Patent rights threatened

Scheming is afoot in Congress to create an unjustified loophole in the patent laws for foreign infringers despite dampening the incentive to American businesses to invent. Legislation has been proposed that would facilitate the unauthorized importation of products made outside the United States by means of a process protected by a U.S. patent.

If enacted, the law would create an asymmetry in favor of foreign production and jobs. Patent laws would continue to prohibit domestic manufacture of products made by a patented process. Strong patent protection should be maintained because patents are a keystone of economic growth. They create the motivation to innovate and to discover new products or ways of doing business that supersede the old. Renowned economist Joseph Schumpeter in “Capitalism, Socialism and Democracy” celebrated this process of “creative destruction” as the kind of competition that counts: “[T]he competition from the new commodity, the new technology, the new source of supply, the new type of organization… competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and outputs of existing firms but at their foundations and their very lives.”

Congress has properly protected process patents by authorizing the exclusion of infringing products. The International Trade Commission (ITC) has been empowered to exclude articles that “are made, produced, processed, or mined” by means of a valid process patent. But the ITC in its discretion may permit entry of excludable articles to protect the public health or welfare or to promote competition. And the president is authorized to override an exclusion order for policy reasons. That power has been exercised on at least five occasions, and makes the ITC alert to its public interest responsibilities in determining whether to issue an exclusion order.

Patent laws do not guarantee a patentee monopoly power to charge exorbitant prices. Indeed, strict enforcement of patent rights encourages rivals to invent around patents to develop competing products.

Take an example from the pharmaceutical industry. Merck initially developed Zocor to treat cholesterol. That stimulated Pfizer to invent its own version of the drug, Lipitor. That patent further prompted other companies to invent around both Zocor and Lipitor to offer several new competing drugs: Pravachol, Zetia, Lescol, Crestor, Advicor, Lovostatin and Zetia.

But suppose a patent does not trigger discovery of rival noninfringing substitutes. Under existing law, both the ITC and the president are authorized to permit importation of infringing articles to further competition, to protect consumers or to promote the public health or welfare.

Detractors of ITC power to exclude infringing articles complain that the patent laws are intellectually untidy in addressing imports. If an imported article is challenged in a suit in federal court as infringing a process patent, the infringer enjoys two defenses not available in an ITC exclusion proceeding: that the product made by a patented process has been either materially changed by subsequent processes or has become a trivial or nonessential component of another product.

But the discrepancy in legal standards is more apparent than real. The true comparison is between domestically manufactured products made by a process patent and their foreign manufactured counterparts. Under existing law, both are deemed to have infringed the process patent to prevent a perverse incentive for foreign over domestic production.

There is nothing irregular about discrepant legal standards or dual authorities in the application or interpretation of the law. Antitrust is an easy example. The Justice Department or private parties enforce federal antitrust laws with suits in federal courts. But an administrative agency like the ITC, the Federal Trade Commission (FTC), enforces those same antitrust laws in administrative proceedings. Moreover, the FTC’s legal mandate is modestly different than the Justice Department’s. The FTC not only sanctions violations of the antitrust laws but also any unfair or deceptive trade act or practice.

In sum, the ITC authority to exclude foreign products made in violation of a process patented in the U.S. is necessary to prevent an artificial advantage of foreign over domestic production. That same authority also encourages inventions while creating exceptions to protect competition, consumers and public health. The law has worked well, and should be left undisturbed.

Bruce Fein is a member of USA for Innovation’s advisory council on intellectual property rights, an opponent of changes in the International Trade Commission’s authority.