Tackling the Challenge of Patent Reform 58

Advice for the Obama Administration and the 111th Congress

Developing Regional Centers of Innovation 6

New Policy Ideas to Ensure Broad-based Economic Prosperity

Government Contracting Run Amok

Science'sTroubled Legacy

www.scienceprogress.orgfall • winter 2008/2009

Editor-in-Chief

JONATHAN MORENO

Editorial Director

ED PAISLEY

Editorial Advisor

KIT BATTEN

Assistant Editor

ANDREW PLEMMONS PRATT

Contributing Editor

CHRIS MOONEY

Fellows Assistant

MICHAEL RUGNETTA

Graphic Designers

SHANNON RYAN

LAUREN FERGUSON

MATT PUSATERI

TOM KALIL Deputy Assistant to President Clinton for Tech-nology and Economic Policy Deputy Director of the White House National Economic Council; Non-resident Fellow, Center for American Progress; Special Assistant to the Chancellor for Science and Technology, University of California at Berkeley

NEAL LANE, PHD Malcolm Gillis University Professor; Senior Fellow, James A. Baker III Institute for Public Policy Rice University

RICHARD O. LEMPERT, JD, PHD Eric Stein Distinguished University Professor of Law and Sociology, University of Michigan Law School, NSF, AAAS, NRC

MARK LLOYD Vice President for Strategic Initiatives, Leadership Council on Civil Rights

ZACK LYNCH, MA Executive Director, Neurotechnology Industry Organization

W. PATRICK MCCRAY, PHD Professor of History & Co-PI/Executive Committee Member for the UCSB Center for Nanotechnology in Society

TARA O’TOOLE, MD, MPH Chief Executive Offi cer and Director, Center for Biosecurity, University of Pittsburgh Medical Center

SCOTT PAGE, PHD External Faculty, Santa Fe Institute; Professor of Complex Systems, Political Science, and Economics University of Michigan

E. ALBERT REECE, MD, PHD, MBA Vice President for Medical Aff airs, University of Maryland, John Z. and Akiko K. Bowers Distinguished Professor and Dean, University of Maryland School of Medicine

MAJOR GENERAL ROBERT H. SCALES, JR., PHDU.S. Army (Ret.)

SUSAN SOLOMON, JD CEO, New York Stem Cell Foundation

JONATHAN TUCKER, PHD Senior Fellow, James Martin Center for Nonproliferation Studies, Monterey Institute of International Studies

PAUL R. WOLPE, PHD Senior Fellow, Center for Bioethics; Professor, Departments of Psychiatry, Medical Ethics, and Sociology, University of Pennsylvania

LAURIE ZOLOTH, PHD Director, Bioethics, Center for Genetic Medicine Professor of Medical Ethics and Humanities Professor of Religion, Northwestern University

STAFF ADVISORY BOARD

BRUCE ALBERTS Editor-In-Chief, Science; Department of Biochemistry and Biophysics at the University of California, San Francisco; Former President, National Academy of Sciences

JOSEPH BARTLETT, LLBOf Counsel, Sullivan & Worcester LLP ; Courtesy Professor, Johnson School of Business, Cornell University; Founder & Chairman, VC Experts, Inc.

DAWN BONNELL, PHDTrustee Professor of Material Sciences; Director, Nano/Bio Interface Center University of Pennsylvania

ROBERT BUDNITZ, PHD Lawrence Berkeley National Laboratory

ARTHUR L. CAPLAN, PHD Emanuel and Robert Hart Professor of Bioethics; Chair, Department of Medical Ethics; Director, Center for Bioethics, University of Pennsylvania

TOM CECH, PHD President, Howard Hughes Medical Institute; Nobel Prize in Cemistry, 1989

VINTON G. CERF Vice President & Chief Internet Evangelist, Google Inc.

R. ALTA CHARO, JD Warren P. Knowles Professor of Law & Bioethics, University of Wisconsin Law School (Madison)

MARTHA FARAH, PHD Walter H. Annenberg Professor of Natural Sciences; Director, Center for Cognitive Neuroscience, University of Pennsylvania

STEVE FETTER, PHD Dean, School of Public Policy University of Maryland - College Park

JOHN GEARHART, PHD Director, Institute for Regenerative Medicine at the University of Pennsylvania, James W. Eff ron University Professor

JOHN H. GIBBONS, PHD Science Advisor to President Clinton; President, Resource Strategies

BARRY GLASSNER, PHD Executive Vice Provost, University of Southern California

GARRETT GRUENER, MS Co-Founder and Director, Alta Partners; Founder AskJeeves

KATHRYN HINSCH Founding Director and Board President, Women’s Bioethics Project

LEO HINDERY, JR. Executive in Residence, Columbia Business School; Managing Partner, InterMedia Partners

JOHN S. IRONS, PHD Research and Policy Director, Economic Policy Institute

From the Editor-in-Chief

fall • winter 2008/2009 1

An opening editorial for a collection of essays on patent and innova-tion policy must address the reason for these policies in the fi rst place: How to build a country based on individual creativity? I bring some personal authority to this question. In 1926 my father emigrated from Vienna on the promise of a contract with the General Phonograph Company in Elyria, Ohio. Back in the old country he and his then-girlfriend’s brother had developed the design of a sound-recording device they called radio-fi lm. Th eir idea was original enough to win a patent and a brief mention in Th e New York Times, where my father was referred to as “an Austrian inventor.” Alas, dad’s relationships with his collaborator and the young woman turned sour, and in any case others accomplished their goal with more technical effi ciency. Matt ers worked out bett er for my father anyway, as he sett led in Manhatt an rather than Elyria, where it would have been much harder to build his psychiatric practice. It turned out that his new country gave him the opportunity to be both patentee and innovator, as his pioneering work on sociometrics and group dynamics was recognized by President Franklin D. Roosevelt in a private meeting at Hyde Park—just 15 years aft er he arrived in New York with nothing but ambition. My father’s American story is not unusual. His mode of entrance to the United States and rapid climb to success gave him a profound sense of the uniqueness of a country that valued personal initiative. America’s use of the patent system has a special quality beyond reward-ing the individual, one that the founders perceived more clearly than previous champions of intellectual property—as a way to construct the common good through socially shared innovation. Th e idea of IP itself is not new, originating probably in ancient Greece when it occurred to certain poets that their prominence stemmed from the value of their recitations. By contrast, Socrates seemed to object to the notion that the poets deserved any credit for their creations, att ributing them instead to divine inspiration. Philo-sophical reservations notwithstanding, the Romans later developed the trademark and Hebrew scholars decreed against the theft of anoth-er’s words. In the Middle Ages, nations and guilds alike enforced arti-sans’ trademarks, and in 1474 Venetian legislators required inventors

America’s

use of the

patent system

has a special

quality beyond

rewarding the

individual—as a

way to construct

the common

good through

socially shared

innovation.

From Many Inventors,

One Nation

From the Editor-in-Chief

2 science progress

to register their creations so that the prospering city could both att ract talent and benefi t from the value of their work. Britain’s Statute of Monopolies enacted in the 17th century set out the fi rst modern intellectual property rules, limited in time to the “true and fi rst inventor.” While the Venetian goal was public ben-efi t, motivation for the British statute was closely tied up with the developing ideas that could be commercialized with new capital to boost national economic development. Over the next two hundred years, bilateral agreements arose to protect inven-tors from the appropriation of their ideas by other states, concluding with a series of late 19th century conventions from which fi nally emerged the World Intellectual Property Organization and the World Trade Organization. While the WTO is famously wrestling with problems of fairness and need with regard to bio-medical IP in the developing world, our nation’s patent system needs a 21st-century redesign to cope with both the scale of idea production and the novel character of the items being produced, from nanobots to strands of DNA. Americans con-cerned with intellectual property have addressed challenges at least as great. Th omas Jeff erson took primary responsibility for the approval of the fi rst

patent applications, a job for which he confessed his lack of preparedness. Th e “subjects,” he com-plained, “are such as would require a great deal of time to understand and do justice to them, and not having that time to bestow on them,” he was

“oppressed beyond measure by the circumstance under which he has been obliged to give undue and uninformed opinions on rights, oft en valuable, and always deemed so by the authors.” Science Progress has therefore made the more effi -cient identifi cation and application of intellectual property one of its signature topics. And with our national economy under stress, the problem of dis-tributing opportunities for innovation throughout the country becomes more pressing. If Jeff erson was perplexed, we’d bett er start bending our collective eff orts to these tasks as best and as soon as we can.

Jonathan Moreno is the David and Lyn Silfen Univer-sity Professor and Professor of Medical Ethics and of the History and Sociology of Science at the University of Pennsylvania. He is a Senior Fellow at the Center for American Progress and Editor-in-chief of Science Progress. He would like to thank University of Penn-sylvania undergraduate student Markley Foreman for her research on the history if intellectual property for this introductory essay.

From the Editorial Director

fall • winter 2008/2009 3

Even before the inaugural edition of Science Progress appeared in print this past spring, we at the journal and our companion website already had our eyes set on the inauguration this month of the next president of the United States. At the time, we had no idea who would win the Democratic and Republican presidential nominations, but what we did know was this—whoever became the 44th president would need thoughtful guidance on the complex public policy questions we pres-ent to you today in this biannual edition of the journal Science Progress. Th at’s why Science Progress and our parent organization, the Center for American Progress, in early 2008 began preparing to convene two roundtable task forces, bringing together experts from both sides of the political aisle and from an array of diff erent private- and public-sector perspectives, to discuss parent reform and innovation. One taskforce set out to identify the ingredients needed to incubate regional centers of innovation so that university-based scientifi c research can result in broad-based economic prosperity. Th e second sought to delineate the parameters of the possible in patent reform—one of the key issues the incoming Obama administration and the 111th Congress will have to tackle this year aft er the eff ort fell short in 2008. Both issues cut to the core of U.S. science and technology policy-making that will be so critical to carrying our deeply troubled econ-omy back to the forefront of global innovation in the 21st century. We believe this is why we att racted the caliber of participants in both roundtables, including two former U.S. commissioners of patents and trademarks, Gerald Mossinghoff and Bruce Lehman, to our patent roundtable, and the former chief counsel to the House Science Com-mitt ee, Jim Turner, and (before her appointment by President-elect Barack Obama to head of the Small Business Administration) venture capitalist Karen Mills, to our regional innovation taskforce. Our task force on regional centers of innovation included venture capitalists and corporate technology offi cers, university technology licensing directors and workforce development experts, and some of the nation’s leading scholars on innovation clustering and commercial-ization. (To see the complete list of taskforce members and advisory board members, please go to our website). Th e fi ve essays beginning

U.S. science

and technology

policymaking

will be critical

to carrying our

deeply troubled

economy back to

the forefront of

global innovation

in the 21st century.

Tackling Complex Issues

for New Policymakers

From the Editorial Director

4 science progress

on page 7 (and the companion essays on our web-site) att empt to tease out examples of how policy-makers in statehouses and diff erent federal agencies can work together with universities to replicate the success of Silicon Valley and the Route 128 Corri-dor in Massachusett s in other university cities and towns—in the process detailing how place and his-tory set the stage for specifi c innovations that poli-cymakers can help commercialize. Th e policy recommendations refl ect that mosaic of geography and specialization. But they also include 21st-century information technology and fi nancial tools to speed development, and include ways to benchmark success—precisely because these are untried policy initiatives that will require prudent monitoring. Our patent reform roundtable was specifi cally designed to gather in one room all the diff erent par-ticipants in the 2008 debate in order to fi nd com-mon ground to move legislation forward this year. And to a great degree we believe we succeeded. Our four essays beginning on page 59 detail our recom-mendations for improving the eff ectiveness of the U.S. Patent and Trademark Offi ce, coping with abusive “patent trolls,” and weaving U.S. and inter-national patent law and enforcement together for more eff ective and effi cient global innovation. “Th e time is ripe for positive change in the U.S. patent system,” says Science Progress and CAP Senior Fel-low Rick Weiss in the opening essay—a conclusion we will work hard to see to fruition in 2009. A historical debate of a diff erent tenor is the subject of our cover story, “Science’s Troubled Legacy: Government Contracting Run Amok.” Th e author, Johns Hopkins University professor Daniel Gutt man, a fellow of the National Acad-emy of Public Administration, charts the rise of

the private sector “contracting estate,” which was born to harness scientifi c inquiry in the interests of national security in the mid-20th century. Gutt -man explains how our nation moved from the success of the Manhatt an Project to Blackwater's armed security units on the streets of Baghdad before presenting a set of principles that re-envi-sion 20th-century government contract reforms for the realities of 21st-century governing. Gutt man’s bott om line: “If contractors are to continue to do basic government work then not only must laws and reality be reconciled but also the public service ethic must be extended to encompass the entire taxpayer-funded workforce, and not just the civil service.” In his essay beginning on page 47, readers will fi nd recommendations of exactly how to enact these critical reforms—ones that the incoming Obama administration could employ to reverse the dangerous and irresponsible outsourcing of so many diff erent government functions under the Bush administration. Th ere are, of course, many other science and technology policy arenas in which the Obama administration will set new policy priorities—from stem cells to climate change to space exploration—many of which we examine every day on our web-site, and many in which we also off er detailed policy recommendations. Inside this journal, however, we have packed lengthy analysis of three complex issues of sweeping economic and historic signifi -cance. We believe our recommendations are only the beginning of the progress our nation is about to embark upon. We hope you agree.

Ed Paisley is Vice President for Editorial at the Center for American Progress and Editorial Director of Sci-ence Progress.

In This Issue

fall • winter 2008/2009 5

Table of Contents

6 PLACE MATTERS

Innovation Springs from Many Seeds, But Soil Is Equally Important

MARYANN FELDMAN

22 PITTSBURGH’S TARGETED INCUBATOR

Taking Innovation to the Next Level

JAMES F. JORDAN AND PAUL L. KORNBLITH

35 BENCHMARKING FOREIGN INNOVATION

The United States Needs to Learn from Other

Industrialized Democracies

STEPHEN EZELL

47 THE STATE OF THE CONTRACTING ESTATE

Time for a 21st-Century Re-envisioning of 20th-Century Government

Contracting Rules Designed to Boost Scientifi c Innovation

DAN GUTTMAN

59 TACKLING THE CHALLENGE OF PATENT REFORM

Recommendations for the Obama administration and Congress

RICK WEISS

78 PATENT TROLLS ERODE THE FOUNDATIONS

OF THE U.S. PATENT SYSTEM

DANIEL P. MCCURDY

15 THE FEDERAL ROLE IN CATALYZING INNOVATION

Beyond the Beltway and Through the Networked Economy

RICHARD SELINE AND STEVEN MILLER

29 CREATING A NATIONAL INNOVATION FOUNDATION

Economic Prosperity Rests on Diverse Technology Innovation

ROBERT ATKINSON AND HOWARD WIAL

72 IMPROVING THE EFFECTIVENESS OF THE U.S. PATENT

AND TRADEMARK OFFICE

GERALD J. MOSSINGHOFF AND STEPHEN G. KUNIN

87 GLOBAL PATENT PROTECTION

The International Patent System and the New Administration

BRUCE A. LEHMAN

INNOVATION

GOVERNMENT CONTRACTING

PATENT REFORM

Innovation

6 science progress

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Innovation

fall • winter 2008/2009 7

Economic restructuring over the past several decades has taken a toll on many places in America. Th e “new” economy has benefi ted certain regions while the economic standing of other places has slipped precariously. Globalization has not brought the promised benefi ts to everyone. Many com-munities are struggling to secure future prosperity, increase their standards of living, or more mod-estly maintain simple economic viability. Th e auto industry in Detroit exemplifi es the interconnection between industry and community, the viability of individual companies and the fortunes of places—and the uncertainty that results when companies and industries are not innovative. Many places search for a recipe for future pros-perity, seeking to understand what the appropriate action is and what investments will yield the types of increasing returns that provide for economic growth. Th e key ingredients are a combination

Innovation Springs from Many Seeds,

But Soil Is Equally ImportantBy Maryann Feldman

of entrepreneurs—individuals who see opportu-nity and go aft er it, and other individuals who are willing to invest in entrepreneurs’ ideas with their money or their labor. Organizing these ingredients successfully has proven elusive. Many places strug-gle to defi ne an economic future, despite the advice of highly paid consultants and the willing participa-tion of state and local government, local institutions of higher education, and others. Th is essay will provide four simple facts about technology-based economic development, and it should certainly not be considered the fi nal word. Th ese simple facts:

Economic growth is local, complex, and beyond • anyone’s controlPlanning for the future is uncertain• Th e role of universities is changing• Innovation economies require preparation•

PLACE MATTERS

Innovation

8 science progress

When an issue is signifi cant, the popular discussion

may easily become muddled. Terms may be used in-

terchangeably and without precision, resulting in su-

perfi cial debate. To avoid this carelessness, a series of

defi nitions that discriminate between the components

of science, technology, and innovation are in order to

advance the discussion and enrich the policy options.

In daily conversation, terms such as invention and

innovation, as well as science and technology, among

others, are often used interchangeably. But for aca-

demics and policy makers, there are important distinc-

tions among these terms, and these distinctions give

each term a unique meaning and enrich the discus-

sion. Invention is about discovery and the creation of

something novel that did not exist previously. Inno-

vation carried invention further with the commercial

realization of the value of the invention or the receipt

of an economic return. This is a subtle but important

distinction. A patent, for example, provides legal pro-

tection of an idea and reveals an invention, while the

marketing and consumer acceptance of a new drug

are evidence of an innovation.

Science, in a broad sense, is the unfettered search for

knowledge for the sake of understanding. That search is

based on observed facts that may be replicated through

experimentation or theory. Thus science begins with

conventional preliminary conditions and searches for

some unknown results to address fundamental ques-

tions related to hypotheses about the world. The pro-

cess of investigation is known broadly as research and

may be basic (with the intention of advancing science)

or applied (with an orientation toward some practical

end). These delineations are two ends of a continuum

of problem solving, as basic research suggests avenues

of inquiry that are advanced by applied research.

Similarly, research is enriched as applied work cre-

ates the need for more theoretical work and suggests

new avenues for further basic research. In addition,

and most critically, while science is classifi ed by disci-

plines that defi ne traditions of inquiry, and scientists

are trained within these specifi c traditions, applied

problem solving frequently creates the need for mul-

tidisciplinary teams or even creates new disciplines to

colonize the frontiers of knowledge. Examples include

the rapidly evolving fi elds of biochemistry and bio-

medical engineering or the emerging fi elds of nano-

technology in the physical sciences and genomics and

proteomics in the life sciences.

In contrast, industrial research and development is

the systematic augmentation or deepening of knowl-

edge by applying it to some practical problem or new

context with the idea of generating a commercial re-

turn. While science is typically conducted by universi-

ties and institutes of higher learning, R&D is typically

conducted by private companies. An important dis-

tinction is that both public and private companies have

a responsibility to earn returns for their shareholders

and investors. In general, the more basic the science

involved in a research project, the more diffi cult it is

to earn the necessary returns. This is due to particular

characteristics of the knowledge that research creates.

A variety of government incentives and public-

private partnership programs have evolved over time

from governments’ desire to steer private investment

toward more basic types of scientifi c activity, and to

stimulate the development of new technologies that

private companies would not consider attractive in-

vestments in the absence of some incentives. These

incentives include direct grants, R&D subsidies, and

other programs that encourage fi rms to conduct proj-

ects with universities or government laboratories.

A similar distinction may be made with regard to

education and training. Training is task oriented and

conforms to a set of skills, techniques, and practices.

Typically, training is oriented to a job, occupation, or

profession. While professional education is typically at

a high level and its graduates command high salaries,

curriculum has the well-defi ned outcome of conveying

well-codifi ed practices, such as being able to read fi nan-

cial statements in the case of business, being able to drill

teeth in the case of dentistry, and being able to conduct

and interpret a patient history in the case of medicine.

Education has a broader goal of expanding knowledge

and providing the capacity to create new knowledge.

Knowledge has the characteristics of being nonrival,

and nonexcludable, which classifi es knowledge as a

public good. Nonrival, in the economists’ terminology,

indicates that one person’s use of knowledge does not

impede another’s use of it. Consider the example of a

mathematical formula. Knowledge is created when the

formula is fi rst derived and formal proofs are demon-

strated. The result is most likely a scholarly publication

CLARIFYING THE TERMS OF SCIENCE, TECHNOLOGY, AND INNOVATION

Innovation

fall • winter 2008/2009 9

that codifi es the knowledge, rendering it easy to diff use

and put into practice. Once the formula is known, one

scientist using it does not diminish its usefulness or util-

ity to other scientists. In fact, the value of the formula

may actually increase as a result of its more diff use use

and acceptance. Knowledge, once created, is nonrival;

many economic actors may enjoy it simultaneously.

Nonexcludability refers to the fact that, once knowl-

edge is discovered, it is diffi cult to contain or to pre-

vent others from using that knowledge commercially,

since the returns to the discoverer are smaller than the

returns to society. This is the traditional justifi cation for

government funding for basic research.

Intellectual Property defi nes specifi c bits of knowl-

edge that are novel. IP can take many forms, including

products and processes that are protected through

patents, trademarks, or trade secrets, and authored

works that are protected through copyright. Most gov-

ernments consider certain kinds of creative endeavors

as intellectual property and allow inventors legal rec-

ognition for these endeavors. Some forms of IP include

software, databases, plant varieties and other biological

materials, as well as “tangible research property.” The lat-

ter includes items such as circuit chips, organisms, drug

targets, formulations, and engineering prototypes.

It is up to the creator of intellectual property, how-

ever, to decide whether an invention, discovery, or

new idea is to be legally recognized and protected. For

instance, a researcher who immediately publishes a

discovery has made the decision not to treat it as IP

and to make it freely available to the public for use.

Commercialization is the process that turns an

invention into an innovation. It involves defi ning a

concept regarding who is willing to pay for the new

idea, what attributes they value, and how much they

are willing to pay for the added value. The ability to

legally protect an invention therefore forms the basis

for commercialization activities, as it precludes others

from copying the invention, entering in the market,

and competing for a share of the economic profi t.

More important, if companies did not have the abil-

ity to protect their discoveries, then they would have

no incentive to invest in many important R&D activi-

ties, such as clinical trials, thus interfering with the cre-

ation and diff usion of knowledge. As such, IP creation

is a fundamental ingredient of the commercialization

process and an important vehicle for the transfer of

knowledge between legal entities and the public.

While patenting measures invention, commercializa-

tion requires the additional steps of translating inven-

tions into consumer needs and product markets. At its

earliest stages, before applications are easily described

or generally appreciated, realizing the potential of an

invention requires a sophisticated understanding of

consumer needs, existing markets for product innova-

tion, and factor inputs. Commercialization, even when

ideas are abundant, may not be completed because

outcomes are highly uncertain, risk aversion may cause

projects to be delayed or abandoned, or the relevant

organizations may not be able to collaborate.

Technology is information that is put into use to ac-

complish some task. This information may take many

forms, including both hardware (physical, material

objects) and software (digital material, procedures)

or combinations thereof. As such, technology has a

fairly broad defi nition and includes anything that

helps to improve the effi ciency and quality of daily life.

Electronic and computer technology helps its users

to share information and knowledge quickly and ef-

fi ciently. Vitamins, new biochemical formulations, and

drugs alter one’s health and improve one’s lifestyle,

making up another important class of technology.

Using this defi nition, technology may often be

considered a form of intellectual property. In general,

technologies are often broadly classifi ed based on

their area of application, and therefore terminology

such as information technology, biotechnology, and

nanotechnology has become commonplace.

Technology transfer is the application of information.

Technology transfer is therefore a distinct and impor-

tant subset of knowledge transfer; knowledge transfer

is a broader concept that encompasses a set of rela-

tionships. Technology transfer is often considered as a

formal activity within or across organizations. Case in

point: a discovery derived from research in a scientist’s

lab may be licensed to a company that will commercial-

ize the technological innovation into a product or ser-

vice to be sold in the marketplace.

Although commonly associated with commercial

goals, examples of technology transfer may be found

between non-profi t organizations or institutions and

even between groups within the same organization.

Direct technology transfer is often treated as a function

and handled by a specifi c offi ce or department within

an organization such as a technology transfer offi ce,

business development offi ce, or research foundations.

Innovation

10 science progress

Th e intention is to provide some guidance and to highlight some steps forward using these four facts as (contradictory but no less pertinent) policymaking guideposts. (Th e box on page 8 pro-vides an introduction to the terms that we use in this essay and others contained in this edition of Science Progress).

ECONOMIC GROWTH IS LOCAL, COMPLEX,

AND BEYOND ANYONE’S CONTROL

All economic activity must be grounded some-where. Th e idea of a fl at world benefi ts corpora-tions who move their operations to exploit wage diff erentials. But labor is less mobile, and people as physical beings provide the nexus for economic activity, either as workers or consumers. Even as the Internet eases long distance collaboration, creativ-ity resides within individual people and that creativ-ity is enhanced by local context and connections between people. Former Speaker of the House Tip O’Neil was fond of saying that all politics is local; by the same logic all economic growth is local. Economic activity has a pronounced tendency to cluster spatially in locations rich in the factors that promote productivity and exchange. Th e 19th cen-tury British economist Alfred Marshall wrote about the spatial cluster of industries in 1890, noting that easy access to pools of skilled workers and special-ized suppliers, localized competition, and the ability to benefi t from knowledge externalities provided an advantage to local companies. Th is is well known today due to the prominence of modern technology-based clusters, such as Silicon Valley and Route 128 in Massachusett s. Manufacturing and productivity activity benefi t from spatial concentration. Creativ-ity and innovative activities, however, benefi t most from the geographic concentration of resources due to increasing returns to the application of knowledge. Th e tendency of innovation to cluster both spatially and temporally is a regular occurrence. Consider Florence under the Medici family, Vienna during

Mozart’s career, Manchester during the Industrial Revolution, or Paris in the 1920s—all places where creative activity fl ourished. New technologies and new industries display similar tendencies even as they begin rather hum-bly as entrepreneurial ventures. Translating entre-preneurs’ dreams and realizing their economic potential involves building an appreciation of what is possible among potential investors, customers, and employees. Increasingly there is recognition that what matt ers for place-specifi c industrial devel-opment is not necessarily resources or initial con-ditions but the social dynamics that occur within a place and defi ne a community of common interest around a nascent technology or emerging industry. Community building—as opposed to planning—can be essential to regional industrial development by constructing a shared understanding and appre-ciation of an emerging industrial activity. Geography and place-specifi c interactions shape industries. If you enjoy coff ee or fi ne wine, then you know that there is something about the soil, the cli-mate, the angle of the sun, the age of the trees, and the growing and harvesting traditions that creates something very unique. Even the best vineyards experience diff erent vintages, refl ecting the myriad of variations that determine quality. While qual-ity winemaking is diff using around the world, with product now exported from Chile, Argentina, Aus-tralia, New Zealand, and South Africa, wines have become more complex and diff erentiated rather than homogenous. Connoisseurs talk about terroir, a French term used to denote the special charac-teristics that geography bestows. Th e term can be translated literally as “dirt” but more poetically as a

“sense of place.” Th e term captures the total eff ect that the local environment has on the product, when the total eff ect is more than the sum of its parts. Location is a geographic platform that provides a means to organize human activity and that is essen-tial to the creation of innovation and the produc-tion of knowledge. Companies are one well-known way of organizing productive activity. Geography,

Innovation

fall • winter 2008/2009 11

spatial proximity, and collocation are another. As technology allows greater communication at long distance, we experiment with distant collaboration and knowledge sharing. But sometimes there is simply no substitute for just being there—being at the place where exciting work is taking place, where high-content unstructured conversations take place, and where the unexpected may be explored and spark something new. Th e essence of strategic advantage is being able to do something well that will not be easily repli-cated by others. Companies understand this, but unfortunately places seem to try to att ract and grow the same glamorous sectors. Unfortunately, by the time an industrial activity is well understood and appreciated and easy to target, it is too late. Th e fi rst movers have already captured the market, and as the process become self-reinforcing it is impos-sible to catch up. Consider the example of Boston’s biotech indus-try (see box on page 12), arguably the most success-ful biotech cluster in the world. It is most relevant that biotech was never an economic development target. Th e industry simply evolved organically, growing up at a time when few people understood biotech or its economic potential. By the time other communities jumped on this bandwagon, Boston was far ahead in its lead.

PLANNING FOR AN UNCERTAIN FUTURE

Our diffi culty comprehending the complexity of future growth underlies faith in market mechanisms. Recently this reliance on the market has diminished the role of government in many people’s minds. Yet government at its best is the vehicle for collective action. Government ensures that markets work well, that competition is fair, and that all citizens are able to participate in the economic future. When gov-ernment works well, communities are viable. Frequently, policy is based on a linear model of innovation whereby innovation emerges from

increasingly practical applications of new fundamen-tal knowledge. Th is type of policymaking is wrong-headed. On the contrary, technological change must be conceptualized as a process whose outcome is not determined but is rather open. It is impossible to discover a sequence of clearly delimited stages that have to be passed one aft er the other.

Instead innovation is more accurately described as a complex, self-organizing process that covers a much wider range of small- to medium-sized enter-prises, large multinational corporations, universities, the public sector, competitors, and collaborators alike. Innovation policies need to provide the infra-structure so that creativity and innovation fl ourish. Th ere is an equal danger that places become too inward-looking, depending too much on local resources, local collaboration, and local markets. Th e most successful economic entities are also globally connected, benefi ting from local buzz and

Sometimes there is no

substitute for just being

there—being where

exciting work is taking

place, where high-

content unstructured

conversations take

place, and where the

unexpected may be

explored and spark

something new.

Innovation

12 science progress

The Boston area is a hotbed of entrepreneurial com-

panies spinning out of the region’s universities and

research hospitals, with the Massachusetts Institute

of Technology leading the way—but with many other

research institutions and institutions of higher edu-

cation participating. Why has it happened in Boston?

And what can other cities do to promote entrepre-

neurial clusters?

By many accounts, Boston has developed the

most successful concentration of biotech compa-

nies in the world. The development of the “biotech

cluster” in the region during the past two decades

has highlighted the entrepreneurial ferment. It is in-

structive, then, to consider the development of the

complex Boston ecosystem from an MIT perspective,

since MIT was the earliest and is still the most active

university player in the eco-system. This story has

been told before but not from the perspective and

history of the university.

History is relevant. MIT is not the typical university

in that it was originally formed as a “school of industri-

al science” to aid “the advancement, development, and

practical application of science in connection with arts,

agriculture, manufactures, and commerce,” according

to the 1861 MIT Charter from the Commonwealth of

Massachusetts. Thus, its commitment to technology

transfer to industry (an unknown term at the time, but

clear in concept) was there at its beginning.

While the educational philosophy of the early Insti-

tute centered on mastery of basic concepts, practical

problems were also attacked. In 1903, for example, a

Sanitary Research laboratory was founded devoted to

year-round research in special problems relating to

sewage disposal and its bacteriology and chemistry,

noted Samuel Prescott in his 1954 essay “When M.I.T.

was ‘Boston Tech.’” Or consider MIT’s Division of Indus-

trial Cooperation and Research, which was founded

in 1921, through which “the resources of the Institute

[were] made available to American industry,” accord-

ing to MIT’s 1921 yearbook, with companies able to

contract with the Institute for consultation by faculty

and research projects. M.I.T. noted at the time that

“through real cooperation and closer contacts be-

tween the two greatest factors of industrial life—the

training school and the manufacturing plant—there

should be no limit to the development and reach

achievements which result.”

In the two decades following World War II, MIT

evolved into a full university, but “a university polar-

ized around science,” as Julius Stratton, president of

MIT, described the institute in 1961. Research grant

volume and the number of graduate students both

began a rapid rise that has continued to this day. The

research focus evolved from mostly “practical” to basic

research, both in engineering and science. MIT’s repu-

tation as a fi rst-rank engineering school began to be

matched by its standing in the “basic sciences:” physics,

chemistry and biology. But importantly, the interac-

tion of industry with the university continued. Many of

the faculty consulted with companies, using their “20

percent of time allowed for outside professional activi-

ties” (standard policies in many universities) to spend

time in company laboratories.

During this period, a number of faculty members

and MIT researchers started companies, many of which

grew into major corporations. Examples include: EG&G,

founded in 1947; Digital Equipment Corporation,

founded in 1957 (and initially fi nanced with a $75,000

investment by American Research and Development,

“the fi rst venture capital fund”); Amicon Corporation in

1962; Bose Corporation in 1964—and many others.

Quite naturally, the majority of the companies were

in the Boston region benefi ting from geographical

closeness to their founding faculty scientists. Indeed,

MIT has a rule that faculty fi rms should be near the

university. Many community hospitals have similar

rules that require house staff to live in close proxim-

ity. This not only makes commuting easier, it also has

the positive eff ect of locating staff and their families

in the community.

REGIONAL INNOVATION: BOSTON AND MIT

Innovation

fall • winter 2008/2009 13

global pipelines. Leaders, while certainly impor-tant, required dedicated followers. Th e most suc-cessful places forge a consensus or shared under-standing about what is possible, what needs to be done, and even how to best organize an activity and realize value. Th e most successful places do not stop, but instead constantly look for improve-ment and new opportunities.

THE CHANGING ROLE OF UNIVERSITIES

Universities are important actors in local econo-mies. Th eir relationships with for-profi t activities are becoming more direct and focused. Institutions of higher education seek to create eff ective transfer mechanisms that effi ciently increase the stock of knowledge, promote social or economic develop-ment, and increasingly enhance economic competi-tiveness. Yet formal technology transfer is certainly less important than teaching, research, and public service —the traditional activities of universities. Universities exist for the very purpose of creat-ing, augmenting, verifying, and diff using knowl-edge—the most important resource in the modern economy. Knowledge is an ethereal concept that is perhaps best considered as embodied in what econ-omists call human capital, or individuals who have received the benefi t of education and who are able to appreciate, integrate, and augment knowledge and engage in innovative activity. In practice, edu-cation is a human cognitive activity, a relational pro-cess in which questions, answers, clarifi cations, and other information fl ow. Innovation is predicated on the creation and application of knowledge. Appreciation of academic discoveries requires a shared vision of what the potential might be and how best to move the technology forward, and oft en requires devising a terminology and a conceptual schema even to talk about the discovery and its mar-ket potential. By constructing a common, shared meaning of the technology through frequent inter-action with academia creates questioning, skepti-

cism, and creative playfulness—what the literature describes as the transmission of tacit knowledge. Places look to their local universities as driving forces in the knowledge economy, yet universities are part of a local context. Th e benefi ts of the univer-sity may be absorbed by the local community and take root or may simply slip away. Universities, like other economic entities, require complementary assets to realize their potential and supply chains to provide them with resources. Th e complementary assets are companies with absorptive capacity both to employ skilled labor and to use research fi nd-ings. If receptor businesses do not exist locally, then anything a local university produces will become an export to other places: Graduates will leave for employment elsewhere and research results will benefi t distant companies. Th e supply chain for higher education certainly involves signifi cant continuing investment in physi-cal plant and equipment. While it is possible to con-duct some activities virtually, thus saving the cost of a physical plant, universities are important social spaces, and a university’s infrastructure has impor-tant symbolic value. Moreover, universities require a steady supply of students who have the requisite background to be able to engage in higher education.

PREPARING FOR INNOVATIVE ECONOMIES

Innovation has become recognized as the founda-tion for all types of places to succeed. Th e ability to create economic value by exploiting technological progress, introducing new products to the market, redesigning production processes, or reconfi guring organizational practices is critical to productivity for companies, industries, and places. Innovation, however, is not limited to new science-based or high-technology industries. Innovation is equally transformative in existing mature industries and provides a means for competitive advantage. When considering the development of indus-trial clusters there are two broad and diametrically

Innovation

14 science progress

opposing models. One model, practiced in East Asia, relies on government dictating the growth of designated science cities. Th is is a very top-down approach to economic development that has been successful in Singapore and Taiwan: Th e central government dictates that a specifi c location will have a concentration of R&D and it accomplishes this in a relatively short period of time. Th e verdict is still out as to whether these locations will be suc-cessful at creating a sustained competitive advan-tage given that innovation is more complex than simply conducting R&D. Th e other model occurs in the United States, and to varying degrees in other market economies, and it relies on self-organization and local initiative. In market economies the central government cannot dictate the actions of private companies, but may only off er incentives to encourage companies to locate and invest in local research and development. Th e closest the United States has to a government-induced cluster is Research Triangle Park in North Carolina, which was the result of state and local government actions. Research Triangle Park, how-ever, was a very long undertaking beginning in the

Places look to their local

universities as driving

forces in the knowledge

economy, yet universities

are part of a local context.

1920s, and it is now the largest and most successful research park in the world. While there are many other examples of government trying to build clus-ters in market economies (see article on page 35), the results typically look very diff erent from what was originally intended. While economic development offi cials and gov-ernment planners want to defi ne long-term strate-gies, it is diffi cult—if not impossible—to predict scientifi c discoveries, new technologies, and new opportunities. IBM, Inc., a mainframe computer industry leader in the second half of the 20th century, famously underestimated the potential of the per-sonal computer industry, creating an opportunity for new companies to create entirely new informa-tion technology hardware and soft ware industries and companies—think Dell Inc., Apple Computer Corp., and Microsoft Corp. But then these and other industries and companies largely failed to predict the potential of the Internet and how it would change the way we access information and communicate—something IBM used to its advantage to reinvent itself as a largely Internet-driven IT services com-pany. Policymakers couldn’t possibly have predicted any of this, but they could and did till the soil that allowed all this innovation to fl ourish. Successful entrepreneurs make and remake their own luck, adjusting and adapting to survive. Instead of wisely considered, far-sighted solutions, entre-preneurial activity is by necessity messy, adaptive, and unpredictable. Economic development strate-gies need to be equally adaptive.

Maryann Feldman is S.K. Heninger Distinguished Professor of Public Policy at the University of North Carolina, Chapel Hill.

Innovation

fall • winter 2008/2009 15

FINANCING SCIENCE

THE 2008 PRESIDENTIAL CAMPAIGN prompted signifi cant discussion about the role of the federal government in supporting innovation and com-petitiveness, especially in strategic areas such as alternative energy, globalization, and heath care—building on an already vigorous debate about the role of the federal government in catalyzing inno-vation. Several eff orts, such as Rising Above the Gathering Storm, led by the National Academies, and A Roadmap for American Innovation, led by the Council on Competitiveness, produced rec-ommendations aimed at supporting the science, technology and business competitiveness of the United States in a complex world. Th ese serious discussions about federally inspired innovation take on even more signifi cance amid the economic meltdown now faced by the American people and our government. We know,

however, that innovation does not happen at the national level. It happens in individual companies, communities and regions, where business, govern-ment, academic leaders and policymakers collec-tively address the relevant challenges, operational needs, and regional strengths of local, national and international businesses. As the new Obama administration develops its innovation, economic development, and work-force policies, it should look to build and sustain regional and networked eff orts, rather than only craft ing broad national policies. Th e work of inno-vation can be inspired or stymied by the regulatory, operational, and funding mechanisms adopted by the federal government and Congress. What has limited prior administrations is the failure to lever-age federal investments and initiatives conducted throughout the country—oft en based on the

The Federal Role in Catalyzing InnovationBeyond the Beltway and Through the Networked Economy

By Richard Seline and Steven Miller

SP

Innovation

16 science progress

aspirations of local business, civic, academic, and entrepreneurial interests—and align them around a highest common denominator for transforming the economy and society. We live in a networked economy that is not refl ected in federal grants and initiatives that are distributed across the country into silos of community needs, and therefore fail to leverage knowledge, experience, and acceler-ated sources of innovation. Th is view of the primacy of federal-regional innovation partnerships stems from more than 20 years of work in assisting local, regional, state, and federal governments in building strong technology-driven economies. Over this period, there has been a shift in the thinking about the development and support of local industry clusters. As originally articulated by Harvard University’s Michael Porter in the late 1980s, traditional cluster theory argued that all assets, companies, and business- and fi nan-cial-related value chains must be located in a con-tained regional area. In our observation, however, industry clusters no longer require the presence of all facets of research, operations, management, and distribution in order to contribute to the strength of a regional economy. In today’s global and domestic hubs-and-nodes clusters, research and discovery is based on a spe-cifi c institution or industry campus in one location, manufacturing in a second node, and distribution hubs in other places. Rather than focusing on spe-cifi c physical assets, the most important element for successful regional, innovation-led economic development is the leveraging and networking of regional assets to best deploy the human talent—the “know-what and the know-how”—that is cen-tral to competitiveness and wealth creation. Our national economic strategy has been based for far too long on individualized responses to individu-alized communities, never considering the link-ages of knowledge or competency in contributing expertise that must be networked to hasten com-petitiveness and innovation in and among “com-munities of practice.”

In the three case studies that follow, we high-light examples of the federal government catalyz-ing regional or networked innovation through the development of new models of collaboration. Some of these, such as the U.S. Department of Labor’s pio-neering Workforce Innovation in Regional Economic Development, or WIRED, initiative, are focused on workforce strategies in specifi c regions across the United States. Others, such as the Central Intelli-gence Agency’s In-Q-Tel venture capital program and the National Cancer Institute’s advancement of cancer cure initiatives, are focused on address-ing longstanding national security/intelligence and medical Grand Challenges. All three initiatives, however, share the same goals of building innovative partnerships in order to eff ect a transformation in the delivery and impact of federal services. Th e Grand Challenges confronting America demand new frameworks for engagement—not from a command-and-control central system but through a networking of networks across the spec-trum of U.S. ingenuity, creativeness and entrepre-neurial spirit. In an uncertain economy undergoing sometimes agonizing restructuring of business and government operating models, these networked partnerships and frameworks should suggest best practices for the Obama administration, Congress, governors, and mayors—and above all for the citi-zens who will benefi t from these transformative sys-tems of collaboration, innovation, and delivery.

CENTRAL INTELLIGENCE AGENCY

In-Q-Tel

Th e Central Intelligence Agency in the late 1990s needed to develop innovative technologies to meet the demands and needs of the post Cold-War era but faced the challenge of how to do so in a rapidly changing marketplace. Ruth David, then head of the science and technology directorate, understood that commercial and consumer markets were so highly active in both discovery and the att raction

Innovation

fall • winter 2008/2009 17

of the best product development minds that the U.S. intelligence community could no longer rely on being the fi rst-in-line for obtaining consistently innovative tools, nor recruiting the workforce and skills required to keep pace. Tasked with identifying and accelerating a new framework—one that would be highly transparent and signifi cantly more public than ever before—David determined the agency should eff ectively partner with the private sector, including research universities, angel and venture capital investors, and emerging technology companies. In this way, the CIA could leverage government, academic, entre-preneurial, and private sector resources toward novel products, services, and even skilled work-force development objectives. Based on a request from the Science and Technol-ogy Directorate to “consider all options—even those that have not been on our list of models in the past so that we can signal our seriousness and commit-ment to att ract innovators and their innovations,” a small expert team benchmarked all previous federal models, among them laboratories, federal-funded R&D centers, outsourced programs, and initiatives such as the Defense department’s Defense Advanced Research Projects Agency, or DARPA. Th e team then assessed the return-on-investment as well as the risk-mitigation scenarios of each of these concepts. Th e outcome: an operational plan for the Central Intelligence Agency’s In-Q-Tel project—a fi rst-ever collaboration among the U.S. intelligence community, academic research, and the entrepreneurial commu-nity. Th e In-Q-Tel framework identifi ed approaches for the selection of key technologies, risk manage-ment in an environment that sought to harness both the intelligence community’s culture of secrecy and the entrepreneurial focus on openness and transpar-ency, along with the criteria for investing the $50 mil-lion per year in dual-use products and services. In-Q-Tel now makes investments in technolo-gies to create sustainable solutions for the national intelligence community. In-Q-Tel measures impact through the value of investments to deploy technol-

ogies, ability to strengthen nascent companies, and long-term fi nancial returns on such partnerships versus att empting to only value in-house resources and capabilities. Th e lesson for the Obama administration: Not all capital and research capacities rely solely on the lead by the federal government. If federal funds are harnessed toward a focused but characteristically venture capital-style investment model, then the results are new resources (talent, knowledge, dollars) deployed in strategies that mitigate confl icts of inter-est while accelerating solutions. Th ese results are not just useful for the CIA’s spycraft needs, but also for alternative energy, information-based government services, and water-environmental challenges.

NATIONAL CANCER INSTITUTE

Accelerating advancements in cancer cures

Since the 1960s’ endeavor to wage a “war on can-cer,” NCI has dedicated signifi cant resources to support an increasing number of Comprehensive Cancer Centers across the United States. Th ere are now some 64 centers across the country that are designated on the depth of research and capacity to engage the public in education and training, with an annual budget of more than $4 billion distributed to these centers, other designated programs, and the research community. In 2003, however, then-NCI Director Andrew von Eschenbach decided to try something diff er-ent. He tasked the entire NCI community (public, private, philanthropic, entrepreneurial, and ven-ture capital-based) to “eradicate cancer by 2012,” a moon-shot commitment for ending a disease cost-ing Americans, employers, and the federal budget a minimum of $500 million per year in health insur-ance payments, treatments, and lost productivity, as well as the loss of lives that could be prevented through a number of new discoveries. Despite signifi cant successes over the 40-year history of the centers, von Eschenbach convened a

Innovation

18 science progress

roundtable in 2004 to examine the “scientifi c, soci-etal, cultural and economic barriers to the success of fi ghting cancer in order to get a head start on his 2012 goal. Th is forum, titled “Leveraging Multi-Sector Technology Development Resources and Capabilities to Accelerate Progress Against Cancer,” brought together a wide variety of leaders from gov-ernment, the academic-medical community, and the private sector, including representatives from biotechnology, pharmaceutical, information tech-nology, and investment companies. In addition, the forum included state and regional economic and innovation-based development enti-ties and organizations, each bringing its perspective on networking relationships and teams for immedi-ate results in applied-translational research and com-mercialization. Th ere were four primary challenges that roundtable members were asked to address:

Identify key barriers that stand in the way of opti-• mizing the timely transfer, development, and commercialization of advanced biomedical tech-nologies, including incremental and disruptive technologies, to accelerate progress against cancerExplore key regional, national, and other models • whereby advanced biomedical technologies are successfully identifi ed, transferred, and ultimately commercialized for broad patient benefi tBrainstorm and evaluate novel concepts to facilitate • the strategic alignment of resources and capabilities from all sectors to remove mission-critical barriers and design novel, innovative approaches to speed the development and delivery of new diagnostics, preventatives, and treatments for cancerSuggest actions that can be undertaken by the • appropriate sectors in alignment and coordina-tion through networked, shared knowledge sys-tem investments

Aft er a series of panels outlining some of the chal-lenges in matt ers such as drug development, fund-ing gaps, eff ective multidisciplinary collaboration, regulatory requirements, technology, and other

matt ers, the group identifi ed four primary obstacles to developing eff ective and innovative cancer tech-nologies: Th e need to build eff ective cross-disci-plinary collaboration; the need to bridge the gap between late discovery and early development of diagnostics and therapeutics; the need to develop new data standards and information sharing; and the requirement to build eff ective cross-cutt ing technology platforms. Just as the NCI Roundtable was driven by the need for new and eff ective public-private partner-ships that could apply a focused and highly lever-aged solution to a specifi c task, the suggested out-comes put a high priority on the need for a new governance structure that could eff ectively address funding, technology, and multi-use eff orts across a wide geography. Two proposed solutions emerged from the NCI analysis and gathering. First was the recommendation that the Depart-ment of Health and Human Services, NCI, the White House, and 10 major philanthropic and ven-ture investment leaders combine resources to create a $3 billion Advancement Accelerator for Cancer Cures, which would work much like the In-Q-Tel model but focus on networking solutions in an open-source teaming sett ing. Second was the deci-sion by General Electric Co. and IBM Corp. to act on that decision by committ ing to invest adjacent to several of the comprehensive cancer centers and regional innovation “eco-systems” in areas of bio-informatics, biomarkers, and bio-imaging. Th ese three sub-technology challenges were declared critical not only to cancer, but also to research and discovery of other diseases. Th erefore, with a proposed $3 billion venture fund and new networks of collaborative commer-cialization, the opportunity to eradicate cancer by 2012 became perhaps more achievable than in prior strategies and initiatives. Although the venture fund was not approved by the Bush White House for further exploration, the venture and philanthropic communities began to link their interests and to drive new investments in market-ready solutions.

Innovation

fall • winter 2008/2009 19

Lessons for the Obama administration: Bringing together all the interested parties to defi ne the inno-vations necessary for addressing a core challenge or targeting a specifi c opportunity, and then in turn putt ing the correct level of resources and gover-nance together for implementation, can enable the federal government to be a true catalyst for demonstrative transformation of a long-standing costly issue to American society and the economy. In turn, by fi rst examining the value chain of the current delivery system, then tweaking or whole-sale revamping the system through new technolo-gies, partnerships and collaborations, federal intent and goals can meet with accelerated timelines and responses beyond the traditional yearly budget objectives or even four-year political cycles.

DEPARTMENT OF LABOR

The Workforce Innovations in Regional

Economic Development program

Every year, the U.S. Department of Labor distrib-utes nearly $18 billion through formula grants and contracts to train, retrain, and otherwise assist employees and employers in developing new skills to meet the demands of the marketplace, or worse, to respond to major dislocations, off shoring, and negative trade scenarios. And every year, through a program under the Workforce Investment Act, governors and, in turn, state employment and labor agencies acting in concert with local workforce investment boards allocate these federal funds intended to ensure the nation’s competitiveness and skills capabilities of all citizens. Problem is, this established public workforce system is increasingly misaligned to the needs of industry, job creation, sustainable skills certifi ca-tion, and a host of other challenges confronting our nation’s economy, which is more att uned to new global business models than the traditional manu-facturing, smokestack days when most of the fed-eral programs were designed. Simply put, ensuring

at one and the same time a safety net for those most vulnerable to the ill consequences of globalization and focusing on the transformative employment, career, and certifi cation of competencies required a diff erent set of tactics and mechanisms. A new approach was required to build upon con-gressional mandates given to the Department of Labor. Th ese included the Workforce Act of 1998, which required a role for the private sector in the operation of regional workforce eff orts, and Com-munity-Based Job Training Grants, which sought to create partnerships between community and tech-nical colleges and the public workforce system. Despite these recent eff orts at labor market reform—supported by both Democratic and Republican administrations—there remained the clear recognition that the workforce system, broadly defi ned to include public- and private-sector and academic programs, was not suffi ciently and quickly responsive to address the needs of both businesses, industry clusters and individual workers in the global economy. New partnerships had to be cre-ated to support, at the regional level, the successful development and deployment of human talent that would drive innovation and support the competi-tiveness of American companies. In 2005, the Department of Labor Employment and Training Administration launched the WIRED initiative, which is designed to bett er align eff orts in workforce and economic development with regional innovation capacity building. In addition, WIRED’s unique request for proposals suggested that regions should broaden their own workforce perspective to include high schools, four-year and graduate-degree universities, community colleges, philanthropic and faith-based organizations, and most important, the emerging technology and entrepreneurial sectors fostering and catalyzing innovations and new industries. Over an 18-month period, 40 regions throughout the country have been awarded WIRED grants total-ing $350 million, and a new national pilot project commenced to determine how best to realign and

Innovation

20 science progress

transform the structures, relationships, networks, and delivery systems for addressing global challenges and innovation-based opportunities. Th e new program at a stroke reframed how policymakers approached the public workforce system and renewed their com-mitment to seek transformations at both the regional and the federal levels of government. For too long there has been a disconnect between federal workforce training eff orts, led by the Employ-ment and Training Administration, and federal eco-nomic development eff orts, led by agencies such as the Economic Development Administration and the Department of Commerce’s National Institutes of Standards and Technology programs, as well as other federal interests at the departments of Energy, Defense, Transportation, and the Small Business Administration. WIRED sought to address this chal-lenge by creating replicable structures and incentives that rewarded joint funding by multiple local, state and federal agencies, thereby breaking down tra-ditional barriers of separate fi nancial mechanisms and evolving the partnerships between federal and regional delivery systems for improved, real-time solution identifi cation and response. Other relevant eff orts at building innovative local and regional workforce and economic development partnerships included several WIRED institutes, which have been held throughout the country. In April 2007, for example, the Institute on Alternative Energies, held at the National Renewable Energy Laboratory in Golden, Colo., brought together 100 regional stakeholders from industry, academia, and government, with federal offi cials from the depart-ments of Energy, Labor, Defense, Agriculture, and Transportation, and the Environmental Protection Agency, to discuss best practices and new develop-ments in renewable fuels—the science, technology, commercialization, business development, and ultimately the human capital and skills. Th e impact from the two-day WIRED Institute was the forma-tion of a multi-agency response on Green Technol-ogies, Green Jobs, and the enhancement of some 68 agencies focused on enterprise and entrepreneurial

development forming a more coordinated response in WIRED regions as a further test-bed for collabo-ration on resource allocation and performance. Finally, WIRED sparked the need for increased access to real-time data and knowledge sharing, opportunities to network the best minds across the country within and beyond WIRED communities and institutions, and to inspire new innovations in economic-workforce products and services. Th rough two tools—the Workforce and Innovation Tech-nical Solution Toolkit and the Innovating Nation Internet-based social collaborative network—the WIRED regions and some 1,500 individuals now have access to more robust data and information on the economy, demographics, economic and innova-tion investments—a whole host of resources never assembled in this manner to assist decision-making, cooperation, and allocation of time and money toward achieving the mission of WIRED nationally and the aspirations and performance metrics locally. Lessons for the Obama administration: When given the platform, rules of engagement, metrics, and the latitude to “own their destiny,” Ameri-cans will identify the collaborations and pathways needed to resolve Grand Challenges and day-to-day operational issues plaguing governance by a Belt-way mindset. Th ese new innovative frameworks for coordination and partnerships at the local and regional level oft en are not measured as quickly in Washington as in states and communities, especially in areas of job creation, employment, and business decision-making, which means these WIRED pro-grams are likely to boost U.S. economic competi-tiveness more creatively and more decisively than the plethora of outdated 20th-century workforce development programs. Further, by coordinating workforce and eco-nomic development at the federal level, governors and mayors can be free to explore and implement new operational plans within their respective geo-graphic domains. Indeed, precisely because WIRED encourages crossing boundaries—including several state lines—the program allows policymakers to

Innovation

fall • winter 2008/2009 21

explore the demand-side of the equation over the supply-oriented mechanisms that historically have been limited by Washington federalism. In short, WIRED increases collaboration among elected and appointed offi cials and their common constituen-cies of employees and employers, enhancing the forces of economic growth by sharing a common accessibility to talent, skills, and know-how.

CONCLUSION AND RECOMMENDATIONS

In this period of economic meltdown and uncertainty, it is imperative that the government create a frame-work to unleash the competitiveness and entrepre-neurial spirit of community and regional ideas and solutions. Th is calls for new federal-regional Inno-vation Collaboratories—intermediaries that con-nect the reach and depth of the federal mission with the goals and opportunities of local institutions, organizations, and individuals inclined to work as a team in new ways and on new outcomes measured by whether we resolved problems bett er and faster and less by whether the money was spent according to the demands of the bureaucracy. Th e Obama administration, in partnership with the Offi ce of Management and Budget, key congres-sional committ ees and staff , federal agencies, and state and local governments, should review all rules, regulations, and barriers that limit the ability to con-struct new frameworks for action and implementa-tion as well as to create these federal-regional Innova-tion Collaboratories. Th is will enable the leveraging of government resources and co-investment oppor-tunities with academia and the private sector. To focus this transformation, we suggest choos-ing two or three Grand Challenges—competitive skills, alternative energy, water and the environment, or health care—to target the best private sector/academic/entrepreneurial/philanthropic localized expertise and creative thinking in partnership with White House policymakers, federal department leadership and program staff . All three of our case

studies suggest that no matt er the sett ing, there is a willingness among government policymakers at all levels to engage in out-of-the-box design and imple-mentation of structures and governance in order to address 21st-century challenges that no longer can be eff ectively resolved without new paradigms. Th is leads us to our fi nal recommendation: Th e Obama administration should swift ly embrace an open-source innovation model for innovation-based economic development that establishes pathways for any person, in any institution or garage, with the interest of the country and its future, to become a member of a national and regional team set to expe-dite and accelerate these new Collaboratories around Grand Challenges. In tandem with new investments in ubiquitous broadband, new emerging wireless communications technologies and collaborative online tools for research and innovation, a national Open Source Innovation Initiative should become the platform for testing ideas with pilot resources. Th e Obama administration will have a unique opportunity to break from the stale research, devel-opment, and commercialization model of long-term planning and tardy approvals by responding to a crying need to “launch a new moon shot.” Our nation has neither the time nor the full fi nancial capital to rely on the traditional ways of encouraging innovation, as is so clearly evident today in national security, health care, and workforce development. Fortunately, we have at hand new, 21st-century pathways to leverage and exploit—based on exist-ing success through proof of previous pilots. If we are to both manage ourselves through an economic crisis and at the same time leap forward to help the current and next generation of Americans thrive and prosper, then it is time to unleash innovation in the public sector from within federal agencies already prone to be more innovative if not for constraints placed on them by old models and old metrics.

Richard Seline is chief executive and principal at New Economy Strategies LLC. Steven Miller is a consultant for New Economy Strategies

Innovation

22 science progress

FINANCING SCIENCE

THE PITTSBURGH LIFE SCIENCES GREENHOUSE was formed in 2000 as a focused incubator to pro-vide capital investments and customized company formation. A focused incubator provides deep knowledge of global industry trends, national net-works, and corporate collaborations to identify investment opportunities. Th e Pitt sburgh Life Sci-ences Greenhouse, or PLSG, is solely focused on biosciences companies with promising innovations in the following concentrations: biotechnology tools, diagnostics, health care information technol-ogy, medical devices, and therapeutics. As western Pennsylvania’s only investment orga-nization with a pure life sciences focus, PLSG serves as an investor conduit for life sciences companies. Additionally, PLSG promotes the region’s biosci-ences innovations and achievements through media relations, industry events, and one-on-one relation-

ship building with investors across the United States and around the world. PLSG grew out of a 2001 initiative, led by then-Pennsylvania Gov. Tom Ridge and the Pennsylvania legislature, which took the bold policy step of investing its share of the state’s portion of the $206 billion tobacco sett lement money into health-related programs. As part of this eff ort, the state took a hard look at where Pennsylvania excelled and where it was fall-ing behind in the biosciences. Th e state’s strength in research wasn’t translating into funding for start-up companies. Patent creation was on par with or out-paced many competitor regions, yet Pennsylvania’s share of venture capital lagged behind dramatically. Pennsylvania responded by creating three inno-vative programs to fuel growth in the life sciences industry: the Life Sciences Greenhouse Initiative for very early stage life sciences start-ups and regional

Pittsburgh’s Targeted IncubatorTaking Innovation to the Next Level

By James F. Jordan and Paul L. Kornblith

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workforce plan development projects; the CURE grants program to help maturing start-ups access the next round of development capital; and the funding of venture capital groups in the state to help fi nance these start-ups as they begin to register sales and profi ts. In the pages that follow we will examine each of these programs as they relate to the emergence of the Pitt sburgh Life Sciences Greenhouse as an inno-vation powerhouse in western Pennsylvania.

THE LIFE SCIENCES GREENHOUSE INITIATIVE

Th e Life Sciences Greenhouse Initiative was one of the programs created to successfully commercial-ize university technologies and was designed to be one of the very few state/university/industry- funded programs focused exclusively on the life sciences. Th e LSGI created three regional Life Sci-ences Greenhouses, with each Greenhouse given the mandate to leverage the unique strengths and opportunities in its region. To achieve their man-date, the Greenhouses were empowered from the very beginning with fl exibility in creating programs to increase life sciences commercialization through accelerated technology transfer, company forma-tion, and sustainable company growth.

Western Pennsylvania was ripe for accelerated company formation and commercialization of life sciences companies because of the University of Pitt sburgh and Carnegie Mellon University, the region’s premier research institutions, which were consistently securing substantial federal research funds. Despite the impressive level of research sup-port and activity, the level of commercialization lagged well behind regions that had established a sustainable life sciences industry. Th e ability to commercialize opportunities gen-erated by research at the universities was hampered by the fact that the region att racted only one-tenth of the venture capital expected based on the mag-nitude of federally funded research. An absence of local venture capital fi rms focused on the life sci-ences, and a regional lag in competing for Small Business Innovation Research grants and other non-VC commercialization funds, resulted in a new life sciences company formation rate of only two or three companies per year. Th e Pitt sburgh Life Sci-ences Greenhouse set out to fi x this problem. PLSG focuses on guiding researchers, entrepre-neurs, and emerging companies through the diffi -cult challenges faced in the early stages of company development. By helping them build sustainable business models and secure capital investments,

Source: Pittsburgh Life Sciences Greenhouse.

Individual Entrepreneurs

University Research

Company IP

Imported Technology

Innovation Commercialization

Seed Early Stage Growth Maturity/Exit

Simulator grants

Technology development fund

Early stage fund

Executive associate program

Workforce development

Non-federal grants

SBIR training

Resident entrepreneur

Interim executive program

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Executive in residence program

Venture capital partnerships

Pittsburgh Life Sciences Greenhouse Investment Funds

Angel Funds

New Venture Capital

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24 science progress

the Greenhouse makes it possible for companies to deliver biomedical innovations to the marketplace more quickly and effi ciently than they ever could alone. In addition to nurturing young companies, we fuel the expansion of life sciences companies in the growth and maturity stages by supporting new product and market developments and by introduc-ing them to new investors. People with deep life sciences commercialization experience are a core att raction of venture capital to the region. Investors want to know that people who have “been there, done that” are managing their investments. In that spirit, PLSG over the years has signifi cantly adapted our existing Executive-in-Residence program, adding new elements on a regular basis. Th e success of this program is now a foundational component of the new PLSG Execu-tive Program because of two key aspects—economic development know-how and industry-specifi c know-how. Our economic development skills help mentor companies through the formulaic steps necessary to start a company, preparing companies with the com-ponents they will need to obtain outside capital. Having an executive as an account manager to foster access to economic development programs is clearly helpful and effi cient. But equally important is having industry-specifi c knowledge to accelerate a company’s impact within its business sector. Exec-utives who have “been there, done that” are deeply knowledgeable in the industry’s commercialization strategies and tactics. Th ey bring their “Rolodexes” of industry relationships to the program to acceler-

ate access to industry insiders and forge relation-ships with future partners and acquirers.

The Focus on Life Sciences

In 2007, the U.S. gross domestic product was $13.8 trillion, spread over hundreds of industry specialties. U.S. health care accounted for $2.3 trillion (16.6 per-cent) of GDP, and the manufactured products side of health care, called life sciences, was estimated to account for $848 billion or 6.1 percent of GDP. Life sciences products are categorized into fi ve verticals: pharmaceutical, diagnostics, medical devices, bio-technology, and health care information technology. In short, our executives need to be experienced in 6.1 percent of the economy, whereas at traditional economic development organizations, with their broader charters, executives would need to be expe-rienced in hundreds of verticals to achieve similar results. Th is is the value of focused incubators such as PLSG. As mistakes are the mother of experience, our executives ensure that companies do not encounter the same stumbling blocks that they experienced. Th is model also has been validated independently by the franchise industry. Its value proposition, simi-lar to that of our Executive Program, is that people choose franchising to start a new business because it oft en requires a smaller investment and less risk than the cost of establishing a new venture. People who develop these models are industry experts. Our Executive Program provides a similar benefi t and as it continues to evolve it will help the local life sci-ences community grow even stronger in the future. Th e next step is to fi nd capital for these com-panies. With federal Small Business Innovation Research grants a company can secure vital capital at its earliest research and development stages. Our innovative SBIR Advance Program teaches a com-pany how to pursue SBIR funds eff ectively so that it can rapidly achieve its technology commercial-ization milestones. Developed for researchers and entrepreneurs and launched in 2002, the Pitt sburgh Life Sciences Greenhouse SBIR Advance Program

• The world’s 17th largest economy with

$510 billion in gross domestic product

• Six of 10 major U.S. markets within 500 miles

of its capital

• Third-highest number of colleges and

universities

PENNSYLVANIA ROLE MODEL

Critical Mass and Key Benchmarks

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fall • winter 2008/2009 25

is the only western Pennsylvania resource dedicated to the specifi c needs of life sciences entrepreneurs. SBIR Advance is designed to enhance researchers’ existing understanding of the SBIR Phase I, Phase II, and Fast-Track proposal processes. Phase I focuses on funding a company’s proof of concept and fund-ing ranges from $60,000 to $200,000. Th ese propos-als generally take six to 12 months to complete. Phase II focuses on developing a working prototype prod-uct. Phase II grants generally are funded in a range of $500,000 to $1,000,000 and can take up to two years to complete. A Fast-Track proposal combines a Phase I and II request all at once. Th e advantage to the company is obvious but this proposal is less likely due to its more risky nature. During a two-day group workshop and the fol-lowing one-on-one consultations, our industry experts guide companies through the proposal pro-cess, with training and scientifi c and editorial review of federal grant applications. Participants who att end all required sessions receive these extensive consulting services free of charge. Th e benefi ts of the PLSG SBIR Advance Program include: expert instruction in the effi cient development of SBIR

funding applications; a track record of improving applicant success rate; and constant, individualized support throughout the application development, submission, and post-award notifi cation process. Since inception, the PLSG SBIR Advance Pro-gram has assisted nearly 100 companies with their federal grant strategies. To date, these companies have received more than $17 million in federal grant funding. Locally, companies such as ALung Technologies Inc., which received more than $3 mil-lion, Separation Design Group ($1.7 million), and COHERA Medical Inc. ($1.8 million) funded 10 percent to 50 percent of their capital to date through these programs.

Workforce Development Program

A prepared workforce will help regional companies keep pace with market demand. To accomplish this goal, PLSG off ers direct assistance to our region’s growing businesses and leads initiatives to prepare the western Pennsylvania workforce for emerging career opportunities in the life sciences industry. PLSG’s Workforce Development Program is cus-

• Identify comparative advantages in science,

technology, and innovation that sustain and drive

your state economy such as life sciences, information

technology, manufacturing, or agriculture

• Find sources of capital needed to invest in research,

business incubation, and people

• Connect the capital and the ideas by:

– Aligning research interests with opportunities for

commercialization that will spark investor interest

– Harvesting sources of innovation broadly

among universities, entrepreneurs and dormant

intellectual property housed in private industry

– Importing innovation from outside the region

• Connect people with the capital and ideas by:

– Attracting the best researchers to develop

regional centers of excellence

– Hiring industry-specifi c business talent to

provide key commercialization skills and access

to venture capital investment and mergers-and-

acquisitions experience

• Provide the physical space necessary for innovation

and commercialization to thrive by:

– Creating the best research space to draw the

best talent

– Developing cost-eff ective incubation space

and services

BASIC TENETS TO STATE-DRIVEN, INNOVATION-LED ECONOMIC DEVELOPMENT

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26 science progress

tomized to life sciences workforce challenges—whether recruiting new employees or expanding the skills of existing talent. Th e Greenhouse connects life sciences compa-nies to educational partners and funding sources for cost-eff ective workforce development. Our workforce development program includes admin-istering a fi rst-of-its-kind $2.4 million federal grant from the U.S. Department of Labor to train western Pennsylvania workers for the life sciences industry. PLSG is working in partnership with Community College of Allegheny County, Lyceum Group LLC, and the Pitt sburgh Technology Council. To date, the workforce program has trained more than 6,000 workers, far exceeding its original goal of 400. As part of our eff orts to foster economic oppor-tunities in the life sciences, PLSG also is facilitating the implementation of a full-scale Mobile Labora-tory Program to serve the region’s Science, Tech-nology, Engineering, and Mathematics, or STEM, educational and workforce development needs. Mobile laboratories are self-contained, traveling laboratories that allow for student participation in laboratory-focused biosciences investigations on board. Mobile laboratories already are successfully serving tens of thousands of students in places such as Arizona, Connecticut, Georgia, Iowa, Massachu-sett s, Maryland, North Carolina, Texas, Virginia, South Dakota, and portions of Pennsylvania out-side western Pennsylvania.

The Incubator

Th e PLSG Incubator off ers cost-eff ective space to qualifi ed seed and early-stage life science compa-nies, including those relocating to western Penn-sylvania. Th e PLSG Incubator off ers far more than preassembled cubicles: Incubator companies have access to amenities that free them from the more tedious tasks of growing a company, and these fi rms will be instantly placed in the midst of a supportive early stage business community. Off ering compa-nies world-class meeting rooms for investor presen-

tations, the Incubator provides computer, commu-nications and Internet infrastructure that present an image of stability and professionalism to investors. Access to the Executive-in-Residence pool off ers support and immediate advice to the sometimes-secluded entrepreneur. Young start-up companies also benefi t from the close proximity of neighboring life sciences start-ups and the experts of PLSG, which has two Incuba-tor facilities equaling 20,000 square feet of available space for growing companies. Th e main Incubator, PLSG East, is adjacent to PLSG’s administrative offi ces. It is a 13,000-square-foot facility consisting of 40 percent modern wet lab space and 60 percent offi ce space. Th e second facility, PLSG West, is 7,000 square feet of mostly laboratory space. Th e benefi ts of the PLSG Incubator include wired offi ces for data and voice communications, basic utilities, and fl exible lease terms. All Incubator tenants have access to small and large conference rooms, offi ce furniture, offi ce equipment, and a kitchen, balcony, and ample tenant and visitor park-ing. Industry-specifi c neighbors or building tenants include Th ermoFisher, the University of Pitt sburgh, the McGowan Institute for Regenerative Medicine, Novitas Capital, and UPMC Health System. Th e PLSG Incubator has a prime Pitt sburgh location within the Pitt sburgh Technology Center, which conveniently places it between Oakland’s university cluster and Downtown Pitt sburgh’s legal and fi nancial center. It also puts us in the Greater Oakland Keystone Innovation Zone, which off ers fi nancial incentives to life sciences companies. Th e Greater Oakland Keystone Innovation Zone is a partnership of collaborating organizations, includ-ing: Allegheny Conference on Community Devel-opment and Affi liates, Allegheny County Depart-ment of Economic Development, Carnegie Mellon University, Idea Foundry, Innovation Works, MPC Corporation, Pitt sburgh Life Sciences Greenhouse, Pitt sburgh Gateways Corporation, Pitt sburgh Technology Council, Th e Technology Collabora-tive, University of Pitt sburgh, University of Pitt s-

Innovation

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burgh Medical Center, and Urban Redevelopment Authority of Pitt sburgh. Entrepreneurship oft en begins with an individ-ual and an innovative idea, but it takes a team eff ort to create a marketable product and a sustainable business. Th e Pitt sburgh Life Sciences Greenhouse gives western Pennsylvania’s entrepreneurs a reach into the global biotechnology industry. PLSG leads collaborations that support our regional industry’s growth and benefi t the individual company. Th ese eff orts include access to capital investment net-works. Th e Greenhouse develops and maintains venture capital partnerships to make funding more accessible for our region’s life sciences companies. Firms such as Pitt sburgh’s Adams Capital Manage-ment, Birchmere Capital, Draper Triangle Ventures, and Novitas Capital, Boston’s Techno Ventures Management, Philadelphia’s Quaker BioVentures, and Silicon Valley’s Longitude Venture Partners LP all have invested in the region. Other collaborations with global industry life sciences companies are off ered via trade missions. PLSG leads and facilitates foreign trade missions in Europe and Asia to identify strategic and cost-eff ective business development opportunities. Sim-ilarly, the Greenhouse hosts regional networking events, working with regional industry groups to create opportunities for peer-to-peer collaboration. And PLSG develops industry-specifi c promotions. Th rough international conferences and media rela-tions, we promote western Pennsylvania’s life sci-ence innovations and achievements. Finally, PLSG prepares start-up life sciences companies to spread their business wings in the region and the state. Life sciences companies require highly specialized facilities to adequately house research and development activities, pro-duction, and daily operations. Th rough its contacts with the region’s foremost site selection services, PLSG aids companies in the search for light indus-trial, manufacturing, or headquarters space. Both expanding local companies and those look-ing to relocate to the Pitt sburgh region can take full

advantage of our site selection services. By arming our site selection partners with our knowledge of a company’s unique business needs, we can ensure that their next location will be the perfect fi t for any regional life sciences company.

THE ROLE OF CURE GRANTS

In addition to the Life Sciences Greenhouse Initiative, the state also initiated the Commonwealth Universal Research Enhancement Program, called the CURE Grant Program for short, to support and encourage Life Sciences-related research, recruitment of scien-tists, and development of laboratories. Th is program was enacted by the State of Pennsylvania in 2001 to direct the Pennsylvania Department of Health to establish a health research program. Under this pro-gram research grants are awarded for clinical, health services, and biomedical research. All funds must be used in a way that is consistent with the research pri-orities as established by the Department of Health. Approximately $68 million per year has been distrib-uted to universities, colleges, and companies working in collaboration to support these goals. Th e majority of the funds are allocated to the universities directly by a formula in proportion to their National Institutes of Health grant funding levels. Th e remainder of the funding is distributed

• Federal programs are integrated toward

universities

• State funding is provided directly to universities

• State funding is provided directly to private capital

• State programs foster and link economic

development entities, corporations, universities,

and private capital

• Economic development entities link innovation

sources with commercialization sources

PENNSYLVANIA INCUBATION

Fast Facts

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28 science progress

by a careful and thorough external peer review process (non-formula funding) to projects chosen in research areas selected by a state commission under the Secretary of Health. Projects submitt ed in response to this RFP are then reviewed by an impartial external review mechanism. All the money in both the formula and non-for-mula components is in the form of grants. Follow-up reports and presentation of results for the non-formula funding are required. Th e program is now in its eighth year and has been very successful in achieving its goals and encouraging collaborative research eff orts in the Life Sciences focused area. Examples of funding include Carnegie Mellon Uni-versity, which received a $710,806 grant to quantify the evaluation of Elder Care Environments, and the Allegheny-Singer Research Institute, which received a $237,838 award to study the impact of cigarett e smoking and tobacco use on wound healing.

THE ROLE OF STATEBASED VENTURE

CAPITAL FUNDING AND COFUNDING

Th e third component of the state’s program entails co-funding three venture capital funds to invest a signifi cant proportion of their funds in Pennsylvania-based life sciences companies. Th e program is a $60 million fund designed to provide loans to venture capital companies looking to make investments in companies located in historically underserved areas of Pennsylvania. Th e program also requires a match by the venture capital fi rm of three dollars of invest-ment into Pennsylania-based companies for every one dollar the state provides, creating to date $240 million in investment capital that has been tapped by, among others, Birchmere Capital, Novitas, and New Spring Capital—the fi rst recipients of these funds.

Th ree local start-up companies, Renal Solutions Inc., Cellumen Inc., and Red Path, started with early Pitt sburgh Life Sciences Greenhouse involve-ment and advanced their funding to tens of mil-lions of dollars. Most recently, Renal Solutions was sold to Fresenius Medical Care AG & Co. for $190 million—completing the state’s vision of providing support through a company’s entire fi nancial life cycle. It is important to note that Renal Solutions remains in the Pitt sburgh region. Of course, a six-year-old incubator program for life sciences startups such as PLSG will probably need another six years before it knows how many of its young companies will survive and thrive in the competitive life sciences industries. Developing a successful life sciences company from the lab to Wall Street is no easy task, taking well over a decade in most cases. So far, however, PLSG has worked with 280 start-up companies. Currently, 118 com-panies are active and the PLSG has invested in 56 companies, helping western Pennsylvania’s young life science companies to take a shot at the suc-cessful commercialization of their products and services. It’s a model other regions of the country with prominent universities boasting comparative advantages in key science, technology and innova-tion arenas should actively consider.

James F. Jordan is Distinguished Service Professor and Director, Master of Science in Biotechnology Manage-ment, Carnegie Mellon University, H. John Heinz III School of Public Policy and Management, and Vice President and Chief Investment Offi cer, Pitt sburgh Life Sciences Greenhouse. Paul L. Kornblith, MD, is Director of the Pennsylvania Biotechnology Associa-tion for Western Pennsylvania.

Innovation

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SCIENCE POLICY

THE PROBLEM OF ECONOMIC GROWTH was on the public agenda this past election season in a way it has not been for at least 15 years. Policymakers have been preoccupied with providing a short-term eco-nomic stimulus to counteract the economic down-turn that has followed the collapse of the housing bubble and the meltdown of the fi nancial services industry. Yet the problem of how to restart and sustain robust economic growth goes well beyond short-term stimulus and fi nancial-market fi xes. Our nation needs a fi rm foundation for long-term economic growth. But to date there has been no serious public debate about how to create one. At best, we have seen a rehash of 1990s debates about whether tax cuts or lower federal budget defi cits are the bett er way to increase savings and (it is oft en assumed) stimulate growth. A growing number of economists, however, have come to see

that innovation—not more savings—is the key to sustained long-term economic growth. Some have found that research and development accounts for nearly half of U.S. economic growth and that its rate of return to the United States as a whole is as high as 30 percent. But R&D is not all there is to innovation. If properly conceived, innovation encompasses: new products, new processes, and new ways of orga-nizing production; both radical and incremental change; and the diff usion of new products, tech-nologies, and organizational forms throughout the economy to companies and even entire industries that are not eff ectively using leading technologies or organizational practices. Innovation is funda-mentally about applying new ideas in organiza-tions (businesses, nonprofi ts, and governments), not just about creating those ideas.

Creating a National Innovation FoundationEconomic Prosperity Rests on Diverse Technology Innovation

By Robert Atkinson and Howard Wial

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Innovation has returned to the federal policy agenda, most recently in the form of the America COMPETES Act, which was signed into law last year. Th at law, unfortunately not yet fully funded, provides for a much-needed increase in federal support for research and science and engineering education—key inputs into the process of innova-tion. But it does not go far enough. It does litt le to promote the demand for those inputs or to organize them in ways that lead to the commercial applica-tion of new ideas. More engineers and more R&D funding do not automatically create more innova-tion, or particularly, more innovation here in the United States. As a result, it is time for the federal government to make innovation a central component of its eco-nomic policy, not just a part of technology or educa-tion policy. To do so the new administration should create a National Innovation Foundation—a new, federally funded organization whose sole responsi-bility would be to promote innovation. NIF would be a nimble, lean, and collabora-tive entity devoted to supporting organizations in their innovative activities. Th e goal of NIF would be straightforward: to help businesses in the non-farm U.S. economy become more innovative and competitive. It would achieve this goal by assisting companies with such activities as: joint industry-university research partnerships; technology transfer from laboratories to businesses; technology-based entrepreneurship, industrial modernization through adoption of best-practice technologies and business behaviors; and worker training programs for employ-ees of companies participating in NIF programs. By making innovation NIF’s mission, funding it adequately, and focusing on the full range of compa-nies’ innovation needs, the new foundation would be a natural next step in advancing the innovation agenda that Congress put in place when it passed the America COMPETES Act. Because fl exibility should be one of NIF’s key characteristics, we do not wish to over-specify NIF’s operational details. NIF would determine

how best to organize its activities; it would not be locked into a particular programmatic structure. Nonetheless, we believe that there are some core functions that NIF should undertake. Th e fi rst is to catalyze industry-university research partner-ships through national sector research grants. Th e second is to promote more regional innovation through state-level grants to fund activities such as technology commercialization and entrepreneurial support. And the third is to encourage technology adoption by assisting small and mid-sized compa-nies in implementing best-practice processes and organizational forms that they do not currently use. We’ll now examine each of these functions in turn.

CATALYZE INDUSTRYUNIVERSITY

RESEARCH PARTNERSHIPS

NIF would off er competitive grants to national industry consortia to conduct research at univer-sities—something the government does too litt le of now. Th ese grants would enable federal R&D policy to break free of the dominant but unpro-ductive debate over science and technology policy, which has tended to pit those who argue that the federal government should fund industry to con-duct generic pre-competitive R&D against those who maintain money should be spent on curiosity-directed basic research at universities. Th is is a false dichotomy. Th ere is no reason why some share of university basic research cannot be oriented toward problems and technical areas that are more likely to have economic or social payoff s to the nation. One way to improve the link between economic goals and scientifi c research is to encour-age the formation of industry research alliances that fund collaborative research, oft en at universities. Currently, the federal government supports a few sector-based research programs, but they are the exception rather than the rule. As a result, a key activity of NIF would be to fund sector-based research initiatives. NIF would off er competitive

Innovation

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Industry Research Alliance Challenge Grants to match funding from consortia of businesses, busi-nesses and universities, or businesses and national labs. Th ese grants would resemble the National Institute of Standards and Technology’s Tech-nology Innovation Partnership programs and the National Science Foundation’s innovation pro-grams, such as Partnerships for Innovation, Indus-try-University Cooperative Research Centers, and Engineering Research Centers. Th ese programs would be folded into NIF. NIF grants, however, would have an even greater focus on broad sectoral consortia and would allow large companies as well as small and mid-sized ones to participate. Moreover, like TIP and the NSF innovation programs, NIF’s work in this area would be led by industry, with industry coming to NIF with proposals. To be eligible for NIF matching funding, companies would have to

Form an industry-led research consortium of • at least fi ve companiesAgree to develop a mid-term (three-to-10-year) • technology roadmap that charts generic science and technology needs that the fi rms shareProvide at least a dollar-for-dollar match of • federal funds.

NIF would also support a productivity-enhance-ment research fund to support research into auto-mation, technology-enabled remote service deliv-ery, quality improvement, and other methods of improving productivity. Automation, including robotics, machine vision, expert systems, and voice recognition, is a key to boosting productivity in both manufacturing and services. Technology-enabled remote service delivery—home health monitoring, remote diagnosis, perhaps even remote surgery—has considerable potential to improve productivity in health care and other personal service industries. A key function of NIF would be to fund univer-sity research or joint business-university projects focused on increasing the effi ciency of automated

manufacturing or service processes. NIF would sup-port early research into processes with broad appli-cations to a range of industries, not later research focused on particular companies. NIF would also fund a service-sector science initiative to research productivity and innovation in the nearly 80 percent of the economy that is made up of service industries.

EXPAND REGIONAL INNOVATIONPROMOTION

THROUGH STATELEVEL GRANTS

Th e design of a more robust federal innovation policy must consider, respect, and complement the plethora of energetic state and local initiatives underway. While the federal government has taken only very limited steps to promote innovation, state governments and state and metropolitan organiza-tions have done much more. Th ey engage in a vari-ety of technology-based economic development activities to help spur economic growth by support-ing the development of cutt ing-edge, science-based industries through targeted research funding. Moreover, states and regional organizations try to ensure that research is commercialized and that good jobs are created in both cutt ing-edge, science-based industries and industries engaging in related diversifi cation. Th ey have established initiatives to help companies commercialize research into new business opportunities. Th ey also promote upgrade- and project-based innovation by helping existing companies become more competitive. While impressive, these state and regional eff orts have only partially fi lled the gap left by federal inaction. Th ese entities could do even more, and their current eff orts could be made more eff ective. Because the benefi ts of innovation oft en cross state borders and take at least a few years to result in direct economic benefi ts, state elected offi cials have less incentive to invest in technology-based economic development activities than in other types of activi-ties, such as industrial recruitment that leads to more immediate benefi ts to state or regional economies.

Innovation

32 science progress

In contrast, an eff ective national innovation ini-tiative would fi nd a way to assist the tens of thou-sands of innovation-focused small and mid-sized companies as well as larger ones that have specifi c, regional innovation needs that they cannot meet on their own. Unlike small nations, the United States is too big for the federal government to play an eff ec-tive direct role in helping these businesses. State and local governments and regional economic develop-ment organizations are best positioned do this. But without assistance from the federal government, states will invest less in these kinds of activities than is in the national interest. NIF would compensate for this political failure by off ering state-based Innovation-Based Economic Development Partnership Grants to help states expand their innovation-promotion activities. Th e state IBED grants would replace part of the grant making that TIP and the NSF innovation programs currently perform but would operate exclusively through the states. To be eligible for NIF funding, states would need to provide at least two dollars in actual funding for every NIF dollar they receive. Rotating panels of IBED experts would review pro-posals. NIF staff would also work closely with states to help ensure that their eff orts were eff ective and in the national as well as state interest.

ENCOURAGE SMALL AND MIDSIZED

COMPANIES TO ADOPT TECHNOLOGIES

A third activity of NIF would be to boost technol-ogy diff usion primarily to assist small and mid-sized companies. While NIF’s national sector grants and state IBED grants would largely support new, sometimes radical, products and processes, its tech-nology-diff usion work would help spread existing processes and organizational forms to businesses that do not currently use them. Th is eff ort would incorporate and build on the existing Manufactur-ing Extension Partnership run by the Department of Commerce—the only federal program whose

primary purpose is to promote technology diff u-sion among such companies. Th e NIF eff ort would follow the MEP model of a federal-state partnership. One or more technology-diff usion centers would be located in each state. Like existing MEP centers, the centers could be operated by state or private organizations. States would sub-mit proposals to NIF for the operation of these cen-ters, and NIF would evaluate the centers periodically. Some specifi c changes to the current MEP program, however, would enable NIF more comprehensively and more eff ectively to promote technology diff u-sion for both manufacturing and services. NIF, for instance, would expand MEP beyond its current emphasis on applying waste-reducing, quality-improving lean-production techniques to also include the direct production of manufactured goods. It would do so by helping improve produc-tivity in some service activities where lean produc-tion could be applied. In addition to supporting eff orts that assist com-panies directly, NIF would more broadly analyze opportunities and challenges regarding technologi-cal, service delivery, and organizational innovation in service industries, such as health care, construction, residential real estate, fi nance, and transportation. It would recommend steps—among them revising procurement practices, modifying regulations, and helping spur standards development—that federal and state governments could take to incite innova-tion. Th is action could include the digital transforma-tion of entire sectors through the widespread use of information technology and e-business processes.

FUNDING AND ORGANIZING A NATIONAL

INNOVATION FOUNDATION

In the current fi scal climate, it will be diffi cult for the federal government to launch major new investment initiatives, especially since strong politi-cal forces on either side of the aisle oppose raising taxes or cutt ing other spending. Nevertheless, the

Innovation

fall • winter 2008/2009 33

compelling need to boost innovation and produc-tivity merits a substantial investment in NIF. We propose that the federal government fund NIF at an initial level of $1 billion per year, but approxi-mately 40 percent of this funding would come from consolidating several existing programs and their budget authority into NIF. Th ese programs include NIST’s TIP and MEP programs; NSF’s Partnerships for Innovation, Indus-try-University Cooperative Research Center, and Engineering Research Center programs; and the Department of Labor’s Workforce Innovation in Regional Economic Development, or WIRED pro-gram. Federal expenditures on all the programs that NIF would replace or incorporate total $344 million. In addition, the America COMPETES Act provides a total of about $88 million more in 2010 for MEP and the new TIP than MEP and the Advanced Tech-nology Program received in 2006. Th erefore, current and already-planned expen-ditures on the programs whose work would be included in NIF total $432 million. We believe that aft er several years, NIF could easily be ramped up to a budget of $2 billion. At $2 billion, NIF’s budget would be approximately one-third of NSF’s. In addi-tion, because of its strong leveraging requirements from the private sector and state governments, NIF would indirectly be responsible for ensuring that states and companies spent at least one dollar on innovation for every dollar NIF spent. NIF could be organized in several diff erent ways. NIF could be organized as part of the Commerce Department, as a government-related non-profi t organization, as an independent federal agency, or as a new offi ce in the White House. But whatever way it is organized, we see it as ultimately being a lean and nimble eff ort, employing a staff of approxi-mately 250 individuals. NIF should recruit the best practitioners and researchers whose expertise overlaps the areas of productivity, technology, business organization and strategy, regional economic development, and (to a lesser extent) trade. Like the National Science

Foundation, NIF would allow some staff members to be rotated into the agency for limited terms from outside of government and to allow some perma-nent NIF staff members to go on leave for limited terms to work for private employers. Already there is legislation in the Senate to cre-ate an NIF-like organization. Th e National Inno-vation Act, introduced by Sens. Hillary Clinton (D-NY) and Susan Collins (R-ME), would create a National Innovation Council, housed in the Offi ce of the President, and consolidate the six programs discussed above.

THE TIME IS RIGHT

Now more than ever, the American standard of living depends on innovation. To be sure, compa-nies are the engines of innovation, and the United States has an outstanding market environment to fuel those engines. Yet companies and markets do not operate in a vacuum. By themselves they do not produce the level of innovation and productiv-ity that a perfectly functioning market would. Even indirect public support of innovation in the form of basic research funding, R&D tax credits, and a strong patenting system, important as it is, is not enough to remedy the market failures from which the American innovation process suff ers. At a time when America’s historic lead in innova-tion is shrinking, when more and more high-produc-tivity industries are in play globally, and when other nations are using explicit public policies to foster innovation, the United States cannot aff ord to remain complacent. Relying solely on companies acting on their own will increasingly cause the United States to lose in the global competition for high-value-added technology and knowledge-intensive production. Th e proposed National Innovation Founda-tion would build on the few federal programs that already succeed in promoting innovation and bor-row the best public policy ideas from other nations to spur innovation in the United States. It would

Innovation

34 science progress

do so through a combination of grants, technical assistance, information provision, and advocacy. It would address the major fl aws that currently plague federal innovation policy and provide the United States a state-of-the-art initiative for extending its increasingly critical innovation prowess. Yet NIF would neither run a centrally directed industrial policy nor give out “corporate welfare.” Rather than taking the view that some industries are more important to the United States than others, NIF is based on the idea that innovation and productivity can grow in any industry and that the nation bene-fi ts regardless of the industry in which they do. NIF would cooperate with individual companies, busi-ness groups and business-university consortia, and state governments to foster innovation that would benefi t the nation but would not otherwise occur. In a world of growing geographic competition for innovative activities, economic and political actors are already making choices among industries and technologies to serve their own interests. NIF would give them the resources they need to make those choices for the benefi t of the nation as a whole. Without the direct federal spur to innovation that

NIF would off er, productivity growth will be slower. Wages will not rise as rapidly. U.S. companies will introduce fewer new products and services. Other nations realize this and now boast highly eff ective national innovation-promotion agencies. It is time for the United States to do the same. By combining America’s world-class market environ-ment with a world-class public policy environment, America can remain the world’s innovation leader in the 21st century.

RECOMMENDED READING

Robert Atkinson and Howard Wial, Boosting Pro-ductivity, Innovation, and Growth through a National Innovation Foundation (Washington, DC: Brookings Institution and Information Technology and Innova-tion Foundation, 2008).

Robert Atkinson is president of the Information Tech-nology and Innovation Foundation in Washington, DC. Howard Wial is an economist at the Brookings Institu-tion in Washington, DC.

Innovation

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RE

UT

ER

S/E

NR

IQU

E D

E L

A O

SA

Benchmarking Foreign InnovationThe United States Needs to Learn from OtherIndustrialized Democracies

By Stephen Ezell

SCIENCE POLICY

MANY FORWARDTHINKING COUNTRIES have made innovation-led economic development a cen-terpiece of their national economic strategies dur-ing the past decade. Th ese industrialized democra-cies know that moving up the value chain to more innovation-based economic activity is a key to boosting future productivity, and that losing the competition can result in a relatively lower standard of living as economic resources shift to lower-value-added industries. Th ese countries are implementing coordinated national innovation agendas that boost research-and-development funding, introduce pol-icy changes and government initiatives that more eff ectively transfer technologies from universities and government laboratories to the private sector for commercialization, and ensure that immigra-tion policies support innovation.

While many nations have taken the innovation challenge to heart and put in place a host of poli-cies to spur innovation, the United States has done litt le, consequently falling behind in innovation policies and risking falling behind in innovation performance as well. We see this gap in at least fi ve main areas: programs to establish civilian technol-ogy and innovation promotion agencies;1 services innovation initiatives; national levels of research- and-development funding; tax incentives for research and development; and policies regarding high-skill immigration. In the pages that follow, we will examine each of these fi ve areas to see what our nation could learn from benchmarking new innovation policies to those of our rival industrialized competitors in Europe and Asia.

Innovation

36 science progress

CIVILIAN TECHNOLOGY AND

INNOVATION PROMOTION AGENCIES

A number of advanced countries are well ahead of the United States in creating national agencies that support innovation. In recent years, Finland, France, Iceland, Ireland, Australia, Japan, the Netherlands, New Zealand, Norway, South Korea, Canada, Germany, Taiwan, Switzerland, and Great Britain have either established or signifi cantly expanded separate technology- and innovation-promotion agencies. Other nations, such as Denmark, Swe-den, and Spain, have longstanding agencies of this type.2 All these countries have science- and university-support agencies similar to America’s National Science Foundation, which largely fund basic research, universities, and national laborato-ries. But these countries realized that if they were to prosper in the highly competitive, technology-driven global economy, they needed specifi cally to promote technological innovation, particularly in small and mid-sized companies and in partnership with universities. Perhaps the most ambitious of these eff orts is Tekes, Finland’s National Agency for Technol-ogy and Innovation. In the last two decades, Fin-land has transformed itself from a largely natural resource-dependent economy to a world leader in technology, with Tekes a key player in the coun-try’s transformation. Affi liated with the Ministry of Employment and the Economy, Tekes funds many research projects in companies, multicompany partnerships, and business-university partnerships. With a budget of $560 million (in a country of only 5.2 million people), Tekes works in partnership with business and academia to identify key technol-ogy and application areas—including nano-sensors, broadband, and services innovation—that can drive the Finnish economy. Tekes also operates a number of overseas technology liaison offi ces that conduct “technology scanning,” seeking out emerg-ing technologies bearing on the competitiveness of Finnish industries, and sponsors foreign outreach

eff orts to help its domestic companies partner with foreign businesses and researchers. Similarly, Japan’s New Energy and Industrial Technology Development Organization is a quasi-public agency that receives its $2 billion budget from the Ministry of International Trade and Indus-try. Great Britain’s new Technology Strategy Board is a non-departmental public body (similar to an independent government agency in the United States) whose mission is to drive forward the government’s national technology strategy. South Korea’s Korea Industrial Technology Foundation, established in 2001, engages in a wide range of technology activities, including providing training to develop industry technicians and cooperating with international entities to promote industrial technology development. A host of other nations have similar bodies dedicated specifi cally to pro-moting innovation and competitiveness.3

Most foreign innovation-promotion agencies provide grants to companies for research, either alone or in consortia, including in partnership with universities. All support university-industry partner-ship grant programs, whereby companies or business consortia can receive grants (usually requiring match-ing funds) to partner with universities on research projects. Vinnova, Sweden’s innovation-promotion agency, gives most of its grants to research consortia involving companies and universities. Adequately investing in and developing inno-vation-enhancing policies is crucial to national innovation competitiveness, as Professors Jeff rey Furman and Richard Hayes found in a study of the national innovation capacity (an economy’s poten-tial for producing a stream of commercially relevant innovations) of twenty-three countries from 1978 to 1999.4 Starting in 1979, they classify countries as either world-leading innovators (the United States, Germany, Japan), middle-tier (Great Britain, France, Australia), third-tier (Spain, Italy), or “emerging” innovators (Ireland, Taiwan) based on countries’ patenting activity per capita, a proxy for commer-cialized innovations.

Innovation

fall • winter 2008/2009 37

A number of these “emerging innovators”—among them Ireland, Finland, Singapore, South Korea, Denmark, and Taiwan, in particular—achieved remarkable increases in innovative out-put per capita, moving to the world’s technological frontier and overtaking the innovative capacities of many mid- and third-tier countries, including Great Britain, France, and Italy, whose economic conditions started off much more favorably in the early1980s. Furman and Hayes conclude that inno-vation leadership among countries requires not only the development of innovation-enhancing policies and infrastructure, such as strong IP protections, openness to trade, highly competitive markets, and strong industry clusters, but also a commitment to maintaining substantial fi nancial and human capital investments in innovation. But compared with other industrialized democ-racies, the U.S. government invests relatively litt le in innovation-promotion eff orts. In fi scal year 2006, the federal government spent a total of $2.7 billion, or 0.02 percent of gross domestic product, on its princi-pal innovation programs and agencies: the National Institute of Standards and Technology’s Advanced Technology Program and Manufacturing Extension Partnership, the White House’s Offi ce of Science and Technology Policy, three NSF-administered innova-tion programs (Small Business Innovation Research, Small Business Technology Transfer, and Industrial Technologies Program), and the Department of Labor’s Workforce Innovation Regional Economic Development, or WIRED, program. If the United States wanted to match Finland’s outlays per dollar of GDP in innovation-promotion eff orts, it would have to invest $34 billion per year. While other nations invest less in their innovation-promotion agencies than Finland, they still invest considerably more than the United States. As a percent of their countries’ GDPs, Sweden spends 0.07 percent, Japan 0.04 percent, and South Korea 0.03 percent on their innovation promotion agen-cies. To match these nations on a per-capita basis, the United Sates would have to invest $9 billion to

match Sweden, $5.4 billion to match Japan, and $3.6 billion to match South Korea.5 It is astounding that economies a fraction the size of the United States spend more on innovation-promotion in actual dol-lars, let alone as a percentage of their economy. Th is places U.S. industries and corporations operating alone at a disadvantage against foreign corporations that benefi t from coordinated and enlightened national strategies among universi-ties, governments, and industry collaborations to foster competitiveness. For example, the Japanese government has recognized advanced batt ery tech-nology as a key driving force behind its competi-tiveness, and views batt ery technology as an issue of “national survival.”6 It is funding Lithium-ion bat-tery research over the fi ve-year period from Octo-ber 2007 to October 2012 at $215 million (¥25 billion)—a level 10 times the amount of announced U.S. Lithium-ion batt ery research investment—and longer term, has committ ed to a 20-year Li-ion bat-tery research program. Germany’s government will provide a total of €1.1 billion ($1.4 billion) over 10 years to applied research on automotive electronics, lithium ion bat-teries, lightweight construction, and other automo-tive applications.7 U.S. automakers, receiving only a fraction of this support, are disadvantaged from the get-go. Th ose who believe that any kind of proactive government support or intervention for U.S. busi-nesses is tantamount to industrial policy and that free markets alone will provide the price signals companies need to make investment decisions will indeed see the marketplace introduce hybrid and electric vehicles, but it will likely be by foreign auto companies, to the detriment of employment in, and long-term survivability of, domestic U.S. automo-bile manufacturers. To be sure, a number of “third party” organiza-tions in the United States fi ll in for some of the roles played by innovation promotion agencies in other countries. Case in point: Th e U.S. semiconductor industry and federal government partnered in the 1980s on SEMATECH, a collaborative partnership

Innovation

38 science progress

to restore U.S. innovation and competitiveness in microprocessor chips. Th e National Academy of Sci-ences’ Government-University-Industry Research Roundtable works collaboratively to identify and target promising new technologies for R&D fund-ing and to promote a highly skilled U.S. workforce. Several states support “regional cluster” initiatives to drive competitiveness of regional industry clus-ters, among them Th e Massachusett s Life Sciences Collaborative and Southeast Michigan’s Automa-tion Alley in industrial automation.8

But many in Washington have recognized that these dispersed and unconnected initiatives will be insuffi cient to close the growing gap between the United States and peer countries in creating a coherent and coordinated national innovation strat-egy. Th e National Academy of Sciences will release a report (funded by the America Competes Act) by the end of 2008 documenting barriers to innovation in the United States. It will be the fi rst NAS report addressing innovation as distinct from technology and research and development. To address these critical innovation challenges, the Washington-based Information Technology and Innovation Foundation and Th e Brookings Institu-tion have called for the creation of a National Inno-vation Foundation—a new, nimble, lean, and collab-orative entity devoted to supporting fi rms and other organizations in their innovative activities. NIF’s mission will be to boost the nation’s innovation leadership for the 21st century and raise productiv-ity and incomes.9 Sens. Susan Collins of Maine and Hillary Clinton of New York have authored Senate Resolution 3078 to create a National Innovation Foundation, and the Obama administration should stridently support and promote this legislation.

SERVICES INNOVATION INITIATIVES

A dramatic macroeconomic shift from goods to services has occurred in Western economies, with services now accounting in the United States for 82

percent of output and 84 percent of employment and for 86 percent of output in Great Britain.10 From an employment perspective, low employment in domestic services sectors accounts for almost all of the variability in employment rates between industrialized member nations of the Organization for Economic Cooperation and Development. As services increasingly drive employment, productiv-ity, and economic growth, a number of countries have developed explicit national services innova-tion policies focused on spurring innovation in the services sectors of their economies. Policymakers in these countries have recognized that knowledge of services innovation has largely been informed by studies of the manufacturing sector, and acknowl-edged the need to tailor unique measures to the needs of services fi rms and industries.11 Th e focus on service innovation began in the mid-2000s with a coterie of small Northern Euro-pean countries—Finland, Denmark, Norway, Th e Netherlands, and Sweden—and has since grown to include additional small countries in Europe and Asia (Taiwan, Ireland, and Singapore) and large nations (Great Britain, Canada, and Germany). Finland was the fi rst to implement a national ser-vices innovation policy, with a fi ve-year, €100 mil-lion12 program launched in 2006 called “SERVE—Innovative Services Technology Programme.”13 Finland’s neighbors soon followed suit, recognizing the increasing importance of services as their domes-tic manufacturing industries departed for cheaper production centers abroad, particularly in the form of “near-shoring” to Baltic and Eastern European countries. Th e same phenomenon aff ected devel-oped Pacifi c Rim countries, as manufacturing moved fi rst from Japan and Taiwan to cheaper production centers in China, and now out of China and on to the poorer nations of Southeast Asia. Th is process has forced almost all industrialized countries to seek to migrate their economies up the value chain towards knowledge-based, high-value-added services activi-ties such as R&D, design, fi nance, consulting/train-ing, and post-installation service and support.

Innovation

fall • winter 2008/2009 39

Policy approaches quickly evolved into two main strands. First, these countries strove to develop framework conditions that support competitive services industries. As they began to scrutinize their services industries, these countries found they fi rst needed considerable work in sett ing favorable framework conditions, such as removing barriers to labor market mobility in services industries, fur-ther opening and integrating cross-border services markets, developing bett er accounting practices for intangible assets, updating intellectual property and trade laws to accommodate the unique charac-teristics of services, developing core information technology infrastructure, and providing structures and incentives to encourage services exports. Second, with this supportive policy framework in place, these countries implemented specifi c pro-grams to support innovation in services businesses. Specifi c eff orts (and at least one sample country implementing them) include:14

Boosting academic research in the area of ser-• vices innovation and services business, especially research on creating innovative services-based business models, quantifying improvements in services productivity, and enhancing quality of services delivery (Finland, Th e Netherlands, Denmark)Funding Services Science research, that is, cross-• disciplinary research that draws on fi elds such as computer science, management, operations, marketing, and organizational behavior (Singa-pore, Taiwan)Extending research and experimentation tax • credits to services industries; especially, defi ning where the “innovative step” occurs for services fi rms (Norway)Developing innovation metrics that measure • innovation in services, not just advanced manu-facturing, and looking for “hidden innovation” in services industries (Great Britain, the United States, Ireland)

Supporting the development of creative indus-• tries through establishing regional design centers (South Korea, the Netherlands, Great Britain)Providing online self-assessment tools that allow • companies to benchmark their innovation infra-structures (R&D budgets, number of employees, intellectual property strategies) against in-nation and in-industry peer companies (Great Britain and European Union)Benchmarking services innovation policies across • European countries (European Union

Unfortunately, the United States lags behind these countries in developing policies to support innovation in its service sectors. In fact, the whole edifi ce of U.S. policies toward services industries is underdeveloped. For instance, U.S. trade law con-templates foreign corporations “dumping” (selling products in the United States below their cost of pro-duction or sale in the home country) only physical products, not services, in the United States. So even if a U.S. company could prove that a foreign corpo-ration is “dumping” services onto the U.S. market—say a fi rm of radiologists in India sold medical imag-ing analysis services in the United States at a price far below the actual cost of providing the service—it would be unable to pursue any kind of injunctive relief through countervailing duties. Of more imme-diate concern, U.S. service industry workers who lose their jobs due to globalization are not eligible to receive Trade Adjustment Assistance, unlike their counterparts in U.S. manufacturing industries who lose their jobs due to foreign competition. To be fair, the United States has at least begun to contemplate redressing some of these imbalances. In the 2007 America COMPETES Act, Congress authorized the funding of a research project to study service science research. And while the United States has not updated its domestic trade laws to refl ect the importance of services to the economy, it has aggressively pushed liberalization in service trade in the recent Doha round on international trade lib-

Innovation

40 science progress

eralization and in bilateral trade negotiations with countries such as South Korea and Peru. Th e United States lags behind peer countries in inviting the rest of the world’s best and brightest to participate in U.S. economic opportunity, but internally it does have fl exible labor markets that direct employment to the fastest-growing, highest-value-added industries.

NATIONAL LEVELS OF RESEARCH AND

DEVELOPMENT FUNDING

While the United States does lead the world in aggregate (combined federal and corporate) R&D expenditures, it lags behind other industrialized democracies in its level of national R&D intensity (R&D as a percentage of GDP) at a time when many countries are renewing their focus on research and development activities and proactively increasing government-funded R&D investment.15

In 2003, the United States invested $292.4 billion in R&D, accounting for 36.1 percent of global R&D (see Figure 1). In that year, the European Union (EU)-1516 and Japan came in second and third, with 25 percent and 13.9 percent, respectively, of world

R&D expenditures.17 While the United States does lead the world in aggregate R&D investment, its global share of R&D has recently been weakening. In fact, as Figure 1 illustrates, whereas U.S. total R&D investment represented an increasing share of world R&D investment from 1993 to approximately 1998, the U.S. share of world R&D investment has been receding since then. Th e major reason for this slip-page has been a slowdown in federal R&D investment since the mid-1990s, as total federal R&D spending grew at a sluggish 2.5 percent per year from 1994 to 2004—much lower than its long-term average of 3.5 percent growth from year from 1953 to 2004.18

When comparing countries’ R&D investment levels, it is crucial to look not only at countries’ raw R&D investment levels, but also at countries’ R&D investments relative to their GDPs, a measure called R&D intensity. Th is is important because countries’ R&D intensity levels reveal the relative level at which countries are investing in the new technologies that will lead to innovative and commercializable prod-ucts and services that keep a nation’s corporations at the forefront of market competitiveness. On this measure, the United States is one of only a few nations where total investment in R&D as a share of GDP actually fell from 1992–2005, largely because of that decline in public R&D support.19 Figure 2

100%

Percent of world dollars at PPP

CAGR (percent) 1993–2003

6.3 (total)

90%

80%

70%

10%

20%

50%

60%

0%

19931994

19951996

19971998

19992001

20002003

2002

30%

40%

FIGURE 1

R&D funding in current dollars at PPP (1993–2003)

as percentage of world total

Source: OECD (2006b, 2006c), cited from Titus Galama and James Hosek, U.S. Competitiveness in

Science and Technology (Santa Monica, California: RAND Corporation, 2008): 22.

U.S.

CanadaChina

Germany

Ireland

Israel

KoreaSpain

Japan

Sweden

FIGURE 2

Percent change in R&D/GDP ratio, 1991–2003

Source: ITIF.

-0.02

0.66

0.00

1.02

0.520.57

0.24

0.13 0.13

5.8

4.9

4.2

9.416.9

8.2

7.4

Rest of world

Russian Federation

China

Korea

Japan

EU-15

United States

Innovation

fall • winter 2008/2009 41

plots the percent change in R&D/GDP ratio for the years 1991–2003 for the United States against a group of competing industrial countries, illustrat-ing how U.S. R&D intensity has weakened against peer countries.20

In fact, a recent report from the RA ND corpo-ration, “U.S. Competitiveness in Science and Tech-nology,” examined seven countries’ levels of R&D intensity, comparing U.S. R&D intensity from 1985–2005 against that of China, Germany, Japan, Korea, the United Kingdom, and Russia/USSR (see Figure 3).21 In this comparison of countries above, Japan clearly leads in R&D intensity from 1985 to 2005. While at fi rst glance U.S. performance appears strong—the United States holding second place for most of this period—the graphic reveals several disturbing trends. One, South Korea has surpassed the United States; South Korea set a goal in 1997 to raise its R&D from 3.6 percent to 5 percent, and these results bear proof of that policy’s success, with South Korean R&D intensity reaching 4.7 percent in 2007. Second, every other country in this com-parison set (except for the U.K.) exhibits increasing levels of R&D intensity, whereas U.S. levels have decreased then fl att ened out.

But as Will Straw documents in his companion piece in this volume, “UK Innovation Policy,” that country is making concerted eff orts to energize its national innovation strategy and ramp up R&D investments. What’s more, this comparison excludes acknowledged world leaders in R&D intensity, such as Finland, Singapore, and Israel. Finland, for exam-ple, has consistently devoted about 3.5 percent of its GDP to R&D, and has recently embarked on a strategy to push that level to 4 percent.22

In fact, when U.S. R&D intensity is compared to other OECD countries, we fi nd that at 2.6 percent of GDP devoted to R&D investment, the United States ranks only seventh in R&D intensity, behind a list of countries including Japan, South Korea, Finland, and Sweden.23 In more recent rankings (2006) from the OECD, the United States places only 22nd in the fraction of GDP devoted to non-defense research.24 While R&D, as with any type of investment, confronts diminishing returns at a certain point, the United States has clearly slipped below OECD averages for national R&D intensity. Th ese fi ndings are cause for concern because the payoff for government support for research and development funding is indeed considerable, as Fred Block and Matt hew R. Keller argue in “Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970–2006.” Th e study by Th e Information Technology and Innovation Foundation documented the crucial importance of federal R&D funding to innovation in the United States, fi nding that in 2006 only 11 of the 88 entities that produced award-winning inno-vations were not benefi ciaries of federal funding.25

TAX INCENTIVES FOR RESEARCH

AND DEVELOPMENT

Th e tax incentives the U.S. government provides corporations for R&D activities have fallen from the most generous in the world in the late 1980s to 17th among 30 OECD countries in 2004 (see Fig-

100%

Japan

Korea

U.S.

Germany

U.K.

USSR/Russia

China

R&D/GDP in percent

90%

80%

70%

10%

20%

50%

60%

0%

19931994

19951996

19971998

19992001

20002003

2002

30%

40%

FIGURE 3

R&D intensity: gross domestic expenditure on R&D

as a percentage of Gross Domestic Product, 1985–2005

Source: Reproduced from Eaton and Kortum (2007); OECD (2006b, 2006c).

Innovation

42 science progress

Source: ITIF.

ure 4.)26 Many nations now provide signifi cantly more generous tax incentives for research than does the United States. From leading the world in the late 1980s,27 the United States by 1996 fell to sev-enth most generous among OECD nations, behind Spain, Australia, Canada, Denmark, the Nether-lands, and France.28 By 2004, we had fallen to 17th in generosity for general R&D; 16th for machinery and equipment used for research; and 22nd for buildings used for research.29 Among nations with a tax incentive for R&D, the United States now provides one of the weak-est incentives, below our neighbors Canada and Mexico, and behind many Asian and European nations (see Figure 5). Japan’s credit is almost three times as generous as the United States’, and for small companies it’s four times as generous. In 2004, France adopted a credit essentially equivalent to a 40 percent incremental R&D tax credit. In an explicit eff ort to att ract U.S. corporate R&D, our neighbor to the north is even more generous. In Canada, large companies are eligible for a fl at 20 percent credit while small companies can receive a 35 percent credit; in many provinces, equally gener-ous credits can be taken on top of the federal credit. Indeed, over the past decade, all other nations with R&D tax incentives have boosted the generosity of their R&D tax incentives, particularly since 2000.31 At a time of increased concern about America’s growing competitiveness challenge, our tax credit has been gett ing weaker, both in absolute terms and relative to other nations, in part because of

changes made by Congress over the years that have diminished its generosity.32 In fact, until the pas-sage in 2006 of the Alternative Simplifi ed Credit, the credit was about half as generous as it was in the early 1980s.33 Even with the recent increases in R&D tax incentives (the passage of the Alternative Simpli-fi ed Credit in 2006 and its expansion in the Emer-gency Economic Stabilization Act of 2008), the United States moved up only to 14th place. How-ever, this doesn’t include non-OECD nations such as India, China and Brazil, all of which have sig-nifi cantly more generous tax incentives to att ract multi-national R&D. India’s R&D tax credit is now four times that of the United States. On top of sala-ries for R&D personnel that are as low as one-sixth of the costs in the United States, China provides a 150 percent deduction on R&D expenses (pro-vided that R&D spending increased 10 percent over the prior year). Given the relative generosity of our foreign competitors’ tax treatment of R&D, it’s not sur-prising that between 1998 and 2003, investment in R&D by U.S. majority-owned affi liates increased twice as fast overseas as it did at home (52 per-cent vs. 26 percent).35 In contrast, corporate R&D spending in the United States as a share of GDP

FIGURE 4

U.S. rank in tax generosity of R&D among OECD

nations, 200430

Canad

a

German

y

Spain

FIGURE 5

Tax subsidy generosity for R&D by large firms in

selected OECD nations, 200434

Source: ITIF.

Austra

lia

Fran

ce

Japan

Korea

Mexic

oU.K

.U.S.

0.5

0

0.1

0.2

0.3

0.4

b-index value

19961990 2004

st th th

Innovation

fall • winter 2008/2009 43

fell every year between 2000 and 2003, to 1.67 from 1.84 percent.36 Moreover, as a share of GDP, corporate-funded R&D fell in the United States by 7 percent from 1999 to 2003, while in Europe it grew 3 percent and in Japan 9 percent.37 While a number of factors have contributed to this dif-ferential in R&D growth rates, the more generous R&D tax incentives in Europe and Japan are likely one important factor.

HIGH SKILL IMMIGRATION

Welcoming the world’s most skilled foreign-born scientists and engineers into the land of economic opportunity that America aff ords has long been one of the strengths of the U.S. national innovation sys-tem. Th e U.S. economy and the standard of living for American citizens have benefi ted enormously from this infl ux of foreign talent. AnnaLee Saxenian, a professor at the University of California-Berkeley, has shown that Indian and Chinese entrepreneurs founded or co-founded roughly 30 percent of all Silicon Valley startups in the late 1990s.38 Microsoft founder Bill Gates has estimated that for every for-eign-born scientist or engineer Microsoft has hired, fi ve new jobs were created for U.S. citizens. Recognizing this, over the last decade many nations have liberalized their policies regarding high-skill immigration, while the United States, in stark contrast, has restricted its policies. In a study benchmarking high-skill immigration policies in eight nations (the United States, Canada, New Zea-land, Australia, Japan, Great Britain, Germany, and France), Global Flows of Talent: Benchmarking the United States,39 Th e Information Technology and Innovation Foundation found that the United States trails other peer countries in developing a proactive approach to att ract high-skilled foreign workers. Using data from 2001 to 2006, the United States received an average of about 67,000 highly skilled permanent immigrants per year, with Canada receiv-ing 56,000 per year, Australia 20,000, and New Zea-

land about 10,000.40 As a share of their populations, these rates are all several times larger than those in the United States—more than 11 times larger in the case of New Zealand (see Figure 6). ITIF’s study of the immigration policies of those eight countries found three broad approaches. Th e fi rst group—Australia, Canada, and New Zealand—conceive of immigrants as a source of economic growth and consider highly-skilled immigrants espe-cially valuable contributors. Th e second group—the United States and Great Britain—were more ame-nable towards immigration but do not place high priority on tilting the mix of immigrants toward the talented. Th e third group—France, Germany, and Japan—tend to view highly skilled immigrants (and immigrants in general) more as threats to native work-ers than as positive additions to national well-being. While the United States may not be as refl ex-ively anti-immigration as some other industrial-ized countries, in recent years it has severely lim-ited the fl ow of foreign talent entering the country at a time when the science and engineering work-force in the United States has become increas-ingly reliant on foreign talent. In 1995, non-U.S. citizens accounted for only 6 percent of the U.S. science and engineering workforce; by 2006, that percentage had doubled to 12 percent, and for the

Canada

Source: ITIF.

Australia New Zealand United States

0.30%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

b-index value

FIGURE 6

Annual inflows of highly skilled as share of total

population41

Innovation

44 science progress

youngest cohort of scientists and engineers (ages 21 to 35), the percentage rose to 20 percent. With the United States restricting the number of H-1B visas issued annually to 85,000, almost 50 per-cent of highly talented foreign professionals who applied for temporary work in the United States in the years 2006 to 2008 were turned away. Limit-ing the infl ux of talented foreign-born science and engineering professionals not only hurts U.S. com-petitiveness, it may also contribute to the decision of companies to source R&D operations abroad to be closer to local pools of S&E talent. At a time when, as Th e Economist put it, “Talent has become the world’s most sought-aft er commodity,”42 the United States needs an immigration strategy that once again wel-comes the world’s best talent to our shores. A fi rst step would be collecting accurate statis-tics about H-1B visa applicants and grantees. Th e Citizenship and Immigration Service (the federal agency that oversees the guest worker program) has been unable to answer basic questions such as “How many foreign-born professionals are working in the United States on H-1B visas,” or “What percent-age of H-1B visa holders seek green cards instead of returning home.”43 Several proposed congres-sional bills would raise the number of H-1B visas annually to 115,000 (with provisions to go as high as 180,000.) Andy Grove, founder of Intel Corp., and other technology leaders have called for “green cards to be stapled to the diplomas” of foreign-born individuals receiving graduate and undergraduate degrees from U.S. universities.44

CONCLUSION

Countries are increasingly recognizing that tech-nology and innovation drive long-term national economic growth.45 Most of these countries already feature robustly funded national technology and innovation agencies, and an increasing number are working to develop explicitly stated national innovation strategies and agendas that coordinate the activities of government, corporations, and uni-versities in their countries to support innovation. Many of these countries have embraced an emerg-ing doctrine of economics called innovation eco-nomics, which reformulates the traditional model of economic growth to place knowledge, technol-ogy, entrepreneurship, and innovation at the center of economic growth, and asserts that the central goal of economic policy should be to spur higher productivity and greater innovation.46 Th ese countries understand that markets relying on price signals alone will not always be as eff ective as smart public-private partnerships in spurring higher productivity and greater innovation. Th e global competitive landscape continues to stiff en as a number of countries get serious about creating favorable climates that att ract foreign direct investment and R&D activities and supporting the innovation eff orts of their domestic corporations and workforce. It is high time the United States articulates an innovation-led economic growth strategy to respond to global economic competi-tiveness challenges.

Innovation

fall • winter 2008/2009 45

NOTES

1 In this context, “civilian” means non-defense-focused technology and innovation promotion agencies focusing on private sector and non-defense public sector technology and innovation funding and support.

2 Information about foreign technology and innovation-promotion agencies is from the following sources: Denmark—Danish Technological Institute Web site, www.danishtechnology.dk; Finland—Tekes Web site, www.tekes.fi /eng, and personal communication with Peter Westerstråhle of Tekes; France—OECD Reviews of Innovation Policy: France (Paris: Organization for Economic Cooperation and Development, 2006); Iceland—Technological Institute of Iceland Web site, www.iti.is/english; Ireland—Enterprise Ireland Web site, www.enterprise-ireland.com; Japan—NEDO Web site, www.nedo.go.jp/english, and personal communica-tion with Hideo Shindo of NEDO; Netherlands—TNO Web site, www.tno.nl/index.cfm?Taal=2; New Zealand—New Zealand Trade and Enterprise Web site, www.nzte.govt.nz; Norway—Innovation Norway Web site, www.innovasjonnorge.no; South Korea—Korea Industrial Technology Foundation Web site, htt p://english.kotef.or.kr; Spain—CDTI Web site www.cdti.es/index.asp?idioma=es&r-1024*768; Sweden—Vinnova Web site, www.vinnova.se/misc/menyer-och-funktioner/Global-meny/In-English; Switzerland—CTI Web site, www.bbt.admin.ch/kti/index.html?lang=en; United Kingdom--Technology Strategy Board Web site, www.dti.gov.uk/innovation/technologystrategyboard.

3 It is diffi cult to obtain information on actual results. However, discussions with government offi cials suggest that overall, the programs have been successful. Moreover, agencies work to improve performance. For instance, Tekes conducts regular evaluations of specifi c programs. An example of such an evaluation may be found at www.tekes.fi /julkaisut/FENIX_arviointi.pdf (in Finnish, with English summary).

4 Jeff rey L. Furman and Richard Hayes, “Catching up or standing still? National innovative productivity among ‘follower’ countries, 1978–1999,” Research Policy 33 (2004): 1329–1354.

5 Expenditures for Finland, Sweden, Japan, and South Korea are based on personal correspondence between the authors and representatives of the respective na-tions’ innovation-promotion agencies. Inference for the United States is from the authors’ analysis.

6 Testimony of Don Hillebrand, Ph.D., Director, Center of National Transportation Research at Argonne National Laboratory, to House Appropriations Subcom-mitt ee on Energy and Water Development, February 14, 2008.

7 Auto Industry UK, “Germany invests €420M in lithium-ion batt ery development,” May 13, 2008 < www.autoindustry.co.uk/news/13-05-08_2>.

8 Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies” (Wash-ington: Th e Brookings Institution, April 2008) <www.brookings.edu/~/media/Files/rc/papers/2008/04_competitiveness_reamer/Clusters Brief.pdf>.

9 Robert D. Atkinson and Howard Wial, “Boosting Productivity, Innovation, and Growth Th rough a National Innovation Foundation” (Washington: Information Technology and Innovation Foundation, April 2008) < www.itif.org/fi les/NIF.pdf>.

10 Tekes, the Finnish Funding Agency for Technology and Innovation, Seizing the White Space: Innovative Service Concepts in the United States (Helsinki, Finland: Tekes, March 2007) <www.tekes.fi /eng/publications/innovative_service.pdf> and United Kingdom National Endowment for Science, Technology, and the Arts, Innovation in Services Policy Briefi ng (London, England: NESTA, May 2008) <www.nesta.org.uk/assets/Uploads/pdf/Policy-Briefi ng/innovation_in_ser-vices_policy_briefi ng_NESTA.pdf>.

11 Forfas, Service Innovation in Ireland – Options for Innovation Policy, (Dublin, Ireland: Forfas, September 2006): 10 < www.forfas.ie/media/forfas060928_ser-vices_innovation_full_report.pdf>.

12 €100M converted into $120M according to exchange rates at the time. (€100M converts to $130M in today’s dollars.)

13 Tekes, the Finnish Funding Agency for Technology and Innovation, Service innovations – innovative business (Helsinki, Finland: Tekes, 2006).

14 While this is a small sampling, a comprehensive inventory of European services innovation policies is available via the European Innovation Policy Project in Services available at www.europe-innova.org/servlet/Doc?cid=9268&lg=EN.

15 Stephen J. Ezell and Robert D. Atkinson, RA ND’s Rose-Colored Glasses: How RA ND’s Report on U.S. Competitiveness in Science and Technology Gets it Wrong (Washington: Information Technology and Innovation Foundation, September 2008): 11–13 < www.itif.org/index.php?id=174>.

16 Fift een was the number of member countries in the European Union prior to the accession of 10 candidate countries on May 1, 2004. Th e EU15 comprised the following 15 countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, United Kingdom.

17 Titus Galama and James Hosek, U.S. Competitiveness in Science and Technology (Santa Monica, California: RA ND Corporation, 2008): 22.

18 Galama and Hosek, 2008, 67.

19 Organization for Economic Co-operation and Development, OECD Science Technology and Industry Scoreboard 2005 (Paris: OECD 2005).

20 Robert Atkinson, “Th e Globalization of R&D and Innovation: How Do Companies Choose Where to Build R&D Facilities?” presented before the Committ ee on Science and Technology Subcommitt ee on Technology and Innovation, U.S. House of Representatives, October 4, 2007.

21 Galama and Hosek, 2008, 23. Figure 2.3 reproduced from Eaton and Kortum (2007); OECD (2006, 2006c.) Used with original author’s permission.

22 Paul Heller, “Finland unveils new innovatio0n strategy,” Science|Business, June 30, 2008 <www.bulletin.sciencebusiness.net/ebulletins/showissue.php3?page=/548/art/11069>.

23 Organization for Economic Co-operation and Development, OECD Science, Technology, and Industry Scoreboard 2007 (Paris: OECD, 2007) <htt p://oecd.p4.siteinternet.com/publications/doifi les/922007081PIG2.xls>.

24 Norman Augustine, Is America Falling Off the Flat Earth? (Washington: National Academies Press, 2006), 53.

25 Fred Block and Matt hew R. Keller, “Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970–2006” (Washington: Information Technology and Innovation Foundation, July 2008) <www.itif.org/fi les/Where_do_innovations_come_from.pdf>.

26 Robert D. Atkinson, Expanding the R&D Tax Credit to Drive Innovation, Competitiveness and Prosperity (Washington: Information Technology and Innovation Foundation, April 2007).

27 Bronwyn Hall and John van Reenen, “How Eff ective Are Fiscal Incentives for R&D? A Review of the Evidence,” Research Policy 29 (2000): 449–469.

28 Dominique Guellec and Bruno van Pott elsberghe de la Pott erie, “Does Government Support StimulatePrivate R&D?” OECD Economic Studies 29 (1997).

29 In fact, government support declined signifi cantly over this period and as a result, the United States was one of the few nations where the share of R&D-to-GDP ratio fell between 1991 and 2002.

30 OECD data including Jacek Warda (op. cit.).

Innovation

46 science progress

31 Martin Falk, “What Drives Business R&D Intensity Across OECD Countries?” Paper Presented at the DRUID 10th Anniversary Summer Conference, Copenha-gen, Denmark ( June 27–29, 2005).

32 In 1985 the rate was reduced from 25 to 20 percent, and other restrictions (such as the 50 percent rule and the recapture of benefi ts through reductions in expens-ing) were put in place in the late 1980s.

33 K.C. Whang, A Guide to the Research Tax Credit: Why We Have It, How It Works, and How It Can Be Improved (Washington: U.S. Congress, Working Paper Series, Off ered to the Joint Economic Committ ee Minority, Dec. 1998).

34 Warda, op. cit.

35 Majority-owned foreign affi liates (MOFA), which are foreign business enterprises that are owned at least 50 percent by U.S. parent(s).

36 However, this is not unprecedented. Corporate R&D fell in the recession of the early 1990s and took fi ve years to regain its peak. National Science Foundation, Science and Engineering and Indicators, 2006.

37 Organization for Economic Co-operation and Development (OECD), OECD STI Scoreboard 2005 (Paris: OECD 2005).

38 Richard Florida, “Th e World is Spiky,” Atlantic Monthly, October 2005: 48-51 <isites.harvard.edu/fs/docs/icb.topic30774.fi les/2-2_Florida.pdf>.

39 David M. Hart, Global Flows of Talent: Benchmarking the United States (Washington: Information Technology and Innovation Foundation, November 2006), 12 < www.itif.org/fi les/Hart-GlobalFlowsofTalent.pdf>.

40 Australian data are drawn from the Australian Department of Immigration and Multicultural Aff airs (DIMA) annual Immigration Update, <www.immi.gov.au/media/publications/statistics/>, accessed August 31, 2006. New Zealand data are drawn from OECD, SOPEMI 2006, pp. 303-304. Canadian data are drawn from Citizenship and Immigration Canada annual Facts and Figures, accessible at <www.cic.gc.ca/english/research/menu-fact.html>, accessed August 31, 2006. All fi gures are for principal applicants only.

41 Ibid., and 2000 U.S. Census; OECD 2005.

42 Adrian Woodbridge, “Th e Batt le for Brainpower, “ Th e Economist, October 7, 2006, survey section, p. 3.

43 Tom Abate, “H1-B Federal Immigration Bill: Reforms to the work visa program are a small part of the overall debate–except in Silicon Valley,” San Francisco Chronicle, May 27, 2007.

44 Ibid.

45 Paul Romer, “Increasing Returns and Long-Run Growth,” 94 Journal of Political Economy (1986): 1002; Paul Romer, “Endogenous Technological Change,” 98 Journal of Political Economy (1990): 71.

46 Robert D. Atkinson and David B. Audretsch, Economic Doctrines and Policy Diff erences: Has the Washington Policy Debate Been Asking the Wrong Questions? (Washington: Information Technology and Innovation Foundation, September 2008) <www.itif.org/index.php?id=177/>

Government Contracting

fall • winter 2008/2009 47

Science'sTroubled Legacy

Time for a 21st-Century Re-envisioning of 20th-Century Government Contracting Rules that

Were Designed to Boost Scientific InnovationDan Guttman

Government contracting grew out of scientifi c inquiry in the interests of national security in the mid-20th-century and represents a government reform that yielded great successes but has since lost its moorings. It's time to re-envision the role of pri-vate contractors in the public service.

Government Contracting

48 science progress

SINCE 9/11, Americans have discovered that con-tractors are doing much of the public’s basic work. In Iraq, Halliburton tends to the mess halls, Black-water to armed security details, CACI International Inc. to Abu Ghraib prison. On the home front, the Coast Guard bet its future on an out-of-control multibillion-dollar contract with Lockheed known as “Deepwater Port” to develop a whole new Coast Guard system. Th e Department of Homeland Secu-rity watched a $100 million contract to hire baggage checkers balloon to $700 million. And the Federal Bureau of Investigation’s $100 million-plus contract with the Science Applications International Cor-poration, or SAIC, to bring FBI case information management into the 21st century came closer to bringing it to a halt. When and how did the U.S. government become so dependent on contractors to do its basic work? Some said these developments refl ect Bush admin-istration policies; others traced them to Reagan- and Th atcher-era distrust for big government. In fact, the reliance on contractors to do the government’s basic work is neither new nor an accident. It is the predict-able and predicted outcome of a mid-20th-century, bipartisan decision to grow government through the use of contractors. What’s more, this decision was made in the name of science and was seen by the sci-ence policy elite at the time as a reform of truly Con-stitutional dimensions. Th is far-from-accidental reform yielded civiliza-tion-shaking developments—the Manhatt an and Apollo projects, innumerable breakthroughs in bio-medical research, and, of course, the Internet. But as is now apparent from the day’s front-page head-lines, the 21st-century legacy of this reform is a gov-ernment dependent on contractors to do its most basic work, such as feeding our soldiers, protecting our diplomats, and collecting intelligence on the batt lefi eld, oft en with too litt le offi cial control or even awareness. Today, dual sets of laws and policies govern the use of government offi cials and contractors—even as they may increasingly work side by side perform-

ing the same work. Consequently, laws enacted to defi ne and limit government and protect Ameri-cans against abuse increasingly do not apply to those doing the real work of government. Proclamations that more competition and bett er management will render government by contract accountable are no longer acceptable. Offi cial over-sight is inadequate, competition is too oft en limited, and the laws enacted to assure offi cial control are too oft en placebos. Th e country needs to know the real condition of its public workforce. Th e path to reform requires not only transparency but also analysis to prevent new imbalances. If contractors are to continue to do basic government work, then not only must laws and reality be reconciled, but also the public-service ethic must be extended to encompass the entire taxpayer-funded workforce. To begin to understand how we reached the point where dedicated contracts for specifi c sci-entifi c projects with profound national security implications morphed into a default determination to meet new challenges by deploying contractors instead of civil servants, we must start with the per-spective of mid-20th-century science policy. For it is there that the reliance on contractors to do the government’s work was conceived as a profound reform, with those present at the creation under-standing the strengths and limits of reform with acute foresight that is relevant today.

FROM THE MANHATTAN PROJECT TO THE

MILITARYINDUSTRIAL COMPLEX

America entered World War II with a small govern-ment and a tradition of distaste for Big Government. Th e war, however, required rapid deployment of the nation’s scientifi c and industrial resources. Th e Manhatt an Project to develop the fi rst atomic bomb, and the further wartime research sponsored by the famed Offi ce of Scientifi c Research and Develop-ment, showed that the genius of America lay not only in its natural scientists and inventors but also

Government Contracting

fall • winter 2008/2009 49

in its management techniques—the ability to use the contract to organize private enterprise for pub-lic tasks of enormous complexity. Th at’s how the atomic bomb was built speed-ily in secrecy by a combination of universities and industrial giants working on contract at secret, gov-ernment-owned, contractor-operated sites through-out America. As Offi ce of Scientifi c Research and Development historian Walter A. Macdougall observed, OSRD established the practice “of state funded but privately executed R&D. In a matt er of minutes, patt erns that had characterized American research throughout its history were undone.” Th at wartime success of the public-private part-nerships led OSRD director and presidential science advisor Vannevar Bush to recommend to President Franklin D. Roosevelt, in the classic report Science: Th e Endless Frontier, that the government continue contract relationships with nonfederal organiza-tions aft er the war. Incomprehensible today, but plausible in the shadow of mid-century totalitarian-ism, Bush needed to explain to corporate colleagues why taking money from Washington was okay. As Bush’s memoir explains, his good friend the presi-dent of Bell Labs “was sure that we were inviting federal control of colleges and universities, and of industry for that matt er, that this was an entering wedge for some kind of socialistic state.” Two decades later, in his 1965 Th e Scientifi c Estate, science policy eminence Don Price, fi rst dean of the Kennedy School of Government at Harvard University, provided a classic explanation for devel-opments calculated to satisfy corporate and science benefi ciaries of the government contracting pro-cess. Th e United States, Price argued, needed more government to prepare to fi ght the Soviet Union, develop infrastructure, provide social welfare, and cure disease. Th e use of private contractors would permit the federal government to draw on private expertise, provide corporations with funding that would allay corporate fears that America was turn-ing socialist, and would provide a force to counter-vail the dead hand of a central offi cial bureaucracy.

Price hailed the transformational import of the “fusion of economic and political power” and the “diff usion of sovereignty,” both chapter headings in his book. Specifi cally, he argued that:

the general eff ect of this new system is clear; the fusion of economic and political power has been accompanied by the diff usion of sovereignty. Th is has destroyed the notion that the future growth of the functions and expenditures of gov-ernments would necessarily take the form of a vast bureaucracy.

American government was undergoing a reform of Constitutional dimensions. Scientists, with their world-shatt ering, public-private research-and-development projects, were providing the elixir that would make the world safe for a new kind of govern-ment. But even before Price championed public-pri-vate contracting as benign reform of Constitutional dimensions, other, less fl att ering perspectives were also emerging. Most famously, in his 1961 farewell address, President Eisenhower declared the new public-private contract-based R&D partnerships to be the “military-industrial complex.” President Kennedy early in his presidency waded into this debate by commissioning a cabinet-level

Scientists, with their world-

shattering, public-private

research-and-development

projects, were providing

the elixir that would make

the world safe for a new

kind of government.

Government Contracting

50 science progress

report to examine the implications of contract-dependent R&D. Th e 1962 “Bell Report” (named aft er Budget Bureau Director David Bell) served as a springboard for the fi rst public congressional hear-ings on the Rand Corporation and other govern-ment-created contract “think tanks” and “systems managers” spawned at the nexus of government and the aerospace industry. It is the last, best, and indeed only (save for Ike’s speech) White House review of the wisdom of government by contract, and it fore-told much of what has since come to pass. Th e report declared that the “blurring of the boundaries between public and private” raised profound questions about the axiom that offi cials must be able to account for the work of government. Th e report said the use of contractors to respond to Cold War emergencies made sense in the short term. But over the longer term, the axiom of offi cial government control over contractors to the federal government would be challenged unless corrective action were taken. Th e “Bell Report” put its fi nger on the problem: the disparity between the rules of law governing offi -cials and contractors. Americans, ever concerned with big government, have enacted over two cen-turies laws to protect against offi cial abuse. Th ese began with the Constitution and its Bill of Rights, which defi ne the limits of government and provide for individual rights against government abuse, and now include laws on ethics, pay, freedom of infor-mation, and political activity. By and large, these laws do not apply to those outside government—even contractors doing government work on taxpayer dollars. Th ey do not apply on the dual premise that offi cials will have the capacity to oversee contractors and that the qualities for which contractors are valued may be constrained if they are subject to rules govern-ing offi cials. Yet as the “Bell Report” prophesied, when the decision to rely increasingly on contrac-tors for key government work was coupled with the freedom of contractors from rules limiting government offi cials, the predictable eff ect would

be the erosion of some, if not all, offi cial capability to oversee contractors. Why, the “Bell Report’s” logic foretold, should experienced government offi cials choose to remain in government service when they can work as con-tract employees who are not governed by offi cial pay caps and the stringent constraints of offi cial ethics—and do work no less interesting than that in government? But the “Bell Report” backed away from answer-ing the basic questions it raised. Th e new public-private mix, it found, was essential to Cold War programs. “Philosophical issues,” the report said, needed to be deferred. Th ereaft er, as government grew, third-party government grew without pause, on automatic pilot driven by bipartisan limitations on civil servants.

FROM THE “BELL REPORT” TO ABU GHRAIB

Cold War agencies such as the Atomic Energy Com-mission, the Department of Defense, the National Aeronautics and Space Administration, and the U.S. Agency for International Development, pro-vided the initial template for the deployment of contractors as a permanent workforce to perform central public tasks. From the get go, and in its pres-ent incarnation in the Department of Energy, the nation’s nuclear weapons complex has been essen-tially government-owned and contractor-operated. “NASA,” the Washington Post observed follow-ing the Columbia tragedy, “may hire the astronauts,” but “at the Johnson Space Center, the contractors are in charge of training the crew and drawing up fl ight plans. Th e contractors also dominate mission control, though the fl ight directors and the ‘capcom’ who talk to the crew in space are NASA employees.” With each new agency or program, contractors were trained and deployed to do the basic work. In this fashion, federal funding gave birth to infor-mation technology and the Internet and also to an increasingly sizeable contract (and university and

Government Contracting

fall • winter 2008/2009 51

further nonprofi t grant) workforce. In the 1960s and 1970s, these contracting models were trans-ferred from Cold War agencies to civilian agencies as the Great Society programs initiated by Presi-dent Johnson rushed to embrace contractor-gen-erated management products, such as PERT (Pro-gram Evaluation and Design Technique) and PPBS (Planning, Programming, Budgeting, and Execu-tion), incentive contracting, and systems analysis. All these products promised to solve the problems of the inner cities as well as those in Vietnam. In 1971, looking back on developments, John Corson, who opened McKinsey Corporation’s Washington offi ce, marveled at what had been wrought. “Th ere is,” he wrote in Business in the Humane Society, “litt le awareness of the extent to which traditional institutions, business, govern-ment, universities, and others, have been adapted and knit together in a politico-economic system which diff ers conspicuously from the venerated pat-terns of the past.” Post-war contracting, he said, was a “new form of federalism.” From the perspective of the Nixon White House, what had been invented was not a new way of govern-ment but a new way of patronage. Th e “Political Per-sonnel Manual” uncovered by the Senate Watergate investigations showed that Nixon White House staff -ers, seeking to catalog ways to control the presum-ably Democratic-leaning civil service, were bemused to discover that, under the guise of effi ciency, JFK and LBJ had used cutbacks in the civil service to hire friends as contractors—with, the Nixon staff ers noted, of course, higher taxpayer costs. Turning the tables, at the Offi ce of Equal Opportunity, the cen-tral War-on-Poverty agency, two young administra-tion offi cials named Donald Rumsfeld and Richard Cheney hired their own contractor, Booz Allen, to help take control of the agency, shuffl ing civil ser-vants under the guise of agency reorganization. In the 1980s and 1990s, a new generation of reformers—the privatizers, downsizers, and rein-ventors—came to argue for the reform of Big Gov-ernment, oft en with litt le evident knowledge of the

history or legacy of the reform that had been occur-ring for decades in America. When, in 1993, the Clinton administration announced its intention to

“reinvent government,” it declared it would reduce Big Government by further reducing the numbers of civil servants, with litt le demonstrable recogni-tion that this had long been the means for growing, not reducing, government. Ironically, the eponymous book that heralded the Clinton administration’s “Reinventing Govern-ment” reform was itself focused on local govern-ment reform and noted that many of the “public-private” partnership methods advocated had long been used at the federal level. Reinventing govern-ment followed the footsteps of the Price logic—the diff usion of sovereignty was a good thing that can be kept under control by modern management techniques such as “performance contracting.” Th e task was to cut red tape and make the use of con-tractors simpler and more effi cient. Th us, a key reform was to centralize purchasing in the General Services Administration, so that other agencies could essentially buy from a catalog with-out need for further competition. As Iraq showed, however, an eff ect of the reform was to maximize potential for unaccountability. When the public learned that a contractor called CACI had been at work interrogating prisoners at Abu Ghraib, there was a scramble to fi nd out exactly how the Army hired the contractor. It turned out that the contract was originally awarded by the GSA, assigned to the Department of Interior for administration, and then used by the Army in Iraq. With responsible GSA offi cials evidently unaware of what was happening with their contract, the Army used the contractor for purposes that were (unlaw-fully) beyond what the GSA contract provided, con-trary to the Army’s own prohibition against the use of contractors to perform such intelligence gather-ing, and contrary to the rule against using contrac-tors to serve, in essence, as integrated members of the government workforce. Th us, in context, the contracting scandals of the Bush administration are

Government Contracting

52 science progress

not an aberration but rather the predictable and pre-dicted consequence of a half century of government contracting reform. President Bush entered the White House com-mitt ed to paring the federal government, but, as with predecessors, the means was not to reduce the size of government but rather to increase the number of contractors. Th us, one of the pillars of the Bush “Management Agenda” was to put out for competition up to 850,000 civil-service jobs. Aft er 9/11, the new Department of Homeland Security was borne aloft on a contractor workforce and lim-ited offi cial capacity for its oversight. Or consider Iraq. In March 2002, before the war began, the Secretary of the Army sent a troubled memorandum to top Pentagon offi cials explaining that Pentagon Army planners had litt le clue as to the size of the contractor workforce, the costs associ-ated with it, “and of the organizations and missions supported by them.” In April 2002, the Army told Congress that its own estimates of the size of the civilian support workforce varied from 100,000 to 600,000. In short, assuming the Iraq war were to be waged, contracting would be the predictable means to be used—and an inability to oversee contractors the predictable consequence.

REENVISIONING 20THCENTURY

GOVERNMENT CONTRACT REFORM

Th e domestic “diff usion of sovereignty” that Price foresaw, and indeed urged, has now meshed with a global diff usion of sovereignty. Research and development is now a matt er of networks of mul-tinational corporations, “global universities,” and numerous governments. But at home, Price’s vision has (as the “Bell Report” prophesied) left a legacy that must now be addressed. We can no longer assume that the offi cial workforce has the capacity to understand and control the basic work of govern-ment. We have the diff usion of sovereignty, but we do not have the rule of law to match it.

In short, 20th-century reform has taken a remark-able journey but is now adrift from its moorings—and we need a map for the future of reform. Today, we have two alternative frameworks for viewing the government system that science policy helped cre-ate. In practice, neither of these is adequate to hold contractors to account. First, governing law and policy enshrine what might be called the “presumption of regularity” or the “rule of law” vision, in keeping with longstand-ing legal tradition that offi cials may be presumed to act with the good faith, diligence, and competence expected of them. Under the Western rule-of-law tradition, the presumption of regularity envisions that offi cials must be subject to rules that defi ne and limit government authority and protect against gov-ernment abuse. Th is is known as public law. If the presumption of regularity is valid, then these rules need not apply to contractors because contractors will be accountable to offi cials. Th e problem, as the front pages increasingly tell us, is that this presumption of regularity does not refl ect reality, where contractors have long since been engaged to do the government’s basic work. When it became apparent, at the dawn of contract reform, that the presumption was imperiled, the Eisenhower White House issued a policy that only offi cials can perform “inherently governmental” functions. Th at policy (now found in Offi ce of Man-agement and Budget Circular A-76) has become a fi ction or fi g leaf. It been dutifully reiterated by every White House since—most recently by the Bush administration virtually coincident with the start of the Iraq war and the wholesale deployment of contractors on the batt lefi eld. Second, while formally reiterating legal prin-ciples, bipartisan governing policy embraces what might be called the “governance-accountability” vision. Th is vision, a modern version of Price’s “dif-fusion of sovereignty,” holds that the work of the public is best done by a mix of government, civil society, and market organizations—with att en-tion to results and not to who does the work or the

Government Contracting

fall • winter 2008/2009 53

“boundary between public and private.” Th is vision premises that it does not matt er so much who is doing the public’s work, but rather whether there is

“accountability” for that work. In the world of governance today, accountability is to be provided in three interlocking ways:

Modern management and social science tech-• niques, which will align public and third-party interests by structuring contract performance standards and incentives properlyTh e force of competition between or among con-• tractors and interest groups, which will help keep the system honestTransparency as an aid to the fi rst two tools. •

While not forsaking the premise that offi cials must be able to account for all government work, propo-nents of this governance and accountability model suggest that the civil service must be transformed into a workforce that functions substantially, or even primarily, to manage third parties. Th e prob-lem, as the front pages once again tell us, is that the tools of governance are insuffi cient and can even be counterproductive—especially in the age of dimin-ished offi cial oversight. Th e upshot: competition in procurement is a key tenet of procurement law today, but the reality is that it is oft en limited because competitors may be few (particularly in security areas where work-forces must have clearances), competition costly, and competition further restricted by socioeco-nomic preferences. Similarly, performance mea-sures are hard to come by for novel public tasks that oft en require unavailable resources to police, which in turn makes poor performance hard to penalize. Because the work has to get done, and because too harsh a penalty may eliminate a competitor needed if there is to be competition, performance measures are oft en mostly useless. As for transparency—again it is nice in theory—the contract workforce too oft en remains largely invisible within agencies, never mind the public at large.

By consequence of the limits of these two visions, the evolution of the rules of the game often owes more to what might be called a “mud-dling through, common law” model. When crises arrive, they are handled with limited regard for the big picture. In the absence of coherent con-gressional and executive oversight, this model has, by default, become the primary means by which new rules of law are set to govern contractors and other third parties who perform the basic work of government. Th is model accepts that rules of public law should apply to those who perform public tasks and applies those rules on a piecemeal basis to nongovernmental actors who perform the public’s work. In doing so, it draws from the Anglo-Amer-ican legal tradition, which (as in the case of public utilities regulation) has long applied public obliga-tions to private entities that serve public purposes and to public procurement law itself. “Th e Science of Muddling Th rough,” as Yale professor Charles Lindblom’s classic article explained, is the American way—but it has its weaknesses, as the evolution of reform by contract well illustrates. First, successful muddling through requires a healthy crew of diverse and well-funded

Rules of public law should

apply to those who perform

public tasks and applies

those rules on a piecemeal

basis to nongovernmental

actors who perform the

public’s work.

Government Contracting

54 science progress

nongovernmental watchdogs to keep policy and practice honest. Government contracting is an insider’s game. Public watchdogs have been few and far between. Case in point: the history of the ethical stan-dards applicable to contractors illustrates the diffi -culty of developing a rule that works in the public interest. At the onset, no confl ict-of-interest rules at all applied to contractors. As Price observed, during the 1950s, “no Congressmen chose to make politi-cal capital out of an investigation of the interlocking structure of corporate and government interests in the fi eld of research and development.” Th e concept of “organizational confl ict of inter-est,” or OCI, was conceived only when some con-tractors felt that other contractors were using their inside track to unfair competitive advantage. It said nothing about circumstances where collective con-tractor interest is served but public interest disser-ved. In the late 1970s, the notion of “public interest,” as well as competitor interest, was added to the OCI concept. Even so, contractors may be hired where confl icts exist. Moreover, while civil servants can go to jail if they work for the Department of Transporta-tion and General Motors, no criminal conflict of interest rules govern contractors. But the real problem is that disclosures of potential conflict are exempt from disclosure under the Freedom of Information Act, and there is no routine of inde-pendent audits of the integrity of the disclosure and review process. Most importantly today, as Lindblom explained, the science of muddling through produces change by increment that serves the interests of those push-ing the change, with oft en litt le regard for a big pic-ture that may be increasingly out of kilter. As is the case with government contracting, whenever incre-mental changes neglect the big picture, which is the fundamental and continuing erosion of offi cial oversight capacity and the disconnection between law and reality, muddling through may be the prob-lem and not the answer.

A PATH TO REENVISIONING REFORM

Th e presumption of regularity, governance, and muddling through all represent frameworks for understanding how the ship of state got to where it is. But none of them provides an adequate chart for today’s waters. Th ere is no current vision to replace the one that kicked off reform of the sci-entifi c estate over a half century ago, but there are steps that can be taken to address its legacy and to re-envision the reform. Proclamations that more competition and bett er management will render government by contract accountable are no longer acceptable. Offi cial over-sight is inadequate, competition is too oft en limited, and the laws enacted to assure offi cial control are too oft en placebos. Th e country needs to know the real condition of its public workforce. Th e path to reform requires not only transparency but also analysis to prevent new imbalances. If contractors are to continue to do basic government work, then not only must laws and reality be reconciled, but also the public-service ethic must be extended to encompass the entire taxpayer-funded workforce.

Truth in government: public workforce must be

seen and planned for as whole

Th e third-party workforce must be rendered vis-ible—to Congress, offi cials, and the public. Fed-eral budgets, organizational charts, and agency directories provide details on the federal work-force, but there is no such detail on the third-party workforce—even where it works side by side with offi cials in federal buildings. Data must be supple-mented by analysis. Because reliance on contractors to perform the basic work of government remains invisible in substantial respects, independent anal-yses of how and how well the system works are exceedingly rare. Th e White House (through the Offi ce of Fed-eral Procurement Policy, but also the Deputy for Management) needs to be able to perform, or coor-

Government Contracting

fall • winter 2008/2009 55

dinate, research and analysis that addresses topics including the extent to which

Functions vital to national security and well being • are in danger of being contracted beyond offi cial oversight capabilityCompetition can be relied on to award contracts • to perform governmental activitiesReviews of past performance, are, in fact, used • and useful in contracts for performance of the work of government.

In addition, the White House must examine the role of contractors in providing “networked gov-ernment,” especially how and how well contractors who work for multiple agencies (or public agencies and private regulatees) perform network functions, and how potential confl icts are addressed. And the new president and his administration must ensure the adequacy of the procurement oversight workforce, including the availability of third-party resources (both contractors and citizens using the False Claims Act or otherwise). All this analysis must then be put to use. In cre-ating new programs or agencies, Congress and the White House should ask, “Who will do the work and can offi cials account for it?” Before funding new programs, relevant congres-sional committ ees and the White House Offi ce of Management and Budget should assess the ability of the offi cial workforce to perform core govern-

ment functions, including oversight of contractors. Th e Department of Homeland Security, for example, was created without evident regard for the reality—as evidenced by the problems of Deepwater Port and much else—that the offi cial workforce was from the get go inadequate to oversee contractors. As the country creates new programs to address, for example, climate change and energy security, fund-ing must be preceded by review of the adequacy of offi cial oversight in light of the Department of Energy’s long dependence on contractors.

The White House must have capacity to lead

Today dual sets of laws and policies govern the use of offi cials and contractors—even as they may increasingly work side by side performing the same work. Th ere must be public review and comparison of the diff ering rules that apply to federal employees and to nongovernmental actors in the performance of the government’s work. Th e sharp concern about contractors on the batt lefi eld in Iraq should be the beginning, but not the end, of the review, which must encompass work at home as well as abroad. Generations of procurement law reform have had mixed results, and the att empt to relate pro-curement and personnel law will be all that more diffi cult. Moreover, mechanical application of uniform rules to offi cials and contractors may be counterproductive and negate qualities for which contractors and civil servants are valued. Th us, at the same time, the White House needs to develop an ethic of public service that can be applied to contractors who do basic government work. Th e focus should not be so much on conduct that is plainly illegal and covered by current law—bribery or kickbacks, for example—but on conduct that is problematic because it takes advantage of the diff erence between the presumption of regularity that is enshrined in law and the practical reality of limited offi cial oversight. It is a tenet of modernity that information asym-metries dog relationships between experts and lay-

The White House needs to

develop an ethic of public

service that can be applied

to contractors who do

basic government work.

Government Contracting

56 science progress

people, or, in a related vein, between principals and agents. Unless controlled, the actor with more infor-mation may be able to take advantage of the client or principal who has called on him or her for help. Sadly, the primary legacy of 20th-century contract reform is the potential to abuse information asymmetry. First, in many cases the only experts on a sub-ject are those in the contracting sector. Second, the dual sets of rules governing offi cials and contrac-tors provide incentives for those experts the gov-ernment does possess to join the contractor work-force. Th ird, information asymmetry is further amplifi ed by the compartmentalization of the pro-curement process that att ended contract reforms in the 1990s: offi cials with responsibility see part of the big picture, but contractors, with contacts, and experience throughout government may see the whole playing fi eld. Professional codes have evolved to limit the abuse of information asymmetry by experts in their dealings with clients. Doctors, for example, must fully disclose and obtain informed consent of patients. Ethical codes also, of course, govern those who perform the public’s work as civil servants. Th ere are no generally applicable ethical principles that govern special ethical problems when private citizens do public service on taxpayer dollars. In part, the very need for such principles has been obscured by repeated offi cial proclamations that offi cials must be in control. In contrast to a patient or a legal client, the U.S. government might be thought to have the resources (authority, people, knowledge, money) to make decisions and protect itself. Indeed, this thought is given legal form in the presumption of regular-ity and the inherently governmental principle. But it is simply not the case today. Th ree remedies, then, present themselves for immediate att ention. First, there must be independent audits of the contractor confl ict-of-interest disclosure and review process. Criminal confl ict-of-interest laws that severely limit civil servants do not apply to

contractors on the premises, which means that contractors must be eff ectively overseen by civil servants. In fact, it may be in the public interest for contractors to work for others than the gov-ernment. Current law also requires contractors to disclose relevant interests to government, but disclosures are not publicly available, and there has been scant independent review of their work-ings. Investigations conducted by Sen. David Pryor (D-AK) found that even on key national security issues, contractors too oft en failed to disclose rel-evant interests, and when disclosure was made, the government too oft en failed to take note. In July 2008, for example, a federal jury found SAIC, one of the largest professional service con-tractors, guilty of making numerous false claims and statements in response to its obligation to disclose interests relevant to work for the Nuclear Regulatory Commission. Th e Department of Jus-tice discovery in the case showed core defi ciencies in both this major contractor’s internal review and the government’s oversight. Th is is why the gov-ernment—and public—must know how and how well contractor internal reviews work, and all must know how well government does its job of review-ing contractor disclosures. Second, there must be att ention to the increas-ing circumstances where contractors are put to work in violation of the law—notably where the work is beyond the scope of the contract (as in contracting interrogation at Abu Ghraib), or where contractor employees staff offi ces alongside offi cials (in viola-tion of the prohibition against personal service con-tracts), or where contractors are used to perform inherently governmental functions, in violation of inherently governmental policy. Abu Ghraib crystal-lized the problem. Among other things, it brought to public light the reality that much GSA “supply sched-ule” contract work, such as one for prison interroga-tion, is outside the scope of that permitt ed in the basic GSA agreement. Addressing this, contractor lawyers explained to the Washington Post that it was

Government Contracting

fall • winter 2008/2009 57

not for the contractor to tell the government that assigned work was beyond that provided for by law. If the presumption of regularity were valid, then it might be argued that contractors may rely on government for the “regularity” of contracts. But where it is known that offi cial oversight may be limited, and, to boot, where contractors talk of themselves as “partners” to government, the duty of disclosure seems clear. Th ird, there are too many instances where work that is poorly specifi ed or not needed at all is per-formed by contractors—again on the grounds that the government asked for it and, therefore, the work can be presumed to be reasonable. Th e objection will be raised that to impose ethics principles would be to stop government in its tracks because of the profound dependence on contractors. But the focus, at least at the onset, may be on disclosure. As with current contractor confl ict-of-interest laws, once disclosure is done, then the government can affi rm that the contract should proceed—even where a problem that cannot be mitigated may exist. A point of the eff ort should be to alert offi cials to problems they may not have seen, to require offi cial refl ection on problems that are seen but not addressed, and to create a public record of the need for variation from principle on which reform can proceed. If, for example, contractors routinely note that their work appears to be impermissible personal service or inherently government contracting, and if procurement offi cials routinely determine there is no alternative to proceeding, then Congress and the White House will have a basis to consider whether such law and policy have outlived their functions, or, if not, what alternatives must be craft ed. In sum, it is time to explore, at the highest level, the possibility and effi cacy of an ethos or ethic of

public service to govern all those who do the work of government, not just the civil service. If ethics may seem a weak reed to account for the powerful forces unleashed by 20th-century reform, then the logic by which contracting information asymmetry has grown may provide a comparative advantage in the development of ethical principles. Th e “revolv-ing door” assures that there will be a steady fl ow of contractor offi cials who understand the govern-ment perspective (in ways, for example, that doc-tors or lawyers may not understand their patient or client perspective). Finally, there is America’s role as the pioneer of modern government by contract for uses of his-toric importance. Th e American system is unique among modern governance systems in its scope of reliance on contractors to do the basic work of government. At the same time, contracting for gov-ernment services appears to be a growing global phenomenon, for which the American system may be a model for study and, with appropriate local modifi cations, adoption. Strengthening the ability of the American sys-tem to creatively address and solve the diffi cult questions that are the legacy of 20th-century con-tract reform may be crucial in the globalized world and best in keeping with the genius that was the spirit of mid-20th-century reform.

Daniel Gutt man, a professor at Johns Hopkins Univer-sity, is co-author of Shadow Government and a fellow of the National Academy of Public Administration. He is currently a Visiting Professor/Scholar at Tsinghua University School of Public Policy and Public Manage-ment, Shanghai Jia Tong University School of Law, and the Peking University School of Law. Professor Gutt -man was the recipient of the Excellence in Teaching Award for Government in 2004.

Patent Reform

58 science progress

Tackling the Challenge of Patent Reform

NATIONAL ARCHIVE

Patent Reform

fall • winter 2008/2009 59

Large-scale investment in science and technology could simultaneously help jump-start the fl agging economy and generate solutions to the pressing problems of climate change, sustainable energy, and national security. But the prospects for private-sector investment in this much-needed innovation economy will be limited if one oft en overlooked element of America’s economic engine is not well tuned to modern realities: the U.S. patent system. Th e nation’s provisions for assigning and protect-ing intellectual property rights, and the U.S. patent system in particular, are at the very core of the Amer-ican model of scientifi c, technical, and economic advancement. Patents assure an inventor a period

Recommendations for the Obama administration and Congress

By Rick Weiss

Scientifi c research and technological development have long been

mainstays of American economic and military strength. Today more

than ever, the global economic crisis and the prospect of a long and

deep U.S. recession call for a reinvigoration of America’s scientifi c,

engineering, and manufacturing enterprises.

of time, generally 20 years, to exclude others from using the invention, in return for a full explication of that invention by the patent holder. Th e assurance that competitors can be blocked from freely copy-ing inventions during this period of exclusivity is a powerful stimulus to capital investment, which is a key enabler of the inventive process. At the same time, the policy of requiring that inventors provide a full and public description of their invention as part of the patent process ensures there will be a well-described platform upon which others can quickly build. Th is provision supports the progressive principle that open access to information is a common good. As a practical matt er, it also fuels

Patent Reform

60 science progress

a faster pace of innovation than would occur through other means of market exclusivity, such as trade secrets, which in turn boosts broad-based economic growth and prosperity. Th e patent system has been the subject of legisla-tive, administrative, and judicial modernization, and many experts in law, industry, and economics agree that the system is past due for another tune-up. Con-gress spent much of 2007 and 2008 debating legis-lation that would have amounted to the most sig-nifi cant changes of U.S. patent law in decades. Th e Senate was unable to reach consensus and the Pat-ent Reform Act of 2008 was not enacted, but a fresh push is expected in 2009. Still, it remains uncertain whether legislators will be able to bridge the few remaining deep divisions among stakeholders. In an att empt to explore patent reform options that could bolster innovation and economic recov-ery and have a reasonable chance of garnering the support of a range of patent players, the Center for American Progress and its sister organization Sci-ence Progress in October 2008 convened a round-table of expert stakeholders from a wide array of business, legal, and academic disciplines, including

many with competing intellectual property inter-ests. Th is report provides a summary of our per-spective and recommendations, taking into account ideas and opinions discussed at the roundtable and prefaced by a brief history of the U.S. patent system to help put the newly proposed changes in context.

ROOTS OF THE CURRENT PATENT SYSTEM

Th e general principle of intellectual property predates by centuries the founding of the United States and was codifi ed in Article 1, section 8 of the U.S. Consti-tution: “Congress shall have the power...to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclu-sive right to their respective writings and discover-ies.” Importantly, and pertinent to America’s current economic predicament, the U.S. patent system was inspired not so much by a desire to protect individ-ual rights but to spur economic growth and inspire technological advancement. Th e best way to catalyze investment in ingenuity, the founders believed, was to enhance the prospect of a return on that investment while simultaneously fostering the public release of information to seed future innovations. Th omas Jeff erson penned the fi rst patent act, which gave the patent holder an exclusive right to make, use, and sell his or her invention in the United States or import the invention from abroad. Th e act, signed by President George Washington on April 10, 1790, declared as eligible for a patent “any useful art, manufacture, engine, machine, or device, or any improvement thereon not before known or used.” Th is defi nition has been reinterpreted over more than 200 years to include, among the many inventions that Jeff erson could not have anticipated, genes and genetically altered plants and animals; the invisible etchings of integrated circuits; and algorithms for predicting the kinds of fi nancial risk a credit card holder might take. Not surprisingly, the process for reviewing and granting patents has changed over the years. In the

The patent system has

periodically been the

subject of legislative,

administrative, and judicial

modernization, and many

experts in law, industry,

and economics agree that

the system is past due for

another tune-up.

Patent Reform

fall • winter 2008/2009 61

For the fi rst 46 years after passage of the Patent

Act of 1790, patents were fi led by name and date

instead of by number. In December 1936 a fi re re-

duced to ashes the almost 10,000 patents issued

so far. Of those, 2,845 were reconstructed from

private records; the rest had to be cancelled. All

of the recovered ones were, for the fi rst time, is-

sued a number—preceded by the letter X to indi-

cate their heritage as part of this original set of fi l-

ings. Subsequent patents received only numbers.

Today those fi rst 2,845 patents are known as the

“X patents” and afi cionados know that the fi rst U.S.

patent is numbered not “1” but “X1.”

WHY THE “X” IN PATENT NUMBERS?

18th century, applicants were asked to provide a description and drawing of their invention and, when practical, a model, along with their $4 fi ling fee. A fed-eral Patent Board, which included Jeff erson, Henry Knox (then secretary of war), and Edmund Ran-dolph (then att orney general), reviewed applications and issued rulings, yea or nay, on the basis of whether the invention was “suffi ciently useful and important.” At most, patents were allowed for 14 years. Th ere was no right of appeal. And there were no lines to wait on. Th e fi rst patent was issued to Samuel Hopkins of Philadelphia for his improved method for making “Pot ash and Pearl ash,” use-ful for the production of soap. By the end of the year, a grand total of three patents had been issued, the latt er two for novel improvements in candle-making and fl our-milling.

THE SITUATION TODAY

Today the United States Patent and Trademark Offi ce has 6,000 employees to handle the more than 460,000 patent applications that are fi led each year. Th ere is a backlog of about a million unexamined pat-ent applications and it takes, on average, two years to get a fi rst action from the PTO and three years to get a patent issued (or rejected). In some fast-changing fi elds, including computer architecture, IT security, and soft ware- and communications-related technol-ogies, average wait times are even longer. While the widespread characterization of the PTO as “broken” is an overstatement, there is no disagreement that improvements are needed. Most obvious among the current failings, examiners are overwhelmed by the sheer volume of applications and the lack of time and resources to perform their jobs at the level of excellence demanded of them. As a result, too many patents are issued that, but for the scarcity of time and resources, would almost surely have either been honed to greater quality through the examination process or not issued at all. Th ere is broad consensus today that the U.S. system for pro-

tecting intellectual property is burdened with too many patents of questionable quality and validity. Underlying these and other problems, the Patent and Trademark Offi ce is underfunded and under-managed. Although Congress converted the offi ce to a “fee-based organization” in 1991, which means it is self-supported through fees paid by applicants, Congress has also repeatedly raided that fund, diverting more than $750 million into the general treasury over the past decade. Although this prac-tice has been quelled over the last three years, prior diversions so eroded the PTO’s infrastructure and resources that rebuilding is now urgently required. Meanwhile the patent challenge, appeals, and enforcement processes are cumbersome and have bogged down the PTO and the courts—a problem exacerbated by the emergence of so-called non-practicing entities, or NPEs, sometimes called pat-ent “trolls.” Unlike operating companies that pro-duce products and services, and universities that generate most of their revenue from tuition and grants and generate intellectual property through their academic investigations, patent-holding enti-ties typically do not produce any products or off er any service beyond patent licensing and enforce-ment. Th eir primary revenue sources are royalties

Patent Reform

62 science progress

obtained from asserting patents against successful product and service companies. Th ese challenges and others faced by PTO have been analyzed repeatedly in an array of indepen-dent reports in recent years, all of which have ended with calls for substantive degrees of patent reform. Among the organizations compiling such reports have been the Federal Trade Commission in a 2003 report, the Commerce Department’s Offi ce of Inspector General in 2004, the National Academy of Sciences (2004), the Government Accountabil-ity Offi ce (2007), the PTO itself (most recently in its 2007–2012 Strategic Plan), and the U.S. Patent Policy Advisory Committ ee (2008). Although a number of reform initiatives have been imple-mented over the years, they have progressed too slowly—in some instances because of resistance by groups of applicants that have learned to use the system’s shortcomings to their own advantage. Informed by previous reports, recent incomplete eff orts at reform, and the patent stakeholders’ round-table discussion sponsored by the Center for Ameri-can Progress and Science Progress in October, we conclude that the patent system can be immediately

improved through a range of practical administra-tive changes within the Patent and Trademark Offi ce. Th ose changes, outlined below, can and should be implemented early in the new administration, though some may require supportive legislative action. Even if supportive legislative action is not required to implement near-term reforms within the PTO, other legislative reform is critical, as out-lined in this report. Th e Constitution directs Con-gress to make the patent system work eff ectively in the public interest. But it has been more than 50 years since Congress took a hard look at patent law and made needed changes. In that time the pace of invention and the complexity of science have both increased enormously. Th e PTO and the courts have tried to fi ll the resulting legislative gaps through jurisprudence, sometimes with strained results. Th is imperfect approach has created a sys-tem with too much emphasis on the mere granting and enforcing of patents, many of them of poor quality, and inadequate att ention to the promo-tion of useful inventions and investment. Beyond the PTO and Congress, patent appli-cants also bear duties and responsibilities to keep the system working well. In recent years, however, applicants have aggressively sought, and in too many cases obtained, patents containing overly broad claims—that is, claims to subject matt er broader than is justifi ed by the actual invention. In a third group of recommendations, this essay sug-gests how applicants could, with proper incentives, cooperatively adjust their behaviors to facilitate the kinds of improvements we seek through adminis-trative and legislative changes. Finally, we take note of some areas of contro-versy in which it is possible—even likely—that the Court of Appeals for the Federal Circuit or the Supreme Court may institute clarifying reforms through court decisions, as they have already done in the recent eBay decision (made by the Supreme Court in 2006 regarding the near automatic grant of injunctions),1 the MedImmune decision (made by the Supreme Court in 2007 regarding the ability

The Constitution directs

Congress to make the

patent system work

eff ectively in the public

interest. But it has been

more than 50 years since

Congress took a hard look

at patent law and made

needed changes.

Patent Reform

fall • winter 2008/2009 63

of a licensee to challenge patent validity while still making royalty payments),2 Sandisk (made by the Court of Appeals for the Federal Circuit in 2007) regarding standards required to fi le a declaratory judgment),3 KSR (made by the Supreme Court in 2007 regarding the obviousness standard),4 Quanta Computer (made by the Supreme Court in 2008 regarding patent exhaustion),5 Bilski (made by the Federal Circuit in 2008, regarding business method patents)6 and other important decisions. Historically, the courts have struggled with pat-ent law. Judges and juries are asked to decide diffi cult cases involving complex applications of science, tech-nology, and law. Recognizing these realities, Con-gress established a specialized court to hear all patent appeals, the Court of Appeals for the Federal Circuit, which in its 20 years has contributed substantially to creating consistency in patent law. While the judicial approach to resolving patent issues is inherently reac-tive, episodic, and slow, there is reason to hope that to the extent the PTO and Congress fall short of the goal of comprehensive patent reform, the courts will fi ll some of the key gaps (see judicial section below).

RECOMMENDATIONS

Whether by administrative changes, legislated reforms, applicants’ stricter adherence to high stan-dards, or judicial review, the overarching goals must be to increase patent quality and reduce uncertainty about the limits of intellectual property protection. Th e following recommendations are presented with these goals in mind and with confi dence that with a just and robust patent system in place the United States will strengthen its position as a global center of innovation and, in so doing, benefi t economically.

U.S. PATENT AND TRADEMARK OFFICE

Th e PTO needs to embark on a series of changes that will make it more fi scally secure, more organi-

zationally effi cient, and more operationally poised to accomplish its goals and those of the inventors it serves. To accomplish these changes it will be nec-essary, through one mechanism or another, for the PTO to operate much more like a smart and pro-gressive business. Th e PTO’s primary responsibility is to determine whether patent and trademark applications meet the legal requirements for issuance, and to issue patents and trademarks as a means to help stimulate inno-vation and economic growth. In an eff ort to facili-tate those important functions, Congress converted the PTO to a fee-based operation in 1991 (under the Omnibus Budget Reconciliation Act of 1990), though because of congressional diversions, those fees were not fully available to fund PTO opera-tions. Eight years later Congress made the PTO into a so-called performance-based organization, which granted the PTO certain limited managerial fl exibil-ities in return for adopting specifi c measurable goals and customer service standards. Today, however, the PTO is still hobbled by bureaucratic barriers and inadequate control over its resources, undermining its ability to perform eff ectively. Th ere are four overarching changes that the PTO must immediately embrace, none of which are likely to be implemented unless the offi ce—through either administrative or legis-lative changes discussed below—is granted an added measure of economic and administrative autonomy and fl exibility.

Solidify the budget, and control revenue

and expenses

No organization can be eff ective if it lacks the abil-ity to balance its income and expenses. Th e PTO has the responsibility of supporting itself entirely by fees, but without having eff ective control over those fees or its expenses. Th e offi ce must gain this authority (subject, of course, to government oversight) and use it to further its mission, keeping in mind that any changes it makes to its fee struc-

Patent Reform

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ture should not have an undue negative impact on individuals and small- or medium-sized businesses, which provide the majority of new patentable inventions in the United States. Among the ideas to consider are the creation of a fee-based fast-track system; demanding that a greater share of patent-processing fees be paid ear-lier in the examination process, since that is the time that some of the most labor-intensive aspects of the PTO’s work is done; and increasing those fees that the PTO is authorized to set. Th e offi ce must have full control over its budget and retention of funds carried over from prior years. And there must be a total and permanent halt to diversion of PTO funds to other government purposes.

Hire and retain the best patent staff

Th e hiring of additional staff will not by itself resolve the problems of increasing patent pendency (the amount of time it takes for a decision to be rendered on a patent application) and decreasing patent qual-ity (one result of a rushed examination process), but progress cannot be expected in these areas with-out fi rst bolstering the examining staff . Examiners today are simply asked to do too much with too few resources and too litt le time. Two-thirds of departing examiners cite unrealistically high production goals as a primary reason for leaving. Th ose goals (the number of applications to handle per week) have not changed since 1976, despite the ever-increasing complexity of inventions and patent applications. Some 70 percent of examiners told the GAO they had worked unpaid overtime in the past year to meet goals. Th e pay of PTO professional staff , relative to compensation available in the private sector, is not competitive. When the undersecretary of commerce and director of the PTO is paid the equivalent of a mid-level manager in the private sector, and all other positions within the PTO are scaled accordingly, it should not be surprising that the best talent will fi rst seek employment in the private sector or migrate there when possible. Indeed, the average examiner is

employed by the PTO for approximately three years, which is just the amount of time required to become a profi cient examiner. It is essential that the abysmal examiner att rition rate be lowered. Adding to job dissatisfaction is the fact that too litt le time is allowed for examination, particularly given the defi cient information infrastructure avail-able. Moreover, rules make access to outside experts and even applicants diffi cult, leaving examiners largely isolated as they work. Substantially improv-ing the work environment, pay, and information resources, and establishing a clear and att ractive career path for examiners could have a dramatic impact on att racting the very best talent. At the same time, the metrics of examiner suc-cess need to be updated. For instance, the quality of the examination process is conventionally assessed by reviewing a sampling of issued patents to see how many should not have been issued. But rejected applications should also be reviewed, to see how many should in fact have issued. Additional objec-tive measures should be developed that are verifi -able by independent, third parties.

Improve communication with applicants

and stakeholders

No corporation is eff ective without dynamic and fre-quent communication with its clients and customers. In similar fashion, it is essential that the PTO main-

Today the PTO is still

hobbled by bureaucratic

barriers and inadequate

control over its resources,

undermining its ability to

perform eff ectively.

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tain clear channels of communication with all the stakeholders it serves so it can respond quickly and eff ectively to the ever-changing global marketplace. PTO outreach and consultations have been in very short supply during the Bush administra-tion, bringing PTO-stakeholder relations to what are widely considered to be an historic low. So strained are relations that last year, for the fi rst time, the PTO was sued by a stakeholder over a rules package the offi ce released without initial consultation. In the Obama administration, the offi ce should seek early and extensive public input on rules packages; off er bett er access to PTO eco-nomic and other data, including fi rst action and appeals statistics; and provide guidance based on relevant judicial decisions. Th e PTO’s Public Pol-icy Advisory Committ ee should open its meetings to the public and webcast them to the maximum extent practicable. Meeting minutes and tran-scripts should be posted, and advisory committ ee membership should be broadened. Some of these goals may require judicial or legis-lative changes to the so-called inequitable conduct defense (see below), to facilitate greater commu-nication and exchange between the applicant, the patent examiner, and third-party experts. But there is no reason why the director of the offi ce, through the power of the bully pulpit, cannot initiate signifi -cant changes from day one.

Improve information available to the PTO staff

Electronic information systems at the PTO are woefully inadequate. While those systems can per-form the core task of searching for patent prior art, they fall far short in their ability to search global products that may practice inventions, as well as non-patent prior art (through, for example, indus-try trade publications, R&D publications, and aca-demic research journals). Th e technology exists to remedy this situation, but it is lacking at the PTO, as are staff ers with the technical expertise to implement it.

At the same time, the offi ce should bett er avail itself of third-party experts. Experiments that have enabled interested third parties to comment and provide input to examiners, such as pilot projects using “peer-to-patent” reviews, have been promis-ing, but have not been scaled up. As with other pro-posed changes, it will be important to ensure that any new duties, costs, or other burdens relating to a shared examination process do not disadvantage independent inventors and small enterprises.

The GOC question

Some argue that the four changes outlined above can be accomplished only by congressional conversion of the PTO into a so-called government-owned cor-poration, or GOC, and perhaps this is the case. Th e conversion of the PTO from its current status as a federal performance-based organization to a GOC would give the offi ce greater fl exibility than agencies have in terms of hiring, fi ring, salary ranges, and full-time employee staffi ng-level caps, eff ectively allow-ing the PTO to manage itself more competitively and att ract and retain highly skilled employees. As a government-owned corporation, the PTO could compete more eff ectively with the private sector to att ract and retain the talent required to improve qual-ity and effi ciency. And it would have fi rewall protec-tion against fee diversions to the U.S. treasury. Nonetheless, we believe that the PTO can accomplish its objectives within the framework of responsive government and that keeping the PTO wholly within the government could have real advantages. It would refl ect the reality that, no matt er how much administrative independence the offi ce may earn, it is the federal government that promulgates the nation’s patent policies. Moreover, to maintain the PTO’s current status within the executive branch would appropriately place the offi ce near the center of the Obama administration’s eff orts to use progressive and enlightened federal policies to take on the economic and fi nancial cri-ses facing our country.

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Finally, it should also be noted that there is no inherent reason that a government offi ce cannot be granted many of the administrative and material resources the PTO needs in order to be successful—nor are those resources necessarily assured through the simple conversion to a GOC. Th us it should be a high priority of the new administration to give the PTO the tools it needs to achieve its goals without separating it from the government family. If organiza-tional and administrative constraints prove to be too high a hurdle to overcome with reasonable rapidity, however, then a GOC should be considered. Whether or not the PTO becomes a GOC, none of the important changes outlined here are likely to be achieved unless the Obama administration appoints a highly skilled director with professional managerial experience in a large, mission-driven organization, empowered with a clear mandate to apply best business practices to every aspect of the PTO. In selecting a new director, skills in executive management and business operations should be par-amount, with less att ention directed to whether the individual is an att orney. In fact, many corporations now select non-att orneys to lead their intellectual property organizations, recognizing that what is lack-ing are business skills to manage those organizations, rather than legal skills, which are already abundant.

ADDITIONAL IMPROVEMENTS WITHIN PTO

As part of a renewed commitment to the quality and consistency of patent application review, the offi ce should, in addition to achieving the above goals, craft and release new examination guidelines clarifying the PTO’s insistence on high standards of disclosure and the need for strict compliance with writt en description and enablement provisions. While hardly a panacea for the recent, widely per-ceived decline in examining standards and concom-itant drop in patent quality, a strong restatement of high expectations through the issuance of PTO guidelines would be an important start.

In addition, given the signifi cant threat posed by patent trolls to the integrity and stability of the patent system (discussed in more detail in the accompanying article by Dan McCurdy on page 78), and notwithstanding the possibility of legislative actions and court decisions to deal with this threat, the PTO should initiate a study assess-ing various approaches to understanding and resolving the patent troll issue. Among the policies that have been proff ered and are deserving of study are the awarding of legal fees to successful defen-dants (a “losers pay” rule); more strict adherence to Rule 11 requirements (which set the bar height for the fi ling of patent infringement suits) by the courts; and a requirement that all patent assign-ments and licenses be registered with the PTO, including ongoing declaration of assignments and licenses to and by the patent-holder’s upward and downward affi liates. Yet another way the PTO could simplify opera-tions and help prosecutors would be to revamp its current interpretation of restriction requirements and unity-of-invention standards. Under current standards, inventions that require the integrated use of many independent pieces of, say, genetic material or gene products—such as those used on analytic “gene chips”—have been ruled by PTO to be multiple inventions, slowing issuance and add-ing signifi cantly to cost. Th ose standards are taking a toll particularly on the emerging bioinformatics fi eld and should be reassessed.

Reducing the time to get a patent decision

A number of initiatives could help reduce the problem of prolonged pendency times, including, as briefl y alluded to above, an increase in regional and international work sharing and bett er synchro-nization among various patent offi ces worldwide. Huge amounts of duplicative work are carried out in patent offi ces around the world. Various forms of work sharing among patent offi ces are allowed under the terms of the Patent Cooperation Treaty

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and the Patent Prosecution Highway, but for the most part they remain untapped. Similarly, programs that enable interested third parties to comment and provide input to examiners, such as pilot projects using peer-to-patent, have been promising, but have not been scaled up. As these and other changes in the examination process are imple-mented, it will be important to ensure that any new duties, costs, or other burdens do not disadvantage independent inventors and small enterprises. A second possible means of reducing pendency would be to remove some of the current incentives for continuations. Th e ability of a patent holder to continue to tailor claims of a related patent provided the claimed invention in that continuation appli-cation is deemed within the scope of the original patent—and to claim the original fi ling date of the parent patent even though the continuation patent may be altered many years following the initial patent fi ling—has created mischief and reduced the predict-ability surrounding patented inventions. Th e PTO should initiate a study of whether continuations as practiced today are in keeping with the public policy principles underpinning the patent system and make recommendations, if necessary, to amend the law. A third approach to reducing pendency is to identify and implement incentives to defer exami-nation. Japan has a robust system of voluntary pat-ent deferrals, which has helped to reduce pendency there (as counted from the date of examination request)—and has resulted in shift ing some of the burden of primary examination to the United States. Deferral is not currently an option in the United States but should be, both to allow the PTO to focus on applicants’ most important applications and to bypass applications that all parties agree are by this time stale. New legislation may be required to implement such a change Finally, the PTO should conduct or share responsibility for a study that would examine the feasibility of launching a multinational patent exam-ination offi ce to conduct patent examinations on behalf of member states (discussed in more detail

in the accompanying article by Bruce Lehman on page 87). Th e fi ndings of such a world-class patent examination entity would be shared across all mem-ber states, but with each member state maintaining its own patent offi ce for issuance, appeal, and other non-examination activities. Given the realities of multinational negotiations, this new offi ce is an ambitious plan, but one that deserves energy and emphasis from the Obama administration. Separately from the issue of patent pendency, the PTO must devise a plan for streamlining existing post-grant and ex parte proceedings, which result when third parties ask the offi ce to re-examine the validity of an issued patent. In particular, inter partes re-examination, which allows third parties to play an expanded role in the re-examination process, is seldom used and therefore ineff ective, and thus has not contributed to providing more IP certainty, as originally intended.

CONGRESS

Th e Patent and Trademark Offi ce has been reincar-nated repeatedly in various forms over the centuries (it fi rst became a distinct bureau in 1802, under the State Department; was transferred to Interior in 1849; and in 1925 moved to Commerce, its cur-rent home). If the administrative changes outlined above—along with some of the legislative changes noted below—cannot be mustered to achieve the major goals outlined in this report, it may be that a new reincarnation will be needed, in this case to a government-owned corporation. For both the philo-sophical and practical reasons outlined above—and given the reality that more political capital would likely be spent arguing over the implication of the PTO as a GOC than would be required to imple-ment many of the changes called for in this report—we recommend the GOC as a mechanism of last resort, rather than the preferred path forward. Notwithstanding how the GOC question is handled, Congress should pass legislation that

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would at last change the U.S. patent system to a “fi rst-inventor-to-fi le” system—that is, a system that rewards the fi rst person to fi le a claim for an inven-tion rather than a person who, aft er a claim has been fi led by another, provides evidence for hav-ing created that invention earlier. Th e United States is the last major economy in the world that grants patents on the basis of “fi rst to invent,” rather than

“fi rst to fi le.” Without question, the American tradi-tion has proven resilient and there remains a lack of consensus among U.S. stakeholders about align-ing the United States with international practice. Some individual inventors and small companies have voiced concerns that a “fi rst-inventor-to-fi le” system could place them at a disadvantage relative to larger companies, which they perceive may be bett er able to fi le patent applications rapidly. Some also fear that, since patents can take years to issue, a policy of making applications public 18 months aft er fi ling might help unscrupulous competitors who are willing to fl irt with infringement. But there are strong arguments to be made for such a change. Among them, moving to a fi rst-inventor-to fi le system would improve predictability and reduce controversy surrounding patents issued around the world. Also, many of the recommendations in this report are predicted to reduce pendency, making 18-month publication less of an issue. To facilitate greater communication between examiners and applicants, Congress should also pass legislation updating the law governing inequi-table conduct—the legal term describing a patent applicant’s failure to disclose faithfully to the PTO all information required during the patent applica-tion process. Th e doctrine serves an important pub-lic policy purpose, namely to help ensure that appli-cants tell the PTO the truth about their inventions and claims. But it is oft en abused. Parties accused of infringing a patent almost always assert—albeit rarely with success—the inequitable conduct defense, which claims that the patent holder was less than appropriately forthcoming about knowl-edge he or she had about relevant prior art.

Th e issue of inequitable conduct is ripe for reform because it may be an obstacle to other changes that could improve patent quality. Specifi -cally, one way to lessen the overwhelming burdens already borne by the PTO is to shift more respon-sibility to applicants to supply information to the patent examiner, such as through more diligent searches of prior art. Such a shift could both speed the examination process and improve patent qual-ity. But it is important that any policy encouraging that diligence not make an applicant more suscep-tible to charges of inequitable conduct that, if suc-cessful, would render the patent unenforceable. To this end, if PTO rules are enhanced to require applicants to more diligently search for invalidating prior art, then it should be made clear that mere failure to cite a specifi c relevant prior art reference would not, by itself, constitute inequitable conduct. Rather, intentional failure to disclose art that was known by the applicant to be material and that resulted in an asserted claim being found invalid would constitute inequitable conduct. Moreover, to curtail abuse and reduce the enor-mous burden on the courts and discovery costs associated with defending against a claim of ineq-uitable conduct, the inequitable conduct defense should be limited to cases in which at least one claim of the patent has been found invalid. And to gain the benefi ts of broadened prior-art searches and submissions central to the peer-to-patent initia-tive, Congress should enact reform legislation that explicitly allows the public to submit prior art to the PTO with commentary. As described in the PTO section above, Con-gress should also consider craft ing legislation that would create a new post-grant opposition system and reform inter partes re-examination, as well as legislation revamping the laws on apportion-ment of damages (though this is also likely to be a subject of review by the courts, as noted below). Instituting a post-grant review proceeding was recommended by both the FTC and National Academies reports.

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Further, Congress should consider legislation to curtail “venue shopping,” the practice of plaintiff s launching lawsuits in jurisdictions with histories of rulings favorable to them even if the jurisdic-tion has litt le or no connection to the parties or the events involved in the litigation. Venue shopping has already been the focus of an important Fift h Circuit case and, like the issue of proportional damages, is likely to att ract further court review in the near term, as discussed below. Congress should also consider legislation that would provide alternatives to a broad right to interlocutory appeal of trial court decisions.

APPLICANTS

Many business leaders decry the recent perceived decline in patent quality. But a signifi cant part of the problem plainly rests on the shoulders of over-reaching applicants themselves and their outside prosecution counsel, who are measured primarily by metrics of patent quantity rather quality. First, applicants need to be more proactive, col-laborative, and thorough with regard to disclosure. Although pre-exam meetings are not always effi cient or worthwhile (or always welcomed by examiners), the prosecution process would generally benefi t from more open communication in the early stages. As mentioned earlier, changes to the inequitable conduct doctrine would likely be required to facili-tate such changes in approach. A second way applicants can step up to the plate is to ensure that their claims are closely aligned to specifi cations in their applications. Many experts have noted a disturbing trend in recent years toward exaggerated claims that rest on litt le or no basis in fact, or evidence of the claimed invention or its practical usefulness. Th ese claims slow the approval process and add to pendency problems. Th ey can also encourage cases of adventurous enforcement, in which a claimed infringement is of a product or service that has virtually no resemblance to the product or service that was envisioned in the issued

patent. Product-producing companies can hardly hazard a guess—let alone know—what blocking patent may lay in their path given suffi cient creativ-ity in claim interpretation. Time-consuming and expensive legal challenges are the only sure prod-ucts of overly broad and low-quality patents. Th ird, applicants should consider working with the PTO and with Congress to design and imple-ment a process of deferred examinations, taking into account the need for a mechanism to mitigate the additional uncertainty that would necessarily result from additional unexamined patent applications. In conjunction with implementation of a fi rst-to-fi le system, discussed above, applicants could preserve the priority of their patent application while defer-ring examination of inventions that are unlikely to have near-term commercial importance. Th e impact of the current application backlog could be signifi cantly reduced if applicants were able and willing to rank the importance of their pending applications and agree to defer some in order to get the most valuable and more urgently required pending patents issued. Incentives may be needed, including some already in widespread use in Japan where deferrals are commonplace.

THE COURTS

Among the most vexing issues in patent law is that of selection of venue, or where lawsuits can be fi led. Currently, plaintiff s have wide discretion in select-ing the court in which they fi le a patent case. Patent owners seeking to enforce their patents generally prefer venues that have a promising record with respect to fi nding in favor of patent holders; pro-ducing signifi cant damages; and hearing and decid-ing cases with relative haste. For these reasons a few jurisdictions—including the Eastern District of Virginia, the Western District of Wisconsin, and the most-favored venue, the Eastern District of Texas—have become popular in recent years. Critics have countered that venue should have a tangible rela-

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tionship to the parties in the suit. Th is was a sticking point in the recent att empt at legislative reform. Recently, in an en banc decision of the Fift h Cir-cuit (in re Volkswagen AG, No. 07-40058, October 10, 2008), the court held that Eastern District of Texas Judge John Ward had erred in his decision to reject a motion to transfer a product liability case from the Eastern District of Texas to Dallas, where an automobile accident at the core of the case had occurred. Specifi cally, the court rejected the judge’s argument that the residents of the Eastern District had an interest in the product liability case because the product (a Volkswagen Golf) was available there as well. “Indeed they [the residents of the Eastern District] do not,” the Court ruled, “as they are not in any relevant way connected to the events that gave rise to the suit ...In contrast, the residents of the Dallas Division have extensive connections with the events that gave rise to the suit.” Th ough the venue-shopping elements of the recent congres-sional patent reform eff ort failed, in re Volkswagen likely indicates a new willingness on the part of the courts to further tackle this contentious issue. Another hotly debated issue in patent law that may move toward resolution in the courts involves royalty damages awards. At issue is how to fairly value the essential elements of the invention and assess reasonable damages for infringement. Central to the debate is whether damages awards are too oft en based on the total value of the product that wrongly incorporated a patented invention, rather than being based on the value att ributable to the infringing ele-ment that contributes to the product’s total value. Consider, for example, a case in which a semi-conductor component that controls a laptop’s abil-ity to connect to a wireless network is found to infringe a patent. Should damages (for example, an assigned royalty rate) be based on the value of the semiconductor component alone? Or (as has been the case in some high-tech cases) should damages be based on the total value of the laptop? Th at question was a major point of contention among diff erent stakeholders in the 2008 congres-

sional patent reform eff orts. Today the issue remains stalemated, and unless or until industry fi nds a compromise position it is unlikely to gain suffi cient congressional support for passage. Th at said, there are signs of a potential willingness by the Federal Circuit or the Supreme Court to take up this issue if presented the opportunity, and it appears likely that proponents of reform may att empt to provide such an opportunity. Th e Supreme Court has sig-naled that it is dissatisfi ed with the way patents are now valued for purposes of assessing damages. In its recent Quanta opinion, a contributory infringe-ment case, the Court said valuation should be based on the “essential elements” of the invention and not the claimed product that incorporates the invention. Th is admonition of the Supreme Court provides good guidance for resolving the legislative and court impasse. A third arena that is inviting legal att ention encompasses issues of inequitable conduct, willful infringement, and enforcement. High among the questions here is whether a patent holder found to have intentionally withheld material informa-tion resulting in the issuance of patents should be punished by having all claims of the patents ruled unenforceable, or only the claim granted by virtue of the conduct ruled unenforceable, or some other approach that leaves valid claims of the patent intact or enforceable. Although much of this legal terrain is still virgin, the courts have begun to address the issue, for example in the recent (Aug. 2008) case, Star Scientifi c, Inc. v. R.J. Reynolds Tobacco Co. Finally, the courts also have recently shown a willingness to deal with longstanding issues relating to standards of obviousness, novelty, and ordinary skill in the art. Specifi cally, there is widespread agree-ment that in recent years the PTO has been grant-ing too many patents for products or processes of questionable novelty or that were obvious. Th is can be addressed in part administratively, as mentioned above. But the courts can also help set the standards through rulings on challenges, as recently demon-strated by the KSR decision, referenced above.

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CONCLUSIONS

Th e time is ripe for positive change in the U.S. pat-ent system. Th e Obama administration clearly understands the important role that investment in science and technology must play in America’s economic recovery. A wide array of patent-system stakeholders agrees not only on the need for change but also on many of the most immediate fi xes that need to be made. And aft er a year of struggle over the remaining diff erences among stakeholders and constituents, Congress is deeply informed and motivated to improve the system. Th e fi rst opportunity to make a diff erence will come very soon, with the all-important selection of a new PTO director—one committ ed to institut-ing much-needed administrative reforms, including greater transparency and communication with appli-cants and others, and examination-process reforms to increase patent quality and reduce pendency.

Sobered by the economic challenges now fac-ing the nation and the world, and cognizant of the tolls that defi cient quality patents impose on enforcement costs, investment, and innovation, patent applicants can and should do their share by recommitt ing themselves to the highest and fair-est standards as they craft their claims and defend their intellectual property. It is to be hoped as well that the courts will tread fairly but assertively into the legal frontier that remains unaddressed by the PTO and Congress. All the pieces of the puzzle are aligned for a renewed fl owering of American investment in inge-nuity. A modernized patent system promises to improve patent quality, reduce uncertainty about the boundaries of intellectual property, and spur the kind of confi dence in the future that in the years to come will be at the heart of American scientifi c, technological, and economic advancement.

NOTES

1 Prior to eBay, the standard applied by the Federal Circuit resulted in permanent injunctions virtually always being granted aft er a patent holder won at trial, and the status of the patent holder (e.g., whether it was a product-producing company or NPE) did not matt er. In its eBay decision, the Supreme Court rejected the automatic entry of injunction and instead ruled that the traditional four-factor test must be applied to determine if an injunction is warranted: (i) Is there irreparable injury (ii) are there inadequate remedies at law; (iii) is there a balance of hardships; and (iv) is the injunction in the public interest. In the case of certain NPEs (such as patent holding companies), it is diffi cult to imagine how these tests will be met in favor of the NPE and thus, post eBay, district courts have refused to grant injunctions to such NPEs.

2 Prior to MedImmune, the CAFC routinely held that a licensee in good standing could not sue for declaratory judgment of patent invalidity because there was no immediate threat of being sued for patent infringement. Th us, in order to bring a declaratory judgment action a licensee had to fi rst stop making royalty payments, thereby rendering itself vulnerable to a lawsuit for willful infringement. Th e Supreme Court rejected this approach, and held that a licensee in good standing is not required to “bet the farm” or risk treble damages for willful infringement and possible loss of business before seeking a declaration of its legal rights. Th us, licensees can now continue to make royalty payments while simultaneously challenging the validity of the patent in court.

3 Prior to the Sandisk case, a potential licensee must have had a reasonable apprehension of litigation to fi le for a declaratory judgment (an important right, since it enabled the potential defendant to select the forum in which the case would be heard). In Sandisk, the Court threw out the reasonable apprehension test and ruled that the new standard only requires a prospective licensee to contend that it does not need a license aft er a patent holder contends that it does in order to create a controversy that is suffi cient to support declaratory judgment jurisdiction.

4 In KSR, the Court rejected the Federal Circuit’s rigid application of the “teaching-suggestion-motivation,” or TSM, test, holding that the determination of obvi-ousness must allow the use of “common sense” by one skilled in the art. A key ingredient of KSR was the elimination of the requirement of foreshadowing in the prior art, which precluded a fi nding of obviousness with respect to “innovations” that were so obvious that no one even bothered to write about them.

5 Because the doctrine of patent exhaustion applies to method patents, and because the License Agreement authorizes the sale of components that substantially embody the patents in suit, the exhaustion doctrine prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.

6 Th e Bilski decision signifi cantly narrowed the 1998 State Street ruling by the CAFC that spurred a decade-long fl urry of business method patents. In Bilski, the CAFC held that the sole analysis to determine if a process qualifi es for a patent should be the “machine-or-transformation” test, which requires a showing that the claimed invention was tied to a particular apparatus or operated to change materials to a “diff erent state or thing.”

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ADMINISTRATIVE POLICY

THE U.S. PATENT SYSTEM is among the most eff ec-tive in the world, measured in terms of both its geographic and economic scope and the variet-ies of the technologies protected. Critical to the continued eff ectiveness of the U.S. patent and trademark system is a well-functioning U.S. Patent & Trademark Offi ce, which is currently a bureau of the Department of Commerce. Alas, the offi ce does not function well today. During the past several years Congress has studied the U.S. patent system with a view toward enacting comprehensive patent law reform, but as yet, no reforms have been enacted—notwith-standing a broad consensus on several of the matt ers that need to be addressed. Th e congres-sional reform eff ort stems from a comprehensive survey of the U.S. patent system undertaken by the National Academy of Sciences, which were

refl ected in recommendations for improvement published in an NAS report.1 A discussion of the NAS recommendations in full is beyond the scope of this essay, but they include, among other things, adopting a so-called fi rst-inventor-to-fi le right of patent priority, post- review by the USPTO of granted patents, reform in the area of what must be disclosed to the USPTO, issues of willful infringement, and the standards of patentability. Unfortunately, controversy within U.S. industry and elsewhere on issues involving damages, interlocutory appeals from district court rulings, and venue for patent litigation has to date prevented enactment of any legislative reforms of the patent system. Separately, the USTPO itself is undergoing an intensive review of its rigorous system of pro-duction goals in managing the more than 5,500

Improving the Eff ectiveness of the U.S. Patent and Trademark Offi ceBy Gerald J. Mossinghoff and Stephen G. Kunin

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patent examiners assigned to examine more than 400,000 patent applications fi led annually and to reach timely decisions on whether to grant or deny patents, based upon recommendations of both the Government Accountability Offi ce and the Department of Commerce Offi ce of the Inspector General.2 But putt ing aside patent reform and the review of the examiner performance system, there are other areas where the USPTO is not serving the needs of inventors and high-technology industry as well as it should. Th ere are currently approximately 800,000 unex-amined patent applications in the USPTO backlog. Th at number will continue to grow during the Obama administration, despite the fact that the USPTO has been hiring patent examiners at a rate of more than 1,200 each year since 2006.3 Th e time it takes to get a patent is now an average of 32.6 months, and it is as high as 44 months in the fast-moving technologies, for example, communications.4 Th e chief information offi cer of the Department of Commerce has recently criticized the informa-tion technology infrastructure of the USPTO as not being properly maintained and updated. Eff orts are currently underway within the USPTO to address those concerns, among them:

To establish the USPTO as an independent gov-• ernment corporation under the Government Corporation Control Act of 1945, 31 U.S.C. § 9101 et seqTo provide adequate fi nancial support to the • USPTO without diverting USPTO fee income to unrelated government programs5

To improve USPTO informed decision making • through enhanced coordination with diverse con-stituencies that use USPTO services, including independent and corporate inventorsTo establish eff ective work-sharing arrangements • with other national and regional (multinational) patent offi ces to avoid redundant examinations and enhance the quality of granted patents, both here and abroad.

Th is essay will examine each of these four recom-mendations in turn to illustrate why a bett er function-ing USPTO will result in a far more eff ective, respon-sive, and robust U.S. patent system geared toward the granting of quality patents in a timely manner.

THE USPTO AS A GOVERNMENT CORPORATION

Th e USPTO has been in a state of organizational transition since 1991, when the concept of 100 per-cent user-fee fi nancing became law.6 Eight years later, Congress enacted legislation convert the USPTO into a “Performance-Based Organization,” 7 thereby providing some limited administrative fl exibilities—especially in the areas of budget, employment lev-els, procurement, and property management. But these authorities, while desirable, do not exempt the USPTO from a much broader range of bureaucratic controls imposed upon typical federal agencies. Stated diff erently, USPTO continues to be ham-pered in its commercial-like operations by an orga-nizational framework that was not designed for the 21st century. Th e problem is simply this: the USPTO is unable to respond as quickly or eff ectively as it needs to in the face of a rapidly growing demand for high quality, timely service under the PBO frame-work. It is still subject to the political vagaries of the appropriations process and it cannot make strategic decisions eff ectively, including establishing pay and benefi ts systems that would make it more effi cient and competitive with the private sector. Two reports by the National Academy of Public Administration recommended that the USPTO be restructured as a government corporation under the Government Corporation Control Act of 1945.8 In the latt er of those two reports, NAPA detailed the advantages of a federal corporation:

As a wholly owned government corporation, USPTO would be granted the operating and fi nan-cial fl exibility necessary to improve its operations. Specifi cally, it would have the following powers:

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• Exempt fr om full-time equivalent, or FTE, hiring ceilings

• Authorized to set and revise fees for its ser-vices based on costs

• Ability to borrow for needed capital investments• Access to all corporate revenues without need-

ing annual appropriations

Th e 1995 Academy report concluded that such an organizational structure would "have the fl ex-ibility to reduce costs signifi cantly by streamlining the procurement process and by making available to its customers the benefi ts of the latest advances in information technology and communication."9

Strong support for the concept of converting the USPTO to a government corporation will likely continue to come from such organizations as the American Intellectual Property Law Association, American Bar Association, National Association of Manufacturers, and the other trade associations, such as Intellectual Property Owners Association and Biotechnology Industry Organization.

ADEQUATE FINANCIAL SUPPORT FOR THE

USPTO WITHOUT FEE DIVERSION

By its very nature, the patent-examining function—determining whether the claims of a patent applica-tion should be allowed (and included in a granted patent) or rejected—involves human decisions by patent examiners. State-of-the-art electronic databases and search systems can be used to fi nd relevant prior art against which the examiners can decide whether or not an invention is patentable. High-quality patents depend absolutely on a high-quality workforce of highly trained and dedi-cated professional patent examiners. Th ose key att ributes have been recognized by every group that has studied the patent system in modern times. Case in point: a Presidential Commission on the Patent System established by President Lyndon B. Johnson recommended in 1966:

Th e commission cannot emphasize too strongly that the prime requirement for optimum Patent Offi ce operation is a dedicated corps of career employees possessing a unique combination of scientifi c and engineering knowledge and the ability to make sound legal judgments. Assem-bling and retaining such a staff of highly trained professional personnel in a competitive man-power market requires, among other things, an increasing expenditure of resources.10

Diversion of fees paid by users of the U.S. patent system is inconsistent with this need for an adequate and skilled examining corps needed to keep pace with the USPTO workload, which is increasing both in magnitude and technological complexity. A Report of the National Academy of Sciences on “A Patent System for the 21st Century” recommended:

Th e patent bar has focused much att ention on the fact that for the past several years the fees collected fr om patent applicants and patent holders have exceeded congressional appropria-tions to the USPTO by a substantial margin. Approximately $638 million in revenue over 10 years and an estimated $100 million in fi scal year 2004 have been spent on other governmen-tal activities. … Th e patent system serves the broad public purpose of stimulating technologi-cal innovation. Its budget should be determined on the basis of what resources are needed to per-form the function well.11

Th e Federal Trade Commission had earlier made a similar recommendation in its report, “To Promote Innovation.” It recommended:

Participants in the Hearings unanimously expressed the view that the PTO lacks the fund-ing necessary to address issues of patent quality. Presidential patent review committ ees have long advocated more funding for the PTO to allow it to improve patent quality. As recently as 2002,

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the Patent Public Advisory Committ ee stated that the PTO faces a crisis in funding that will seriously impact … the quality of … issued patents. Th e FTC strongly recommends that the PTO receive funds suffi cient to enable it to ensure quality patent review.12

A Report of the National Academy of Public Administration estimates that the current back-log of unexamined patent applications is the direct result of the fee diversions documented in the NAS and FTC reports. Had the USPTO not experienced diversions of $680 million of user-fee revenues during the fi scal year 1990 to 2004 time period, then the time that it takes to examine a pat-ent application would have averaged slightly over 21 months as compared with the 30 months to 40 months that it currently takes to process a patent application.13 In its report recommending that the USPTO be converted into a government corpora-tion, the NAPA stated:

Whether USPTO remains a PBO [Perfor-mance Based Organization] or is established as a government corporation, all user fee revenues could be deposited and retained in a special fund (or corporate reserve) to either fund cur-rent operations or to build an operating reserve that would fund future operations if future col-lections are lower than expected (that is, insuf-fi cient to sustain operations in that year). Under this approach, the annual appropriation would release the amount of fee revenues to fund cur-rent year USPTO operations, but any with-held amount would be added to the reserve to be available to meet any unexpected revenue shortfalls in either the current or future years. In years when current revenues were actually less than the amount initially released in the appro-priation act, the existing reserve level would be reduced to cover the shortfall. Th e user fee reform proposal could also call for establishing a designated operating reserve amount (based

on a target reserve level needed to assure contin-uous uninterrupted operations when revenues decline) and provide for a rebate of certain user fees or a reduction in future user fees when that designated reserve amount had been met.14

IMPROVING USPTO INFORMED

DECISION MAKING

Historically, the USPTO has communicated to the patent and trademark community and to the pub-lic the problems and issues confronting it to solicit ideas for addressing them. Increasingly over the last three to four years, however, the USPTO has formulated new policies, rules, practices and pro-cedures without any signifi cant participation from its constituents. Further, when proposed rules have been published for comment, USPTO representa-tives give the clear impression that they are not seeking constructive comments and would not be responsive to bett er proposals. Th is has gradually led to deteriorating relations between the majority of the patent user community and the leadership in the USPTO. For bett er informed decision making the USPTO should revise its current way of conduct-ing business by making a concerted eff ort to engage its constituent groups early in the decision-making process by explaining the problems confronting them and soliciting public ideas before propos-ing new policies, rules, practices, and procedures. USPTO should convene public hearings or town hall meetings around the country to allow the pub-lic to participate in fi nding pragmatic solutions to the USPTO’s problems while minimizing adverse impacts. Th is would also include making greater use of advance notices of proposed rulemaking; using speaking engagements by USPTO leaders to publicize the problems faced by the USPTO and the constraints it is under in seeking solutions, and becoming more transparent about how the USPTO operates.

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Th e USPTO should allow adequate time for the public and users to study, refl ect upon, and com-ment upon proposed policies and rules before implementing them. Th ey should provide com-plete factual backgrounds and reasons for proposed rule packages, be cognizant of the needs of users, especially organizations, to consult internally, and always allow suffi cient time for careful refl ection and comment. Moreover, since quality patent examination is of paramount importance, the USPTO should openly invite and consider new approaches from industry, academia, and the public at large to enhance the quality of the patent examination process. Th ey should encourage suggestions for new techniques as alternatives to ex parte examination such as “peer-to-patent” third party participation in the examina-tion process, expanded work-sharing with other national and regional patent offi ces using common search tools and techniques, adopting quality man-agement systems, and implementing collaborative examination. Th e USPTO should also remain open to legislative reforms, which have the potential to enhance its effi ciency and eff ectiveness.

EFFECTIVE WORKSHARING

WITH OTHER NATIONAL AND

MULTINATIONAL PATENT OFFICES

Th ere is a debilitating redundancy built into the current national/regional patent search, exami-nation 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 addi-tion, 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.

Th is unnecessary redundancy drives up the costs of and delays in obtaining and enforcing world-wide patent protection to a level that can only be aff orded by the largest multinational corporations. Th e senior patent counsel of one of the world’s major research-based pharmaceutical companies estimates, for example, that it currently costs more than $1 million to obtain comprehensive world-wide patent protection for an important chemical compound, and that fi gure is growing at a rate of 10 percent each year. Th e costly duplication of eff orts also adversely aff ects the governments themselves, many of which are looking for ways to reduce the costs associated with patent protection within fi xed or in many cases reduced budgets. Th e Patent Cooperation Treaty also provides an important mechanism to reduce the duplica-tion of search and examination eff orts on patent applications fi led in several nations. Recently, the USPTO entered into bilateral arrangements with several countries in what is referred to as a Patent Prosecution Highway, which provides search and examination results of one offi ce to subsequent examining offi ces.15 Finally, the USPTO has under-taken to achieve harmonization of patent laws with other developed countries (referred to a “Group B+”). Th ese eff orts should be encouraged as a way to improve the quality of granted patents and to cope with the enormous workload challenges experienced by the major patent-granting offi ces of the world.

CONCLUSION

Adoption of the recommendations included in this essay, together with adoption by Congress of the patent reform measures on which there is broad consensus today, will result in a far more eff ective, responsive, and robust U.S. patent system geared toward the grant of quality patents in a timely man-ner. Given enhanced international work sharing, which would be facilitated, the quality and timeli-ness of granted patents would be enhanced.

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NOTES

1 A Patent System for the 21st Century, Committ ee on Intellectual Property Rights in the Knowledge-Based Economy, National Research Council (National Acad-emies Press, 2004).

2 Final Inspection Report No. IPE-15722, “USPTO Should Reassess How Examiner Goals, Performance Appraisal Plans, and Th e Award System Stimulate and Re-ward Examiner Production” (September 2004); GAO Report 07-1102, “Hiring Eff orts are not Suffi cient to Reduce the Patent Application Backlog” (September 2007).

3 USPTO Patent Data Update, FY08-Th ird Quarter (Department of Commerce).

4 Public Session, Patent Public Advisory Committ ee, August 8, 2008.

5 Under the Omnibus Budget Reconciliation Act of 1990, the USPTO has been fully funded by user fees, with no taxpayer money provided. Yet the USPTO continues to be subject to the annual appropriations process, and beginning in FY 1990 until FY 2004, that process shortchanged the USPTO by allocating $680 million to other unrelated federal activities.

6 Id.

7 Th e American Inventions Protection Act of 1999, P.L. 106–113.

8 National Academy of Public Administration, “Incorporating the Patent and Trademark Offi ce” (August 1995); “Restructuring the Patent and Trademark Offi ce” (February 2003).

9 Footnotes omitt ed. NAPA, “Restructuring the Patent and Trademark Offi ce” p. 12,13.

10 “To Promote Th e Progress of . . . Useful Arts” in an Age of Exploding Technology, Report of the President’s Commission on the Patent System (1966), p. 45.

11 A Patent System for the 21st Century, footnote 1, p. 107–108.

12 To Promote Innovation: Th e Proper Balance of Competition and Patent Law and Policy, (Federal Trade Commission, October 2003), p. 12, 13. See also, Th e Advi-sory Commission on Patent Law Reform, Report to the Secretary of Commerce (Aug. 1992), available at htt p://world.std.com/obi/USG/Patents/overview; Report of the Industrial Subcomm. for Patent and Information Policy of the Advisory Comm. on Industrial Innovation, Report on Patent Policy (1979).

13 U.S. Patent and Trademark Offi ce: Transforming to Meet the Challenges of the 21st Century, A Report by a Panel of the NAPA (August 2005) pages 42–46.

14 NAPA, “Restructuring the Patent and Trademark Offi ce,” footnote 9, p. 38.

15 See USPTO News and Notices at www.uspto.gov for notices regarding work-sharing agreements with the European Patent Offi ce and the patent offi ces of Japan, Korea, Canada, Australia, Denmark, Germany, and the United Kingdom.

Establishing the USPTO as a government cor-poration would enhance its personnel management fl exibility to facilitate a high-quality national exam-iner workforce, stemming the signifi cant att rition of skilled patent examiners from the offi ce. With reduced att rition of examiners and the institution-alizing of greater upfront interactions with pat-ent practitioners outside of the offi ce, improved informed decision making will be facilitated. With the adoption of these initiatives, the USPTO will be well positioned to be the premiere patent offi ce in the world in the 21st century.

Th e Honorable Gerald J. Mossinghoff is a former assis-tant secretary of commerce and commissioner of pat-ents and trademarks, and is senior counsel to Oblon, Spivak, McClelland, Maier and Neustadt, P.C. in Alexandria, Virginia. He currently teaches intellectual property law at the George Washington University Law School. Stephen G. Kunin is a former deputy commissioner for patent examination policy of the USPTO and is a partner at the Oblon Spivak law fi rm. He is the director of the LL.M. and J.D. intellectual property law programs and adjunct professor of law at the George Mason School of Law.

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CLIMBING OUT OF THE DEEP economic recession the United States is facing will require multiple rem-edies, but there is no doubt that ongoing innovation will be critical to restoring the long-term economic health and prosperity of our country. Innovation is so key to our nation’s prosperity that our founders enshrined the general principle of intellectual prop-erty as an essential element of economic develop-ment in Article 1, Section 8 of our Constitution. Th e basis for this constitutional provision establish-ing a patent system was not the protection of indi-vidual rights to inventions per se, but rather the pro-motion of economic development in a young and ambitious country. As originally conceived, the patent system would catalyze economic development by provid-ing individuals (and those investing in the inventive process) the prospect of a return on that investment

should the invention achieve market success, while ensuring the public had the ability to learn from the invention to enable follow-on research and devel-opment. Th e fundamental policy intent of the pat-ent system still holds true nearly 220 years later. Patents are created for a single purpose—as an incentive to encourage innovation and, through such innovation, to increase the general economic well-being and prosperity of the nation. In recent years, however, much in the practice of intellectual property management has changed in ways that are inconsistent with the public policy objectives that were the foundation for the patent system. Left unchecked, some of these new approaches threaten to undermine this patent system and our prospects for renewed economic growth. By far, the most signifi cant and destabilizing change in the patent environment since 2003 has

Patent Trolls Erode the Foundation of the U.S. Patent System By Daniel P. McCurdy

LEGAL POLICY

SP

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been the dramatic increase in the growth, fi nancing, and patent acquisitions of so called non-practicing entities. NPEs in legal parlance—more commonly referred to as “patent trolls”—derive or plan to derive all or most of their revenue from the enforce-ment of patents. Patent trolls are clearly distinguish-able from major research institutions, universities, and businesses that derive their revenue, respec-tively, from funded research, tuition and grants, and the sale of products and services. Some of the largest of these NPEs raise large funds with which to purchase the patents they seek to enforce—with-out any plans to turn those patents into marketable products or services. Instead, they then use these funds to enable—through direct or veiled threats of infringement—their pursuit of royalties from successful businesses. Many factors have come together to foster this phenomenon. Th ese include the cheap cost of capi-tal until the fi nancial crisis of mid-2008, an open-ness to new investment vehicles among institutional investors, and a large number of patents available for sale. Many of these patents are of questionable validity at the individual level, but in the aggre-gate become more valuable because of the cost to a potential licensee of separating the rare grains of wheat from the chaff . Th e jump in patent troll-related lawsuits is truly alarming. From October 1, 1994 through Septem-

ber 30, 2002, 527 patent lawsuits were fi led by or against the 219 NPEs currently identifi ed and tracked by PatentFreedom. Th is represented 2.7 percent of patent lawsuits fi led in the United States during that 8-year period. From October 1, 2003 through September 30, 2007, there were 1,210 lawsuits fi led by or against these entities, represent-ing approximately 8.4 percent of all patent lawsuits fi led in that period, and exceeding 10 percent in 2006 and 2007 (see Figure 1). Over the past year—from October 1, 2007 through September 30, 2008—389 litigations were fi led involving the PatentFreedom-tracked NPEs, compared with 297 in the prior year. Today, 219 patent trolls boast more than 800 subsidiaries or perhaps as many as 1,500 if all of the subsidiaries of the largest NPE, Intellectual Ventures, were known. Combined, all of these subsidiaries have more than 12,500 active and pending U.S. patents in their hold-ings. And in all likelihood, these numbers dramati-cally understate the magnitude of the problem. For instance, these fi gures include only 3,167 U.S. patents and applications held by Intellectual Ventures, a mere fraction of the more than 23,000 worldwide patent assets they claim to own, most procured with a portion of the $5 billion in pri-vate capital they have raised to date. Intellectual Ventures is unique by virtue of its capital structure, its collection of signatory operating companies, its public relations capabilities, its leadership, and its patent portfolio. But it shares a probable require-ment with other NPEs—it will likely have to follow the path of litigation. Th e reason: Whether a large private equity fund like Intellectual Ventures or a more focused patent aggregator with less available capital, inves-tors in patent trolls expect a return on their invest-ment. Persuading a company to pay for a license to patents that the potential licensor may feel are invalid or not infringed is a diffi cult task. For this reason, as the amount of patent royalties requested increases, the chance that litigation will be required to untangle the debate over validity and infringe-

FIGURE 1

Lawsuits by patent trolls on the rise

Percentage of intellectual property-related lawsuits

by non-practicing entities to total IP-related lawsuits

Source: PatentFreedom ©2008. Data Captured as of November 2008.

12% cases fi led by NPEs

% total IP cases

0

8

10

4

2

6

19941995

19971999

20012003

20052007

19961998

20002002

20042006

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ment also increases. When NPE funds are very large, the returns they require to satisfy investors are commensurately large. Th us, it is likely that notwithstanding its stated desire to avoid litigation, Intellectual Ventures will ultimately have to follow the litigation path used by other NPE funds. But even with litigation, profi ts, will be dependent on legal fi ndings of validity of the patents asserted, then infringement of the patents, and then substan-tial damages. Th ere exists the potential, however, that damages could be seriously limited by new laws or jurisprudence aff ecting damages calculations, such as those refl ected in the on-going “proportional dam-ages” debate. Finally all of these fi ndings would have to stand up to the scrutiny of appeal. Th e losers in this process will be businesses, con-sumers, and an overburdened court system, all made possible by the collection of funds from investors that enable patent trolls to amass new inventions that would spur national economic growth under the assumed but incorrect premise that patents are individual rights with discrete monetary value rather than a government tool of economic devel-opment enabled by the conveyance of certain rights to inventors and those that invested in them.

The Patent Troll Realm

Beyond Intellectual Ventures, the remaining 218 PatentFreedom-tracked NPEs have varied back-grounds. Some, like Acacia Technologies, Allia-cense Ltd., and Rembrandt Technologies, are pri-marily patent enforcement entities that are highly selective in their purchases. Th ey have relatively small and focused patent portfolios. Th ey rely sub-stantially on litigation to demonstrate their com-mitment to enforce. Acacia, for example, since its inception in January, 1993 through August, 2008 has itself or through companies it has acquired been a plaintiff in 280 patent lawsuits (and a plaintiff or defendant in 308 lawsuits) seeking to enforce at least 121 of the 274 issued patents iden-tifi ed to date by PatentFreedom.

Moreover, those NPEs that are heavily liti-gation-focused have substantially increased the scope and pace of litigation. Th is increase takes two forms. Th e fi rst is the absolute number of liti-gations fi led (see Figure 2) and the second—fre-quently overlooked—is the number of defendants named in each lawsuit, which if properly refl ected, substantially increases the scope and scale of NPE litigation. As an indication of this increase, see Figure 3. Other NPEs are not so litigious. Firms such as 1st Technology, ArrivalStar, Cygnus Telecommunica-tions Technology LLC, Freedom Wireless, Inc, Mil-lennium LP, and Rates Technology derive or plan to derive the majority of their revenues from patent enforcement, but rather than buying patents cre-ated by others they primarily or exclusively license patents created by their employees or owners. A third category involves individual inventors who have chosen to enforce their patents as the primary means to derive revenue from them. Th e patent litigation practices of these last two groups of patent trolls at fi rst glance may not seem to be as egregious. Aft er all, they are at least seeking to profi t from their own ideas, rather than the ideas of others. Yet they are clearly akin to Intellectual Ventures and other patent aggregators in that they are using a patent system designed to promote the economic development of a nation through the cre-

FIGURE 2

Patent trolls clog up the courts

Number of patent lawsuits by non-practicing entities: 1994–2008

Source: PatentFreedom ©2008. Data Captured as of November, 2008.

500

Patent lawsuits involving NPEs, 1994–2008

0

300

400

100

200

19941996

19982000

20082002

20042006

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ation of new products and services to, alternatively extract profi ts from new products and services developed by other companies, potentially harming both consumers and competition. All patent trolls share a common att ribute: the primary source of their revenue is extracting royal-ties from companies they believe are using inven-tions claimed in patents they own. And because these NPEs do not derive any signifi cant portion of their revenue from designing, developing, manu-facturing, or selling products, they are essentially immune to counter-assertion claims by the compa-nies from which they seek royalties. Th is profound disparity in NPE vs. product company assertions, as opposed to product company vs. product com-pany assertions, has destabilized the patent system.

THE DESTABILIZING IMPACT OF PATENT TROLLS

Because these entities and individuals do not pro-duce products, there is some question as to how their enforcement activities contribute to the “fi rst principle” underlying the creation of the patent sys-tem—to encourage economic growth made pos-sible by encouraging innovative new technologies that would foster the introduction of valuable new products and services to the market. Th e creation

of an idea is frequently the least costly and least time-consuming aspect of product success. Development budgets vastly exceed research budgets in research and development-intensive companies. Much more time, and substantially more investment, is required to commercialize a product or service embodying an invention than to create the invention in the fi rst place. When I was director of business development for IBM Research in the early- to mid-1990s, for example, the global development budget exceeded the global research budget by about 20 times. R&D spending and development spending has fallen since then, but the proportional diff erences remain similar today. Even if this were not the case, the tremendous fi nancial and tactical advantages NPEs have over their business targets are huge. When one busi-ness asserts patents against another, both have the opportunity to reduce or eliminate the asser-tion by counter-asserting patents of their own against key products of the aggressor. In addition, both have the opportunity—if successful in prov-ing infringement of a valid patent—to obtain an injunction that could severely damage the other’s business operations. Neither of these defenses is available to a business when confronted with a patent assertion from a patent troll.

FIGURE 3

Patent trolls cast wider net

IP court cases involving select non-practicing entities

NPE Name Total Cases Cases since 2003 % of Total since 2003

Acacia Technologies 308 239 78%

Rates Technology Inc 130 38 29%

Millennium LP 99 90 91%

Cygnus Telecommunications Technology LLC 69 31 45%

General Patent Corp International 66 36 55%

Plutus IP 59 59 100%

Papst Licensing GmbH 59 31 53%

F&G Research Inc 56 51 91%

Ronald A Katz Technology Licensing 54 48 89%

Catch Curve Inc 53 36 68%

Source: PatentFreedom ©2008. Data Captured as of August 31, 2008.

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In fact, by choosing to not pursue products or services using their invention (or att empting prod-uct sales and failing) an NPE is actually rewarded with these tactical advantages. Th is can actually serve to diminish competition, and increase prices to consumers, by rewarding entities to not put products and services in the market but rather tax-ing those that do. To compound the disadvantage faced by busi-nesses, many NPEs operate in a stealth mode, hiding behind tens or even hundreds of subsidiar-ies, masking their patent holdings, their fi nances, and their activities so that they can sue for patent infringement only aft er the market has locked into using the covered technology. Th e many NPEs that purchase the patents they enforce can develop highly tailored portfolios focused on the most suc-cessful products of their intended licensees, with acquisitions suffi ciently deep and broad to achieve an overwhelming assault. Th is is in stark contrast to their targets, most of which are public companies that must reveal, by regulatory mandate, virtually everything about themselves, their products, their strategies, and their fi nances. Left unchecked, these tactics will enable NPEs to further enhance the vast amount of capital they have already obtained from pen-sion funds, hedge funds, endowments, and other sources of alternative investments, including even other businesses. Acacia for example, has a wide array of institu-tional investors, including fund managers Fidel-ity Management & Research, Vanguard Group, Oppenheimer Group, and Barclays Global Inves-tors, hedge fund Kingdon Capital, private equity fi rms Apex Capital and Pequot Capital, and the giant U.S. teachers pension fund TIAA-CREF. Or consider Germany’s IPCom GmbH which report-edly is funded by one of the world’s largest hedge funds, Fortress Investments. Armed with private capital, patent trolls are able to purchase large patent portfolios with absolutely no intention of producing meaningful revenues from

products or services. Th eir extraction of royalties from product companies either diverts funds from the research and development needed to fuel continuing innovation that will drive economic development, or raises prices paid by consumers. And to what end?

Patent trolls’ hollow market arguments

don’t ring true

Some NPEs argue that their presence provides needed liquidity to inventors that may otherwise never obtain any return on their investment, spur-ring those inventors to further innovation. But that argument is hardly credible when most patent trolls off er such trivial rewards to the inventor. Indeed, the principal exception—General Patent Corporation, which has a long history of supplying enforcement services to small- and medium-sized inventors, with a substantial portion of the royalties provided to the inventor—proves the point. More frequently, NPEs with hundreds of millions or billions of dollars in cap-ital seek out patents held by others and pay the actual inventors a small fraction of the money they seek to obtain in subsequent enforcement activities. It is hard to imagine that the prospect of nett ing so small an amount will, on its own, stimulate further innovation. In fact, patent trolls could alter their behavior if they truly believed their objective was to be an advo-cate and defender of the small inventor. Th ey could:

Att empt to enforce only those patents they could • demonstrate were clearly valid and infringed by fully applying Rule 11 of the Federal Rules of Civil Procedure, which prescribes sanctions for the fi ling of a frivolous lawsuitAvoid predatory massing of patents through • acquisition that is intended to overwhelm a potential licenseePractice full disclosure and transparency in their • funding, patent holdings, and practices Commit to the return of the majority of royalties • to the original investor or inventor who created the technology.

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Even with these changes, patent trolls would still remain a dangerous threat with signifi cant advan-tages over businesses, but the changes would help to level the playing fi eld. Th ese commitments, how-ever, will be diffi cult for most NPEs to make. Most patent trolls have already made promises to their investors that they will buy low, sell high, and keep the vast majority of the proceeds. Th e intended winner is not the inventor, but the NPE. Th at’s why the United States (indeed, the world community) needs a fully functional and trans-parent Patent Exchange, where every seller could advertise the availability of their patent to every potential buyer in a public forum so that companies potentially threatened by a patent at least would have the opportunity to purchase the asset. A Pat-ent Exchange would help to establish greater com-petition for the asset at whatever stage the patents were off ered for sale, thereby enhancing the reward to the innovator. And it would enable patent-acqui-sition entities, such as Allied Security Trust, RPX, and Open Invention Network—all of which were created in whole or part to combat NPEs and those wishing to stifl e innovation—to participate in pat-ent acquisitions as an alternative to inventors set-tling for off ers from patent trolls that have not been thoroughly exercised in a competitive marketplace. But not all businesses boast the fi nancial fi repower to join patent-acquisition entities or to individually ward off NPE-induced patent litigation by striking royalty deals. Smaller or less successful competitors cannot aff ord to pay the huge royalties asked by a never-ending stream of litigious patent trolls. Th ere-fore, these smaller players, who can provide mean-ingful innovation and apply critical competitive pres-sures on industry leaders, face patent uncertainties (as do their potential customers) that are avoided by the larger, licensed market leaders, thereby poten-tially solidifying the market leaders’ positions. In short, patent trolls may be a compelling (yet still unproven) business model, but they do noth-ing to contribute to innovation or the nation’s eco-nomic prosperity. In fact, they severely complicate

the ability of businesses large and small to produce products and services that produce jobs and rebuild our nation’s (and workers’) economic health. Indeed, the unpredictability that any product can be made, used, or sold without the very real risk of a devastating onslaught of patent att acks results in a marketplace in which innovation and competition are stymied. Th is is no way for our patent system to work as the United States tries to innovate its way out of today’s deep economic recession.

ADDRESSING THE TROUBLE

WITH PATENT TROLLS

Fortunately, some meaningful actions have already been taken by the Supreme Court and the Court of Appeals for the Federal Circuit to deal with issues that have exacerbated the NPE problem. First, the eBay decision by U.S. Supreme Court in 2006 removed the so-called “automatic injunction” remedy for plaintiff s in a patent dispute, replacing it with the established “four factor” test to determine whether an injunction should be granted. Th is test will be dif-fi cult for an NPE to pass. Second, the MedImmune decision by the Supreme Court in 2007 permits a licensee to challenge the validity of a patent while still paying royalties. Th is removed the prior require-ment that a licensee must fi rst cease royalty payments, thereby triggering a breach and termination of the license and exposing itself to willful infringement and treble damages. Th ird, the Federal Circuit in the Sandisk deci-sion in 2007 dramatically lowered the threshold required for a company approached by a patent holder to seek a declaratory judgment from a court selected by the threatened party. Under Sandisk, the off er of a license, coupled with the rejection of the off er by the intended licensee, constitutes suffi -cient controversy to sustain a declaratory judgment action. Th at said, many operating companies are reluctant to initiate a lawsuit that, on average, will cost $5 million prior to its conclusion.

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Fourth, the KSR decision by the U.S. Supreme Court in 2007 initiated a vital reassessment of the obviousness standard. A patentable invention must pass three key tests: it must be novel (new, not previ-ously known); it must be useful; and it must not be obvious. Over the past decade in particular, there has been mounting criticism with respect to the qual-ity and validity of patents issued by the U.S. Patent and Trademark Offi ce. In particular, many observers charge that issued patents fail to pass the novelty or obviousness tests and are therefore invalid. Th e KSR decision held that when dealing with a patent that covers improvements over the prior art (as most do), a court must now ask whether the improvements are more than the predictable use of prior art elements according to their established functions. Th e fi nal two notable cases of importance to bett er managing the threat of NPEs are the Quanta Computer decision this year by the U.S. Supreme Court and the Bilski decision by the Federal Court of Appeals, also earlier this year. Quanta clarifi es and strengthens the principle of “patent exhaustion,” holding that a license to make a product “exhausts” the ability of the licensor to then claim infringement by the products that were actually produced. Th is ruling will materially limit some of the adventurous practices of NPEs with respect to chasing the entire value chain of a product, from manufacturer through to the consumer. And the Bilski decision signifi cantly curtailed the patentability of business methods (a favorite category of patents being amassed by NPEs) that do not rely on an apparatus or do not transform a material to a diff erent state or thing (the so-called

“machine-or-transformation” test).

More can be done

Th e courts, however, have yet to deal with at least three other important issues fueling the att raction of the patent troll business model to institutional inves-tors and fi nancial speculators. Two of the issues—awarding of damages that are refl ective only of the economic contribution of an invention to a product

and the selection by patent trolls of the court to adju-dicate their lawsuits—were highly debated and con-sidered by Congress in the Patent Reform Act, which failed passage in 2008. Let’s consider each in turn. Th e importance of “proportional damages” revolves around the eff ort by patent trolls and also operating companies seeking to enforce their own patents—particularly in the high-tech industry—to claim damages against the total price of a fi n-ished product, or the totality of revenue for a ser-vice, regardless of the economic contribution of the infringing element of that product to the product’s total value. So, if a $5 integrated mouse is contained in a $2,000 laptop computer, the licensor would claim that the mouse was essential to the total value of the computer, and seek a multiple percentage royalty against each $2,000 laptop that contained the allegedly infringing mouse, as opposed to a mul-tiple percentage royalty of the $5 mouse. Congress failed to resolve this damages debate because of diff ering views between major industries. Broadly, the batt le lines pitt ed primarily some high-tech companies against pharmaceutical companies, which expressed concerns that limiting damages only to the economic contribution of the invention per se would weaken their ability to deter competi-tors seeking to undermine their patent-protected products. Th ose opposing the language related to proportional damages, in addition to the pharma-ceutical industry, included certain high-tech com-panies and non-practicing entities. With respect to the “venue” debate, the impor-tance of the selection by plaintiff s of the court in which they choose to fi le a patent action involves the ability of plaintiff s to “shop” for the most favor-able forum to fi le infringement actions. Basically, patent trolls and businesses trying to enforce their own patents seek out jurisdictions that have dem-onstrated by their results that they are friendly and generous toward patent holders, and relatively fast. More money as fast as possible is the motivation. Th ere are few restrictions that preclude a plain-tiff from selecting a forum of their choice, even if

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neither the plaintiff nor defendant has reasonable nexus to the chosen venue. Entities that are gener-ally the defendant in patent litigations (which tend to be businesses, and particularly businesses con-fronted by NPEs as well as other businesses) were generally supportive of reforms that would limit venue shopping, whereas plaintiff s were generally opposed to such reforms. Figure 4 depicts the juris-dictions of choice. It would seem reasonable that Congress or the courts will ultimately limit this forum-shopping ability as this wasn’t as germane to the failure of patent reform in Congress as was the confl ict over the apportionment of damages. All that’s required is that the jurisdiction in which the case is heard must be reasonably tied to the dispute at hand. Th e recent 5th Circuit decision in In re Volkswagen AG in October 2008, which ordered Judge Ward in the Eastern District of Texas to transfer a case to Dal-las where the events surrounding the case occurred, appears to signal the federal court’s willingness to tackle these diffi cult issues. A fi nal step that should to be taken is for Con-gress to adopt a law that requires unsuccessful pat-ent plaintiff s to bear the cost of their adventurous litigation in court. Today, particularly plaintiff s that use contingent law fi rms (as do many NPEs) incur

minimal risks when fi ling an infringement suit. Only two things can happen—the target sett les and pays money to the plaintiff , or the target refuses to sett le, goes to trial, and the plaintiff wins or loses. But even if the plaintiff loses, the only cost it has incurred is its legal fees, and therefore the NPE only absorbs out-of-pocket expenses. Adopting a system where plaintiff s or a success-ful defendant in a patent-related declaratory judg-ment action would have to pay the target’s costs if the case fails would provide a substantial brake on adventurous litigation. Such a law would force all patent holders—patent trolls and businesses alike—to thoroughly investigate infringement actions prior to approaching a potential licensee with the threat of a lawsuit. It would dramatically curtail the amount of contingent litigation pursu-ing weak claims of infringement, a mainstay of most patent trolls, and yet it would permit the vigorous enforcement of strong patent rights. If there were only one action that could be taken, then I believe a law to oblige unsuccessful patent enforcers to bear the costs of their lawsuits would be by far the most important and useful, yet likely the most diffi cult to achieve, since those that make a living from this practice will lobby extremely hard to avoid enactment of the required legislation.

FIGURE 4

Court shopping

Patent trolls’ choice venues for their lawsuits in the United States

CourtNPE as Plaintiff NPE as Defendant

Total Cases by NPENo. of Cases % of Total No. of Cases % of Total

Eastern District of Texas 332 94% 20 6% 352

Northern District of California 156 70% 66 30% 222

Central District of California 152 86% 25 14% 177

Souther District of New York 122 92% 10 8% 132

Northern District of Illinois 100 93% 8 7% 108

Northern District of Georgia 76 92% 7 8% 83

Delaware 57 69% 26 31% 83

Eastern District of New York 73 94% 5 6% 78

New Jersey 56 88% 8 13% 64

Southern District of Florida 56 97% 2 3% 58

Source: PatentFreedom © 2008. Data captured as of August 31, 2008.

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CONCLUSION

Patent trolls amass fortunes by using purchased patents to reap profi ts from those who commer-cialize innovation, raising costs to consumers, and retarding innovation. Th ese eff ects hardly promote the public policy on which the patent system was created. But for the government’s grant of a patent, the sole means of exploiting an invention is to put it in a product and off er it for sale. Fostering the commercialization that spurs economic growth must certainly be at least as important as fostering invention. Patent trolls damage invention and com-mercialization by exploiting their unfair advantage in the market. Th ey increase barriers to entry for new companies that might otherwise lower prices through competition, while at the same time raising the cost to consumers for the use of the patents that NPEs purchase from others for the primary, if not sole, purpose of pursuing profi t.

Fortunately, the courts have already begun to intervene to address this dangerous phenomenon. Th e Federal Trade Commission’s 2003 report on intellectual property, coupled with other studies, such as the National Academies’ A Patent System for the 21st Century, subsequent studies by academia, industry, and other stakeholders, and numerous congressional hearings, have individually and col-lectively played a signifi cant role in stimulating the courts to act. Th e FTC, the courts, Congress, the U.S. Patent and Trademark Offi ce, and patent applicants and owners can each take further measures to address this aggressive threat. Our nation’s prosperity and security will be the benefi ciary of prompt and vig-orous action.

Daniel P. McCurdy is chief executive offi cer of Allied Security Trust and chairman of PatentFreedom.

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THE WORLD TODAY faces many challenges that require massive investments of private capital in the research and development necessary to create break-through innovations. Th e United States, which boasts the greatest levels of investment in basic research, has a clear global comparative advantage in economic growth and job creation based on technological inno-vation. And our patent system plays a key role in this commercialization of U.S. investments in technology. Adam Jaff e, Harvard University economics pro-fessor and former staff economist for the President’s Council of Economic Advisors, detailed the link between patents and innovation best in testimony before the House Judiciary Subcommitt ee on Intel-lectual Property in 2007:

While creativity is inherent in human nature … it does not help society, unless it is taken further and

converted into a commercially useful new product or process, and this stage of converting inventive ideas into real products is very costly and uncer-tain. Th e economic function of the patent system is to provide a measure of predictability and pro-tection to this expensive process of product and process development. As such, it lies at the heart of technological progress, which is in turn the pri-mary engine of economic growth.1

Unfortunately, this link is increasingly frayed in the United States and abroad. Patent systems here and in other countries are experiencing a period of crisis, characterized by too many patent appli-cations pending fi nal approval, the declining qual-ity of patent examinations, duplication of work by multiple patent offi ces, and the increasing costs of patent prosecution. Th is global patent backlog cri-

INTERNATIONAL POLICY

Global Patent ProtectionThe International Patent System and the New Administration

By Bruce A. Lehman

SP

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sis cuts to the heart of the problem plaguing the roll out of timely and eff ective innovations to help the world cope with such immediate dangers as climate change and pandemic diseases. Th e incom-ing Obama administration will need to grasp the problems with the international patent system and act swift ly but carefully—along the lines recom-mended in the pages that follow.

THE PROBLEM

Th e number of patent applications awaiting exami-nation at the U.S. Patent and Trademark Offi ce climbed to more than 1 million by the end of 2006, with the backlog of unexamined applications increasing by 9 percent by the end of 2007, the last year for which complete data are available.2 Dur-ing the same period the number of patents granted by the USPTO actually declined by more than 16,000—despite a substantial increase in examin-ers to a total of 5,477.3 A study by the U.S. Government Accountabil-ity Offi ce released in September 2007 concluded that USPTO eff orts thus far to address the rise in workload through hiring new examiners has failed with the result that the agency “ultimately may be unable to fulfi ll its mission of ensuring U.S. competitiveness.”4 But the USPTO is not alone in falling behind in accomplishing its vital mission. A study by the combined staff s of the European, Japanese, and U.S. patent offi ces found that the increasing demand for patent rights is a global phenomenon, with a 15.5 percent average growth rate among regional and national patent offi ces from 2002 through 2006.5 Th is increasing demand is coming not only from developed countries served by the Euro-pean, U.S., and Japanese systems, but also by emerging nations such as China, India, and South Korea. Th ese countries experienced a 16 percent increase in patent applications from their nation-als between 2002 and 2006.6 Between 2005 and

2006 applications from Chinese inventors alone increased by over 32 percent.7 Th e United States, however, continues to lead in the number of applications involving high technol-ogy and in the percentage of its citizens fi ling such applications. Th irty-nine percent of USPTO applica-tions refl ect high technology inventions and 55 per-cent of these applications are from U.S. inventors.8 Maintaining the U.S. advantage revealed by these sta-tistics will be crucial to the president-elect’s plans to create economic growth through investment in new technologies, particularly green technologies. Th ese statistics emphasize the importance to the United States of an effi cient patent examination system that will keep that comparative advantage secure.

The internationalization of the patent system

as a cause of the backlog

Th e World Intellectual Property Organization iden-tifi es the internationalization of the patent system as the primary source of the explosion in work among national and regional patent offi ces. Its 2008 World Patent Report notes that there has been a dispro-portionate increase in direct non-resident patent fi l-ings as well as fi lings through the multinational Pat-ent Cooperation Treaty system.9 Th e World Patent Report observes that the “non-resident fi lings share of total patent fi lings increased from 35.7 percent in 1995 to 43 percent in 2006.” Th e WIPO also fi nds that these non-resident fi l-ings currently originate in a small number of coun-tries led by the United States, Japan, and Germany. Eight developed countries increased their share of worldwide non-resident fi lings, to 74 percent in 2006 from 66 percent in 2000. Th e 2008 report fi nds that “applicants from emerging economies, including China, fi le relatively few patent applica-tions outside their home countries.” In addition, WIPO statistics also reveal that most of these mul-tinational fi lings involve essentially the same inven-tion. Patents involving the same invention are called

“patent families”; approximately 24 percent of all

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patent families are fi led in two or more national or regional patent offi ces.10

While a large number of duplicative fi lings involv-ing the same “patent family” are initiated through the Patent Cooperation Treaty system, many do not involve the use of the PCT at all. Th is is particu-larly true of patents originating in the United States, Europe, and Japan and simultaneously fi led in each of the other jurisdictions. Whatever the method of fi ling (either through the PCT or directly) these duplicative fi lings have had a disproportionately large impact on the USPTO and its workload. Between 2005 and 2006, for example, the number of fi lings at the USPTO originating in Europe and Japan increased to 135,806 from 114,526. Probably nearly all of these applications fi led in the USPTO represent inventions for which patents were also sought in the countries where the applications originated. Th e total number of patent applications in the USPTO for 2006 was just short of 496,000. Th us, approximately 27 percent of the work received by the USPTO involved European and Japanese inventions that in all likelihood will also be examined independently in those jurisdic-tions. Overall, in 2006 nearly 48 percent of applica-tions in the USPTO were from foreign inventors.11 Th e United States, however, suff ers alongside its global trading partners from duplicative patent applications. In 2006, 15 percent of all applications fi led in the Japanese Patent Offi ce were from for-eign inventors. Forty-one percent of the workload of the European Patent Offi ce consists of applica-tions from U.S. and Japanese inventors, and more than half from all foreign inventors. And, it can be assumed that these inventors also fi led applications in their home jurisdictions.

The disproportionate impact of duplicative

fi lings on the USPTO

A review of statistics contained in the 2007 Tri-lateral Report reveals that while the time periods for fi rst action on an application in the United

States and Europe were not too dissimilar, the time between the fi ling of the application and fi nal action, known as pendency in patent parlance, was much greater in Europe. Th e overall pendency time for the entire examination process in Europe was 45.3 months compared to 32 months in the United States. In Japan, pendency to fi rst offi ce action was 26.7 months, but total pendency was only 32.4 months. Th e Japanese statistics are misleading, however, in that pendency is measured from the time of request for examination. And, Japanese applicants have up to three years to request examination. Overwhelm-ingly, Japanese multinationals use this “deferred examination” procedure. Deferred examination currently is not an option in the United States. Th is means that if an application is fi led simultaneously on a Japanese invention in both countries, the actual time to fi nal action in Japan is 68 months, or fi ve and one-half years. Th e diff erences between the three most impor-tant patent offi ces in the world mean that it is not possible, in spite of the expressed desire to do so, for the United States to take advantage of the results of foreign examinations and thereby decrease the workload of examiners. Th e United States must examine virtually every application from scratch even though that application will receive a so-called prior art search to determine the patent’s claim of originality in another jurisdiction. Th e costly and time-consuming impact of duplicative examination has been recognized by the USPTO and its sister patent offi ces for some time. Th is has lead to discussions over several years to develop a system to share examination information among the offi ces so as to lessen the workload for each one. Within the past year, the USPTO has expanded these discussions to include similar agreements with other countries. Yet the fact remains that these discussions have had litt le practical eff ect because the foreign searches and examinations are not eff ectively available for use by the USPTO.

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For all practical purposes, then, many foreign applicants are not inconvenienced by longer pen-dency times in their home countries. Th is is in part because the United States is the world’s largest and most important technology market—and therefore the market where it is most important to obtain a patent—but also because the United States is a much more litigious society in which it is vastly more important to secure rights as a protection from or as a cause of action for an infringement lawsuit. Patents are arguably much more important to technological industries in the United States than in other countries. This is not only because there is fiercer competition and a greater likeli-hood of patent litigation in the United States, but also because investments in technology in the United States are to a much greater extent than elsewhere financed by venture capitalists who require the certainty of patent protection as a precondition to investment. Increasingly long pendency periods create an unacceptable uncer-tainty for these investors, which in turn threatens their return on these investments.

PATENT LAW HARMONIZATION AND

ITS IMPACT ON PATENT EXAMINATIONS

Th e global patent system is one of the most harmo-nized areas of international economic law. It also is one of the oldest subjects of international harmo-nization. Th e universally recognized requirements of patentability date from the Paris Convention on Industrial Property, which came into force in 1883. Th ese basic principles are that patent protection requires that an invention be novel and that it not be obvious to one ordinarily skilled in the technologi-cal art. Th is is called “inventive step” in most coun-tries. In the major technology markets of the United States, Europe, and Japan this step also requires that an invention have industrial applicability. Th ese requirements were included as condi-tions in the Agreement on Trade-Related Aspects

of Intellectual Property Rights, or TRIPS, which is an annex to the World Trade Organization Treaty. Any WTO member state must adhere to these basic principles. Th e TRIPS agreement also con-tains additional requirements such as a prohibition against discriminating against the patentability of certain technologies. Because of these common standards of patent-ability, the same inventions routinely receive pat-ents in all countries. Th ere remain, however, some important diff erences among countries regarding patent rights. And it is the United States that retains the most important non-conforming idiosyncrasies. Chief among these is the so-called fi rst-to-invent system. In the United States, it is the inventor who can prove that he invented fi rst who receives prior-ity when there is a dispute over who owns the rights to a particular invention. In all other countries pri-ority is given to the fi rst inventor to fi le a patent application, known as the fi rst-to-fi le system. Another important diff erence between the United States and other countries’ patent systems involves the so-called “grace period” in which inventors have 12 months to fi le a patent applica-tion aft er they publicly disclose the invention. In most other countries, particularly in Europe, there is no such grace period. In Japan the grace period is only six months. Also, in the United States, domes-tic applicants who do not also fi le in another coun-try are not required to have their applications made public as in the case in other countries. Th ese diff er-ences—and the unwillingness of the United States to change them—have made it diffi cult to harmo-nize further the standards and conditions of patent-ability among various nations. In recent years eff orts by the United States to negotiate with other countries on patent issues have been hindered by the diff erences in the U.S. system. Opposition in Congress to legislation that would eliminate these unique features of U.S. pat-ent law has made it diffi cult for the United States to achieve further harmonization in areas where such approval is necessary.

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Furthermore, the idiosyncrasies of U.S. patent law have been used by leading developing coun-tries such as Brazil and India as reasons to resist U.S. eff orts in international norm-making organizations such as WIPO to modernize and strengthen inter-national protection of patent rights. Indeed, there have been concerted eff orts by these countries to expand exceptions to the TRIPS agreement, such as in the area of compulsory licensing.

International cooperation eff orts

of the Bush administration

During previous administrations, including the Clinton administration, U.S. intellectual property diplomacy was primarily focused on global nego-tiations that took place either in the context of the General Agreement on Tariff s and Trade, the prede-cessor to the WTO treaty, or at the WIPO, which is the specialized U.N. agency responsible for global norms involving intellectual property rights. Where bilateral or multilateral negotiations did take place, such as under the North American Free Trade Agreement or the U.S.-Japan patent harmonization discussions, these negotiations always were seen as a predicate to a global agreement. Yet eff orts by the Bush administration to achieve further harmonization were stymied by its unwilling-ness or inability to eliminate the remaining anoma-lies in its patent law, combined with a determined pushback on the TRIPS Agreement by a number of important developing countries. As a result, IP diplo-macy in the Bush years focused either on bilateral or multilateral negotiations independent of the WTO or WIPO. Consequently, the role of the USPTO in trade-related IP negotiations was greatly reduced, with the U.S. Trade Representative proceeding either with limited input by the USPTO or with greater input by a variety of government departments and agencies other than the USPTO. 12 Th e result? During the Bush years the USPTO’s role was largely limited to negotiations involving the mechanics of patent examination and of inter-

national cooperation among patent offi ces. Th is has taken the form of discussions of more eff ective

“work sharing” among the three “trilateral” patent offi ces and a small number of additional technologi-cally developed countries such as Canada, Australia, South Korea, and Singapore. More recently, China has been included in this group as a result of the rapid growth of its patent offi ce—now the world’s fourth largest. As a practical matt er these nego-tiations have not had any substantive impact on eliminating duplication in the international patent examining system or in further harmonizing inter-national patent law norms.

NEW ISSUES

Th e most important changes brought about by the TRIPS Agreement required all WTO signatories to: adhere to the principals of patentability contained in the Paris Convention; eliminate discrimination against specifi c technologies in granting patent rights; limit the use of compulsory licensing to emergency situations; and establish eff ective mech-anisms for the enforcement of patent rights. While the TRIPS Agreement restricted the discretion of signatory countries to use compulsory licensing, it did not eliminate compulsory licensing as policy tool. All countries, including the United States, retain the power to use compulsory licensing in emergency situations. Indeed, in the United States compulsory licensing of patents is much like the extension to intellectual property of the concept of

“eminent domain” used by government to acquire real property. Th e use of compulsory licensing by foreign governments, however, to access technol-ogy originating in the United States is something that can raise serious issues for an economy that is based on exports of patented technology. Th e fi rst two of these changes were largely positive but the third one—compulsory licensing—resulted in unforeseen consequences that remain unaddressed by changes in enforcement issues.

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Here’s what happened in the public health fi eld. In response to the AIDS crisis, the WTO Ministers in 2001 adopted a special declaration clarifying article 31 of the TRIPS Agreement concerning emergency compulsory licensing. Th e eff ect of this declaration was to give developing countries wide latitude in determining the circumstances under which compul-sory licensing can be used in matt ers involving public health, and to permit the use of compulsory licens-ing for the importation of drugs from other coun-tries. Subsequently, important developing countries such as Brazil and Th ailand, both of which had been importing patented therapies from the United States at market prices, began to demand more favorable terms from U.S. pharmaceutical companies under the threat of compulsory licensing. In 2007, the U.S. Congress endorsed this approach by demanding as a precondition for approval of bilateral trade agreements with Peru, Columbia, and Panama that the Bush administration recognize the right of those countries to use compulsory licenses. Th en, earlier this year, an intergovernmental work-ing group of the World Health Organization rec-ommended that the use of compulsory licenses be extended to all health-related technologies, includ-ing medical devices.13 Th e demand for more liberal use of compul-sory licensing has now surfaced in negotiations in the United Nations Framework Conference on Climate Change, where developing countries are pressing for the ability to license compulsory yet-to-be developed technologies that will reduce greenhouse gas emissions. Th is is a development that will have to be carefully considered by the incoming Obama administration, particularly since a premise of the environmental and eco-nomic policy articulated in the president-elect’s campaign was that exports of these technologies would become a principal component of job cre-ation and economic growth for the United States. Th e eff ective transfer of technology is an important element in any eff ort to combat climate change in emerging economies, but this must be

done carefully—in a manner that recognizes the signifi cance of the comparative advantage the United States enjoys in this area as an essential element of its economic growth and the creation of new jobs for its workers. Th e impact of these new issues on the challenges facing the USPTO is that probably any att empt by the new adminis-tration to negotiate global agreements to further harmonize international patent law or to eliminate duplication in patent examining may be met with demands for a quid pro quo on these issues from big developing countries.

RECOMMENDATIONS FOR

THE NEW ADMINISTRATION

Th e most immediate problem confronting the U.S. administration is to respond to the fi ndings of the Government Accountability Offi ce that U.S. com-petitiveness will be undermined unless the backlog in patent examination at the USPTO is reversed. Th e GAO report makes it clear that simply hiring more examiners will not solve the problem. In fact, patent grants by the USPTO actually declined last year in spite of increased hiring of examiners. Any analysis of international patenting statistics reveals that much of the pressure on the USPTO results from duplicative fi lings of essentially the same patent application in multiple national juris-dictions. And for the moment these duplicative fi lings are originating in a handful of other techno-logically advanced countries that also have sophisti-cated patent examining infrastructures. Th erefore, more eff ective sharing of the exami-nation burden among these patent offi ces and the elimination of duplicative prior art searching would greatly reduce the burden on the USPTO. But if eff ective work sharing that will benefi t the USPTO is to take place, then U.S. examiners must have access to the work product of their foreign counter-parts prior to beginning their examination of a pat-ent application originating in the foreign jurisdic-

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tion. Th is will require either that the United States adopt a system of deferred examination that will permit it to delay substantive searching and exam-ining until aft er the foreign jurisdiction has pro-duced a search report, or that the existing system of deferred examinations in these foreign jurisdictions, especially in Japan, be eliminated. Where an applicant has fi led for a patent on the same invention in the European Patent Offi ce, U.S. examiners should have access to the search report of the EPO prior to beginning their work. Th is should not be diffi cult because the EPO itself bifurcates the search and examination phases with search spe-cialists producing the prior art report that serves as the basis for the substantive patentability analysis later made by the examining specialist. Given that the EPO currently has a relatively short time period (22 months) until a fi rst offi ce action on an applica-tion, the search report ought to be available to the U.S. examiner sooner than 22 months. It should be emphasized that these recommenda-tions would apply only to the 27 percent of USPTO applications that originate in Europe and Japan—jurisdictions with reliable search systems. And any deferred examination of an application originating abroad would take place only if the applicant had utilized deferred examination in his own jurisdic-tion. Th e ability to eliminate duplicative searching with Japan and Europe could reduce the USPTO workload substantially, with the result that the examiner time saved could be used to reduce the current backlog.

Create a multinational or global patent offi ce

for the United States

Ultimately, however, the most eff ective way of eliminating duplicative examinations from the global patent system—and to promote uniformity and harmonization—would be for the United States to work with its foreign partners to create a multinational patent examining authority that could be used as a substitute for the USPTO. Th is

is how the EPO serves as an alternative to country-by-country examination in Europe. It is important to keep in mind that this recom-mendation does not contemplate replacing the USPTO with a multinational authority. It simply means that an applicant intending to fi le multina-tionally would have a choice as to which approach to use—as is the case in Europe today where indi-vidual national offi ces continue to accept and exam-ine applications applicable to their own territory. And as is the case in Europe today, the U.S. patent would be issued by the national offi ce, the USPTO, not the multinational examining authority. Th is would take place only aft er a review that the exami-nation complied with U.S. law. In no way would the sovereignty of the United States be compromised. A predicate to reliance on the work of an inter-national examining authority—or the search report of a foreign offi ce—must be that the work be of the highest quality. Th is will require a strong oversight mechanism to ensure that the USPTO can rely on this external work product. While the EPO serves as a precedent for a mul-tinational search authority it must be kept in mind that the EPO is a mid-20th century offi ce that was created long before the Internet and 21st-century information technology. It is likely that any new multinational examining authority would be a

“virtual” patent offi ce, relying heavily on resources in more than one country. Th e new system would not require a large physical plant or thousands of new hires stationed in a specifi c location. It is likely that existing patent offi ces, including the USPTO, would provide the search and examination services on an agreed basis. It would, for example, be possible to assign work to offi ces on the basis of special expertise in which a particular group could become the most competent. Th is system also would permit the use of examining resources such as the high-quality national offi ces of Europe whose work has partially been displaced by the European Patent Offi ce. Such a patent offi ce also would be free to

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employ the most advanced electronic search tech-nology unencumbered by archaic legacy systems currently in use by existing offi ces. Any new multinational authority could be cre-ated on an ad hoc basis by agreement of countries willing to participate. Or it could be created under the auspices of WIPO. One advantage of using WIPO is that developing countries would be more likely to use the services of the new authority as WIPO is widely trusted throughout the world. Th is would enable the vast majority of countries that today are incapable of conducting meaningful examinations to do so, and would eliminate dif-ferent examining results in diff erent jurisdictions and the mischief that is possible when individual countries manipulate the examining system for political purposes. Were the WIPO to serve as the home for a new multinational patent offi ce, it would not be neces-sary to promulgate a new treaty prior to sett ing up the offi ce. Th is is because the current Patent Coop-eration Treaty recognizes that examination may be by a multinational authority and permits the WIPO General Assembly to recognize specifi c national or multinational offi ces as search authorities. Th e WIPO General Assembly could simply designate its own search authority as one of the limited num-ber currently recognized to perform this function under the PCT. Under no circumstances would the creation of a search-and-examination authority under the auspices of WIPO involve a large Geneva-based bureaucracy. Th ere would be only a small central staff to administer the components of the “virtual offi ce” spread among a number of countries. Th is central staff would maintain the IT infrastructure and assure quality control of the searches and exam-inations performed by the various components. As is the case today with the USPTO and most other national offi ces, patent examining activity is not supported by taxpayers. It is paid for by fees assessed to applicants. Th is would be the case with any new multinational offi ce. Yet these fees would

not be subject to diversion into national treasuries and the structure and technologies used would, in all likelihood, be more cost effi cient than the exist-ing system. Certainly, a one-stop-shop ought to provide sig-nifi cant cost savings for applicants compared to the highly duplicative system in existence today. Th e resulting cost savings could be passed on to appli-cants, making it possible for individuals and small businesses—particularly those in poorer develop-ing countries—to obtain eff ective patent protec-tion in the world’s major markets in a way that is not possible today.

Harmonize U.S. law with international norms

In the absence of globalization there would be very litt le need for the United States to consider modifying its longstanding doctrine that the per-son who is fi rst to invent receives a patent even when another has fi led a patent application on the same invention earlier. Th e fi rst-to-invent system is arguably fairer, particularly to inventors who lack the fi nancial resources to hire a patent att or-ney to draft and fi le a patent application immedi-ately aft er the act of invention. Th e economy of the United States, however, is now inextricably intertwined with those of other countries. And given the comparative advantage of the United States in trade based on patented technology, the United States will receive dispro-portionately greater benefi t from the economic effi ciency created by global patent law harmoniza-tion. Th e United States stands alone in maintain-ing a fi rst-to-invent system. Th erefore, it will be extremely diffi cult, if not impossible, to persuade other countries to change their long-standing prac-tices and conform to the U.S. system in any patent law harmonization negotiations. Further, out of the hundreds of thousands of U.S. patents granted every year there are only a small num-ber, usually no more than a few hundred, where there

Patent Reform

fall • winter 2008/2009 95

is a dispute over whether the fi rst inventor also was not the fi rst fi ler. Given the fact that the anomalous fi rst-to-invent system makes it much more diffi cult to negotiate an easier path to global patent protection for U.S. inventors, any arguable equities inherent in maintaining a fi rst-to-invent system are outweighed by the advantages to U.S. inventors of a higher level of international harmonization. Th erefore the incoming Obama administration should give strong consideration to adopting a fi rst-inventor-to-fi le position in any international negoti-ations involving substantive patent law harmoniza-tion. Of course, if the Unites States agrees to change its law in this regard it should expect corresponding concessions from other negotiating parties. As an example, this could include concessions on matt ers such as the grace period between public disclosure and the fi ling of a patent application.

Develop a response to the growing pressure

to expand compulsory licensing

Th ere is growing pressure from developing coun-tries to expand the use of compulsory licensing beyond replication of the chemical composition of pharmaceuticals needed to respond to health emergencies. Th is is seen in proposals put forth by infl uential developing nations such as Brazil in the United Nations Framework Conference on Climate Change. Th e United States must develop a response to this pressure that does not damage its compara-tive advantage in technology-based trade, while at the same time recognizing the legitimate need of countries such as China and India to have access to the newest technologies to reduce greenhouse gas emissions into the earth’s atmosphere. Th is response must be more than ideological. It must be based on persuasive evidence, such as the fact that the widespread presence of compulsory licensing statutes in the laws of developing countries in the mid-20th century as part of their strategies to eff ect ‘import substitution” had no demonstrably positive eff ect on their eff orts to industrialize. In

fact, the evidence suggests that such strategies may have retarded technology transfer. Th e reason: Access to the data contained in a pat-ent is rarely adequate, in itself, to enable developing country industries to manufacture the sophisticated industrial products containing patented inventions, particularly products that are typical in the transpor-tation and energy industries that account for the larg-est share of carbon emissions into the atmosphere. It would be tragic if private-sector investment in envi-ronmental technologies were to be impeded because of fear of loss of global patent protection. Th e incoming administration must put patent issues in the context of the many other issues that aff ect transfer of technology, including the fi nancing of low-carbon infrastructures in developing countries and the fact that technology transfer is best achieved when it is practiced as technology-based trade. Suc-cessful trade relationships must involve a balance between the interests of trading partners. As it takes the lead in developing a new global treaty to address climate change, the United States must not relegate patent issues to the status of an aft erthought. Th is will require the involvement of patent law specialists early in the development of U.S. climate change strategy. And within gov-ernment those specialists are to be found in the USPTO and the patent licensing offi ces of the existing departments and agencies that license gov-ernment-funded technology, such as the National Institutes of Health, Department of Defense, NASA, National Institutes of Standards and Technology, and the Department of Energy. Th ese are depart-ments and agencies with long experience in market-based transfer of government-funded technology to the private sector.

Use the USPTO’s expertise in

international negotiations

Th e USPTO is the government agency with the great-est concentration of expertise in intellectual property law and policy. It is the only entity within the govern-

Patent Reform

96 science progress

NOTES

1 “American Innovation at Risk: Th e Case for Patent Reform,” available at htt p://judiciary.house.gov/hearings/February 2007/jaff e07215.PDF. Professor Jaff e is Dean of Arts and Sciences at Brandeis University and is the author of Th e Money of Invention, co-author of Patents, Citations, and Innovations: A Window on the Knowledge Economy, and co-author of Innovation and its Discontents: How our Patent System is Endangering Innovation and Progress and What to do About it.

2 World Intellectual Property Organization, Th e World Patent Report (2008), p. 8.

3 Th e Trilateral Co-operation, Trilateral Statistics Report 2007, Chapter 2, available at htt p://www.trilateral.net/tsr/tsr_2007/.

4 Government Accountability Offi ce, Hiring Eff orts are Not Suffi cient to Reduce the Patent Application Backlog (Sept. 2007), p. 23.

5 Trilateral Statistics Report 2007, Chapter 3.

6 Ibid.

7 World Patent Report 2008, at 7.

8 Trilateral Statistics Report 2007, Chapter 4. Th ese technologies include computer and automated business equipment, micro-organism and genetic engineering, aviation, communications technology, semi-conductors and lasers.

9 Th e Patent Cooperation Treaty is a WIPO-administered treaty that permits applicants to fi le in one member country and simultaneously fi le provisional applica-tions in other member countries. While the applicant may fi le in multiple jurisdictions initially using the PCT he or she must pursue the actual examination of the application in each designated country. Th ere is no world patent. A national patent is valid only within the jurisdiction of the country in which it is granted.

10 Th e principal regional patent offi ce in the world is the European Patent Offi ce, which examines patents for 33 member states. While, the European Patent Con-vention permits fi ling in each member state, most multinational patent applicants prefer the one-stop shop of the European Patent Offi ce.

11 Trilateral Statistics Report 2007; World Patent Report 2008.

12 Beginning with the Reagan administration, while the USTR served as the lead agency for trade negotiations, the substantive policy development and day-to-day negotiations were principally undertaken by the USPTO under the leadership of Michael Kirk, a career USPTO offi cial who was appointed deputy commissioner of patents and trademarks by President Clinton. No USPTO offi cial has played a comparable role in the Bush administration.

13 Th is refl ects the “Rio Document” authored by Brazil’s Minister of Foreign Aff airs and signed by representatives from Argentina, Bolivia, Costa Rica, Cuba, Ecua-dor, El Salvador, Honduras, Mexico, Peru, Suriname, Uruguay, and Venezuela in September 2007, which states that “the promotion of technological innovation and the transfer of technology is a right of all states and should not be restricted by intellectual property rights…”

ment with a leader at the undersecretary level focused solely on intellectual property matt ers. Th erefore, in addition to implementing a system of work sharing or multinational examination that would meaningfully take pressure of the USPTO itself, the new adminis-tration should restore the policy role of the USPTO in the wide range of international intellectual prop-

erty negotiations. Th e USPTO has the expertise and career staff to ensure that any such negotiations will be based on the substantive technical knowledge that is essential to successful decision making.

Bruce A. Lehman OS former assistant secretary of com-merce and U.S. commissioner of patents and trademarks

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