And copycats around the world would have more than a year to duplicate the invention and even claim it as their own.

To be sure, there are flaws in the existing U.S. patent system. The Patent Office is backlogged and underfunded, while legal protections for patent holders could be stronger. But the new legislation doesn’t fix these problems. Instead, it would weaken a system that has sparked invention for two centuries. And it would alter the future of medical science for the worse.

Sally C. Pipes ([email protected]) is president and CEO of the Pacific Research Institute.