Innovation in Diagnostics and Patent Subject Matter Eligibility

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Greg Walsh:  Welcome to The Federalist Society's Teleforum conference call. This afternoon's topic is titled "Innovation in Diagnostics and Patent Subject Matter Eligibility." My name is Greg Walsh, and I am Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today, we are fortunate to have with us the Honorable David J. Kappos, a Partner at Cravath Swaine & Moore; Professor David O. Taylor, the Robert G. Storey Distinguished Faculty Fellow and Associate Professor of Law Co-Director at the Tsai Center for Law of Science and Innovation; and Professor Paul R. Gugliuzza, Professor of Law at Temple University Beasley School of Law. Finally, our moderator is Mr. Andrew F. Halaby, a Partner at Snell & Wilmer.

 

      After our speakers give their opening remarks, we will go to audience Q&A. Thank you all for sharing with us today. Andy, the floor is yours.

 

Andrew F. Halaby:  Thank you, Greg. Good morning, everyone, or good afternoon. We are here to talk about patent subject matter eligibility issues, which are, of course, highlighted by the continuing COVID-19 pandemic and which manifest themselves most immediately, in our minds, as relating to the patentability of medical diagnostic tests, a hot issue, of course.

 

      Let me say a few more words about our panelists before turning the microphone over to them. David Kappos is, of course, widely recognized as one of the world's foremost leaders in the field of intellectual property, including intellectual property management and strategy. From August 2009 to January 2013, he served as Under Secretary of Commerce and Director of the United States Patent and Trademark Office, in which role he advised the President, the Secretary of Commerce, and the administration on intellectual property policy matters.

 

      He played an instrumental role in achieving the very substantial legislative reform of the patent system embodied in passage and implementation of the Leahy-Smith America Invents Act, which President Obama signed into law in September 2011. Before leading the PTO, Director Kappos worked for 25 years in the intellectual property department at IBM.

 

      Professor David Taylor, who teaches at SMU Dedman in the areas of contracts and patent law. Professor Taylor's scholarship focuses on, in particular, patent law, patent policy, patent litigation, and civil procedure. Before beginning his career as a professor, David worked for seven years at Baker Botts in Dallas, and before that, he worked as an applications engineer at National Instruments Corporation in Austin.

 

      Professor Taylor is very widely published in a variety of well-regarded law reviews and journals. His publications have been cited by the federal circuit and various district courts. He has testified before Congress on patent eligibility, and he has a forthcoming piece in the Cardoza Law Review on patent eligibility in investment, which you may -- the fruits of which, the work on which you may hear more about in a bit.

 

      Finally, we have Professor Gugliuzza. He is an award-winning scholar and teacher who specializes in civil procedure, federal courts, and intellectual property law, particularly focusing on patent litigation. He, too, has published articles in numerous leading law reviews. He has a forthcoming piece in the Iowa Law Review on "Law, Fact, and Patent Validity." He's also published pieces well worth reading on the procedure of patent eligibility and the federal circuits of the federal court. Like Professor Taylor, he, too, has testified before Congress on patent litigation issues, and his scholarship has been widely cited by the courts.

 

      To set the table before turning the microphone over to Director Kappos, let me just remind the audience of the statute we're talking about. It's 35 U.S.C. § 101: Inventions Patentable. It reads "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title."

 

      The statute has existed in that form since long before the 1952 Patent Act, before the 2011 America Invents Act, the most comprehensive and wide-reaching legislative reform of the patent laws. The legislative history accompanying that act makes reasonably clear that Congress viewed anything under the sun that is made by man is patentable. Nevertheless, the courts, since long before that, for a century and a half, have viewed patent subject matter eligibility as riven by three exceptions, namely laws of nature, natural phenomenon, abstract ideas are viewed by the courts as unpatentable.

 

      The decade beginning with the year 1972 was an interesting year as regards our subject matter. While Congress was engaging in the rather lengthy process that ultimately led to the creation of the federal circuit in 1982 designed to strengthen the patent laws, the Supreme Court was deciding a series of four decisions which touched directly on patent eligible subject matter under Section 101.

 

Nevertheless, subject matter eligibility under Section 101 fell into a state of desuetude for about a quarter century until it was resurrected beginning with a dissent by Justice Breyer in the LabCorp case, a dissent from denial of cert in 2006, followed by very prominent Supreme Court decisions in Bilski v. Kappos in 2010, Mayo Collaborative Services v. Prometheus in 2012, and Alice Corp. v. CLS Bank in 2014, all of which have led to the upshot that now the Supreme Court views patent subject matter eligibility analysis as a two-step process in which, in the first step, the Court asks whether the patent's claims are drawn to one of the judge-made exceptions I just recited. And second, if they are, whether there is enough of an "inventive concept" to make what otherwise would be unpatentable, patentable.

 

      So having set the stage, let me turn the microphone over to Director Kappos for his remarks.

 

Hon. David J. Kappos:  Yeah, thanks, Andy. Well, that's a great set up for a discussion of 101, and I'm pleased to be a part of this Federalist Society program here this afternoon.

 

      What I would add from a policy and legislative perspective on Section 101 is first to step back a bit and talk about -- as Andy explained, Section 101 has been a bedrock portion of our law. It was quiet for many years. It was assumed to be extremely expansive. The U.S. was known to set the gold standard on expansive interpretation of eligible subject matter under Section 101. And for my entire life, until recently, the last seven or eight years now, Europe and Asia, first Japan, and then more recently, China, were considered to lag behind the U.S. and were considered to struggle with, at times, what seemed to be artificial and constrictive discussions about the breadth of patentable subject matter.

 

The Europeans put out rules that they've since found clever exceptions to, but when they came out with their rules in the 1970s, if I remember right, that found that software inventions, computer programming inventions per se, or as such, were unpatentable. It took them decades to work their way through that, and it created a disadvantage for them and a discrimination against what we now know is an obviously critically important area of technology.

 

      So we always assumed and felt like the U.S. had a big leg up because, for most of our lives, we just didn't get confused about Section 101. It really was, as Andy said, a section that covered all things under the sun made by man, and we could move on to more productive topics like obviousness and inventive step or novelty and disclosure requirements, what we call Section 112, enablement and written description, for those of you who are patent lawyers.

 

And that all really abruptly changed with the Supreme Court decisions that Andy's mentioned, and it put us in the U.S. in the opposite posture, actually, as the laggards on a global scale, as the country that's got a highly constricted subject matter eligibility test that I would tell you makes diagnostic innovation essentially unpatentable in the U.S. And I'd like to come back and talk about that a little bit more in a moment and how that compares with our overseas competitors.

 

But I said I'd step back. The reason that matters isn't because patent attorneys have to struggle to get claims through the U.S. PTO or because we don't have the opportunity to issue as many patents. Frankly, I couldn't care less about any of that. What I care about, and what I would propose that should be something that everyone in our country cares about, is innovation outcomes. It's the ability to take research results, great university discoveries and breakthrough ideas, and turn them into patient treatments, diagnostics in the marketplace that can actually save people's lives.

 

And that's why it pains me, it troubles me when the Mayo Clinic, as an example, a few decades ago, finds an important diagnostic, an enzyme that correlates with oncoming cardiovascular events. So to put that into vernacular, the Mayo Clinic -- oh, sorry. Not Mayo. I'm using the wrong term there. The Cleveland Clinic—credit to the Cleveland Clinic—clinicians discovered that if you have an elevated level of this particular enzyme in your blood, you are going to have a heart attack.

 

Now, probably everyone on this call, whether personally or for a loved one, would view that as a pretty important breakthrough and a pretty important discovery, and something that we would want to have turned into a diagnostic in the marketplace. Of course, the Cleveland Clinic issued three patents on the discovery and went on to attract capital because of the intellectual property to form a company to commercialize and create a diagnostic test and put it in the marketplace so that Americans and, indeed, people all over the world could enjoy this new diagnostic.

 

It all seemed to be fine until the district court, and then affirmed by the federal circuit, and in cert denied by the Supreme Court, found that all three of those patents, despite the fact that they represented important discoveries—clearly very novel, clearly unobvious, clearly important—were unpatentable because of Section 101.

 

What does that say about the ability of our country to incent investment in diagnostics? Well, it says terrible things. What I've learned -- and I challenge anyone on this call to talk to companies, CEOs, and board members of for-profit companies that we charge in this country with taking the vast majority of great university research, and even NIH-related research, and translating it into marketplace outcomes, spending the billion or more dollars that it takes to get through Phase 1, Phase 2, and Phase 3 clinical trials, and to do all the other things that are required to take a great university discovery and put it into the marketplace.

 

And what you will find, as I have found in speaking with many CEOs and board members—and I'm fortunate that that's my day job, advising those kinds of people—is that they can't justify investing in diagnostic commercialization anymore because they know that there's no return on it because they won't be able to get patent protection.

 

And as a result, of course, the well-meaning and altruistic researchers at universities and places like the Cleveland Clinic and other research institutions, are significantly changing their behavior as well. Because while they may be less profit motivated than for-profit companies, they're not stupid, and they're not going to spend their time researching things that will have no chance of finding their way into the marketplace. They actually want to have an impact; that's why they go into government work or into academia.

 

So we're seeing, right before our eyes, how the patent system works, or more clearly in this case, how a failure of the patent system stops our economy from working and prevents important outcomes from getting into the marketplace. That's what's going on right now, and that's why I care a lot about this topic.

 

Now I'll come back with that and just make a few more comments about where we are in the process of fixing this catastrophe, I think I would have to call it. We've struggled with this. Since the Supreme Court decisions that Andy briefed for you earlier, there have been dozens—in fact, I believe it may be now more than 100—but in any event, many dozens of 101 decisions, many in the diagnostics area, but some in other important areas as well: genetics-related innovation.

 

How about areas of national security and national competitiveness, like artificial intelligence and 5G and quantum computing? Many of you probably know the current administration has declared that 5G in particular is critical to U.S. national security. You know what? Innovations in that area and AI and quantum computing -- unpatentable. They can't be protected with a patent because of Section 101.

 

So it's a broad-based problem. There have been dozens of requests for cert, petitions for cert, before the Supreme Court of decisions that the unfortunate federal courts, first at the trial level and then at the appellate level at the federal circuit, have been bound to follow the Supreme Court precedent. And of those dozens of requests for certiorari since the cases that Andy briefed for you, there have been zero accepted for cert. So the Supreme Court has clearly given us its view that it doesn't really care about this issue anymore and isn't going to get further involved to fix the mess that it's created, to be quite frank about it.

 

The federal circuit and the district courts, for all they've tried, of course, are very hamstrung and required by our law to follow the Supreme Court's precedent. The Patent Office, for its part, has struggled mightily and done the best it could as well. And I'm thankful and congratulate the current leadership there that put in place some really good guidelines in about January 2019 that have enabled examiners at the PTO to do as rational a job as possible, given the irrational state of the underlying law.

 

But everybody on this call knows that the Patent Office doesn't make the laws or make up the laws; it follows the laws. And for the Patent Office or any federal court other than the Supreme Court to make sense of the chaos is impossible. The cases cannot be reconciled with one another. They are in clear facial conflict with one another, and that's how we've got the mess that we've got.

 

That has turned attention in recent years to a legislative fix for the problem, and that's something I've been heavily involved in, along with some others. Many may know that a couple of senators in the Senate Judiciary IP Subcommittee chaired by Senator Tillis with ranking member Senator Coons, took an issue in this topic last year, in 2019. They held a series of roundtables. They convened three hearings where 45 witnesses, including myself, and I think maybe one or two of the other people on this call, testified, and they came up with starting point legislative text. They didn't drop a bill or, to my recollection, introduce a discussion draft, but they made a lot of progress. But the effort stalled out as parties on both sides of the divide, if you will, the debate about what to do to fix Section 101, couldn't come to agreement on appropriate approaches.

 

That's where things stand currently. We've got a badly broken area of the law, and we're foundering in terms of fixing it. The last thing I'll say, and then I'll stop, is I mentioned that I'd come back to counterpointing the U.S. with our economic competitors, and then just a word or two about COVID, where this call started.

 

A number of years ago, I was talking with a member of Congress about the situation, and this member said, "Yeah, look, Dave. I get it. 101's a problem, but none of my other fellow members are going to understand this issue. How can we explain this in a way that they'll care?" And I said, "Well, I think it's the case now that important innovations, like in the diagnostics area, that cannot be patented in the U.S. over Section 101 can be patented in both Europe and in the People's Republic of China. And I think that's a crying shame for our country to have fallen behind in that way." And this member said, "Well, that's interesting. Can you go and develop data on that point?"

 

And so I did, and found, easily, over 12,000 instances, which we then curated to remove false positives and noise, as the academics on the call will tell you occurs in any data set, and were easily able to show in a data set that was since published by Adam Mossoff in a paper called "Turning Gold into Lead," I believe, that details the travesty of patentability that leads us to a place where important life sciences innovations, especially diagnostics and in other art areas, are readily patentable—the very same invention—readily patentable in the People's Republic of China and in Europe and unpatentable, ab initio, under Section 101 in the U.S. That is a real problem and a real shame.

 

Last point, very quickly, to just mention relative to COVID-19. Clearly, that is a global issue and no legal regime, intellectual property, or other should stand in the way of quickly finding a vaccine and diagnostics and getting them to as many patients throughout the world as possible. I wouldn't say for a moment that intellectual property should get in the way at this point.

 

The good news is that great companies are focused on this and have the libraries of base molecules to start dealing with it, but we should recognize the reason they are able to focus on it and the reason they have the intellectual wherewithal to quickly mobilize against COVID-19 is precisely because we had a strong intellectual property system in the past. We incented them to invest, and we rewarded them for that investment.

 

What I would say is we should think about intellectual property versus pandemics in a longer timeline, longer timeframe. IP is about long-term innovation incentives. Don't think about COVID-19 because we've got do to everything we can, setting aside property rights systems, to deal with that pandemic. Think about the next pandemic and setting in place the policies and the incentives so that huge investment will be made in new diagnostics and new treatment and new vaccine disciplines so that we never get in this mess again, the mess that we're in with COVID-19.

 

I'll stop there and turn it back over to you, Andy.

 

Andrew F. Halaby:  Thank you, Director Kappos. Let me now ask Professor Taylor for his introductory remarks.

 

Prof. David O. Taylor:  Sure. Thanks, Andy. It's good to be on the call. It’s an important topic.

 

      Just taking a step back, we want to have the law encourage creation and disclosure of inventions. That's really what patent law's all about, but if you take a step back from patent law, really there's two ways to have that goal achieved. One is government-funded research and development, and Director Kappos mentioned this, investment by the National Institute of Health, or public universities, for example.

 

      Government-funded research and development can result in inventions, can result in public disclosure of those inventions. But that's a limited field of money. We can tax. We can spend that money on and invest it through the NIH and different researchers. But what about unleashing the private sector and encouraging and setting up a legal regime that encourages private investment in research and development? Well, that's what the patent system is really doing. It's there to spur private investment.

 

      There's another alternative. There's a reward system where it's kind of after the fact. You look and see what people have invented and give them some sort of reward. That system is not the patent system. The patent system is a rights-based system. You can think of it as a property right or right to an injunction, perhaps, in certain situations, to exclude competition, exclude someone from using the invention, also damages if someone infringes that right, uses the technology without the permission of the rights holder. So in some sense, it's property-like rights. That's the patent regime.

 

      It's essentially an economic incentive to invest in research and development, but also, it encourages not just the creation of inventions, but their disclosure through the publication of the patent document. And that's a huge advantage over a system where we wouldn't have patents where trade secrets would be a primary mode of protection.

 

      So there's huge benefits to the patent system. It unleashes huge sums of money outside of the tax system. It's not centrally driven where a central controller makes decisions on what to invest in. That's limited, and there may be mistakes or lack of foresight.

 

      But this patent system, it does have its limitations. At least two factors for me that I think about are the stability of the rights are hugely important, and at the end of the day, there has to be a market for the fruit of the research and development. Because the government is not spending its own money to reward the inventors, the inventors only obtain a reward through the market through the use of their rights in the market; for example, by excluding competition and getting a leg up on competition by having the only product, for example, on the market with this new technology. Or, if it's infringed, we do bring back in, of course, the legal regime to allow for courts to provide remedies. But there has to be infringement. There has to be use of the technology in the market.

 

      So the patent system is based on use of the technology in the market. That's the only way the patent owner is going to obtain a return on that research and development. Again, the patent system depends on the stability of rights and a market for the fruits of the research and development.

 

      The COVID-19, it kind of indicates this perfect storm—and I'll emphasize storm—that we've been in. It's not great. It's a bad situation. But COVID-19 really highlights these two factors and problems that have arisen recently. The rights on patents have not been stable. The Supreme Court, as has already been discussed, changed patent eligibility law. And if you go in and look at the cases, at the federal circuit in particular, the diagnostics cases which --

 

Greg Walsh:  I think we may have lost the professor. Paul, would you mind jumping in?

 

Prof. Paul R. Gugliuzza:  No, not at all. And if David Taylor's able to hop back on, I'm happy to -- just shout at me and I will let him finish up his opening remarks.

 

Greg Walsh:  Absolutely. Will do.

 

Prof. Paul R. Gugliuzza:  In the meantime, I will fill the space as best I can. Thanks so much to Andy and to The Federalist Society for organizing this. It's really nice to get together to talk about exciting things like patent eligibility even if we have to just simply do it over the phone rather than in any sort of in-person event.

 

      Just a few things to sort of riff on what Director Kappos and Professor Taylor had said already. One thing that's worth, I think, taking up at the outset is this question of what's the doctrinal basis for this requirement? Is the Supreme Court just making this up out of thin air? Where does this requirement of patent-eligible subject matter come from?

 

      At the outset, Andy read the relevant statute, Section 101 of the Patent Act, which recites eligibility in relatively broad terms. It says any "machine, manufacture, or composition of matter," or any improvement of those things, is eligible for patenting. But the courts for a long time have recognized an implicit exception in that statute.

 

Both Andy and Director Kappos mentioned that in the legislative history of the 1952 Patent Act, which is the most recent substantive revision of the statute, there's a statement about anything under the sun being patentable. But if you take a close look at the legislative history there, to the extent you think legislative history ought to matter at all, the language is not quite as expansive as that phrase might suggest.

 

      What the actual sentence in the committee report says is that a person may have invented a machine or manufacture, which may include anything under the sun that is made by man, but it's not necessarily patentable under Section 101 unless the conditions of the rest of the patent statute are satisfied. So I think the relevant language of the legislative history, again, to the extent you think it matters, is ambiguous as to whether Section 101 and the eligibility conditions are as expansive as some people might want them to be.

 

      Setting aside the doctrine and turning a little bit more to policy, Director Kappos makes the really great point that one big policy concern with the Supreme Court's move in this area in the last ten years of heightened eligibility requirements is that medical diagnostic tests, generally speaking, are not patent eligible. So I think it's worth expanding on why that's so just a little bit.

 

      It's because most medical diagnostics rest upon some sort of correlation that exists naturally in the body or out in the world. You find this particular chemical in the blood, or some amount of a particular chemical in someone's bloodstream, and that indicates to you that that person has some particular medical condition. And that correlation between this thing in someone's body and the medical condition occurs naturally. It's not anything due to human intervention. And if it turns out that the way in which you detect that chemical or that biomarker in someone's body is well known, then your patent is going to fail the eligibility test in Mayo because it simply covers a natural law with no other inventive concept to save it from invalidation.

 

      The poster child of a case that really raises some serious policy concerns about the application of that test is this case called Ariosa v. Sequenom. The inventors in that case had discovered that the DNA of a fetus actually floats around in its mother's bloodstream. This was really useful because if you want to do genetic testing on the fetus, before you had to do amniocentesis, which required sticking a needle into the mother's uterus. It's very dangerous both to the mother and to the fetus. I imagine it's incredibly uncomfortable as well. Not a great way in which to test for fetal abnormalities like, say, Down syndrome. But if you can just take a blood sample from the mother and run a DNA test on the fetus' DNA, you can find those same genetic abnormalities in a much safer, much more cost effective way. And in fact, I think you can also do it much earlier in pregnancy as well.

 

      So that's a step forward in terms of medical treatment and diagnosis, but that patent claims the presence of fetal DNA in the maternal bloodstream, which is a natural phenomenon. It's always been there, separate and apart from any human intervention, and the methods of detecting and sequencing DNA are well known. We've been sequencing DNA for decades now. So that patent was not eligible. So we might look at that as a problem from a policy perspective because those sorts of innovative tests that make medical treatment safer and cheaper are precisely the sorts of things we think the patent system ought to be incentivizing.

 

      What's on the other side of the ledger here? Well, a couple of things. One, the Ariosa case, and a lot of our discussion so far, has focused on medical diagnostics, or maybe think a little more broadly like the biotechnology industry, more broadly. And this discussion highlights a problem that we have with the patent system, which is that we have this system that was created in the late 1700s and we have to adopt it to technologies that now exist in the 21st century. Although biotechnology is a big part of the patent system, so are computers and communication technology. And it's the exact same statute that applies to both of those innovations in both of those fields.

 

      It just so happens that the story about patent eligibility in the computers and communication technology side is one that arguably is much more positive. In fact, they did a study on this a few years ago, but about 90 percent of patent eligibility cases, at least at the federal circuit level, were about computers and communication technology and not biotechnology.

 

      Why does that matter? Well, it matters because of patent trolls. We don't really see patent -- in fact, this is the first time we've said the phrase "patent trolls" on this call because they don't really exist in the biotechnology sphere. But in the computers/communications/software sphere, they exist, and they're a real scorch. There are many patentees that use broad, vague, abstract patents—perhaps the most infamous being the patent on one-click buying on the internet—to file, many of them, large numbers of suits making settlement demands just below the cost that it would actually present to the defendant to litigate the case to a judgement.

 

      On the computer/communications/software side, the eligibility doctrine has been an incredibly useful tool for defendants to challenge those type of suits not only because those one-click patents are relatively broad and vague, but also because patent eligibility -- courts are often willing to decide it on a motion to dismiss, which is the very first document that a defendant files in response to the plaintiff's complaint.

 

      Most of you might look and say, "Well, the one-click patent, eligibility aside, it's not novel. It's obvious." True, but courts usually treat those doctrines as raising questions of law, so they won't decide those issues until a motion for summary judgment, which will occur after the defendants already incurred most or all the costs of discovery, which is why trolls can make a model out of threatening suits and then just walking away with a relatively low-dollar settlement.

 

      If the defendant can get the case dismissed with its very first responsive pleading, that lowers the cost to the defendant significantly and allows the defendants to actually fight these suits and win them, invalidate the patents from ever being asserted again. And that's a really positive development in that area of technology where this policy story is much, much different than the policy story we've been talking about for biotechnology. So that just makes analyzing all of this all the more complicated here.

 

      One thing—and I'll wrap up—that maybe the courts, particularly the federal circuit, have done to try to bring a little bit more predictability to the medical diagnostic side and maybe try to strike a balance between the broad interpretation of the Supreme Court's case laws prohibiting any patents on medical diagnostics and acknowledging the reality that sometimes diagnostics do need the incentives of a patent, is there's been a line of federal circuit cases over the last couple of years where the Court has said, basically, "Well, we know that pure methods of medical diagnosis are not patent eligible under cases like Mayo and Alice, but if the patent includes a treatment step -- if it says, "Look for this correlation. Look for this chemical in this amount in the blood, and if you find a specified amount or a specified range, do this treatment. Give them more of this medicine. Give them less of this medicine, etc."

 

If the patent includes the treatment step, the federal circuit has been willing—the leading case on this is called Vanda—the federal circuit's been willing to uphold patent eligibility over those diagnostic patents that also include a treatment step.

 

      Now, is that a perfect solution? Potentially not. There are potentially diagnoses we may want to make for which we don't yet know the treatment, but requiring the treatment step to be recited does strike, I think, a decent balance in terms of preventing patentees from just broadly claiming a naturally occurring correlation. It doesn't allow them to do that but makes sure that if you want to claim that correlation, you need to specify a reason why that correlation is important. What are we learning? What might we do upon discovery of that correlation?

 

      I have a few thoughts about how this also potentially relates or does not relate to COVID, but I've probably gone on for long enough, so I'll hold those back. I'm sure we'll touch on some of those in the Q&A. Thanks again so much.

 

Greg Walsh:  I think we have Professor Taylor back on, if he wants to continue his introductory remarks. Professor?

 

Prof. David O. Taylor:  Sure. I'm sorry. I didn't realize I dropped off. Andy, can you let me know what you last heard from me?

 

Andrew F. Halaby:  Yeah, it was at 26 minutes after the hour. You had just identified stability of rights and the market for the rights as the pivotal issues, and then you were continuing from there when you were cut off.

 

Prof. David O. Taylor:  Okay, thanks. Sorry about that. Stability of rights and the market for the fruits of the R&D are significant factors in the patent system working. So I was going to transition to just focus on COVID for a minute before I talked about my own research.

 

      We're kind of in a perfect storm, unfortunately, with respect to those two factors because as Director Kappos highlighted in his remarks, those rights have not been stable. Really, they're nonexistent in the diagnostic industry. In fact, federal circuit judges in the Athena case, the most recent case addressing diagnostics, several federal circuit judges basically said if you have a diagnostic invention, you're not going to get a patent, according to the federal circuit and the Supreme Court.

 

      Then the question is well, why would you invest in research and development in a field where you have no right to exclude and no way to earn profits because you can't get a patent? Unless you're Bill Gates, which I guess he would say not invest but just spend his money without seeking any return on the investment other than good will, I guess. So someone can copy your invention without a patent and maybe reverse engineer it and sell it at a discount. They don't have to recoup their investment. It's a significant problem with respect to diagnostics.

 

      The other aspect in this perfect storm is, with respect to COVID-19, this disease did not exist until late 2019, and so there was no market. It wasn't a problem that needed to be diagnosed. But really, the money had been exiting the diagnostic industry and we weren't prepared because technologies had not been developing in the diagnostic industry. We have anecdotal reports of that. The Ariosa v. Sequenom, that was an important patent case, one of the first diagnostic cases where the patents were invalidated.

 

      Sequenom was bought on the cheap by LabCorp; exited the market, effectively, as a company. We have other anecdotal reports. Regeneron's another company. Now, they're not a diagnostic company, but they highlighted in their testimony last summer in the Senate that the Supreme Court's case law has created a disincentive to invest in these areas, limits the patentability, and limits the sharing of scientific information without patents.

 

      Certainly, now there's a huge need. It's highlighted by the COVID-19 pandemic that we're in, but this problem with respect to diagnostics has been building over the last five years. We have these anecdotal reports. And so, turning to my research, I've been exploring this area and thinking about this area for the last five years or so. Seeing the anecdotal reports, I wanted to do a more robust study to see if there are real problems that we could demonstrate not just in an anecdotal way.

 

      I did a survey. I surveyed investors, private equities, insured capital investors. I was exploring the question of has there been an impact on investment decisions by the Supreme Court’s cases? Exploring this question to see if there's a consensus of whether we need to reform, legislative reform.

 

      The results of my survey—I won't go over all of the details of it, of course—but the end result was the Supreme Court's cases have impacted investment decisions and have done that negatively. I had 475 venture capital and private equity investors respond to the survey. There were four principle findings.

 

First, patent eligibility is an important consideration when their firms decide whether to invest in companies developing technologies; 74 percent agreed, 14 percent disagreed. That's the general proposition underlying the patent system, of course.

 

      Related to diagnostics, or more generally life sciences, what the survey showed—the second principle finding—reduced eligibility definitely correlated with particular investment behavior in particular industries. And in particular, what I found was the life sciences were the most negatively affected industries, according to the investors.

 

      They reported that the elimination of patents would, for example, only have slightly decreased investments or even have no impact in the software and internet industries, but with respect to life sciences, significant impact, either somewhat or strongly decreased investments in the biotech, medical device, and pharmaceutical industries. For example, in medical devices, 79 percent of the respondents said that they were somewhat or strongly decreasing investments as a result of the Supreme Court's cases. So that was fairly significant.

 

      The third principle finding: The Supreme Court's decisions, have they negatively impacted investment behavior? Yes. 40 percent reported negative impact. Some indicated no impact. Fewer than that reported any kind of positive impact.

 

      Importantly, the impact was a going-forward impact. Thirty-three percent indicated reduced investment going forward. Where this reduced investment and shifting investment—shifting investments out of particular industry—where that was most significant was in the life sciences: pharmaceutical, biotech, and medical device. So the investors were reporting shifting an investment out of those industries, or decreasing investments, or both.

 

      The life sciences industries were most negatively impacted. I presented this to Congress last summer, testified. Yet, here we are a year later. No real movement on any legislation.

 

      Andy, I'll turn it back to you.

 

Andrew F. Halaby:  David, thank you. Well done for doing your presentation bookend style to Paul’s. Greg, do we have any questions in the queue?

 

Greg Walsh:  Let's go to audience questions. Andy, it doesn't look like we have any questions in the queue. Do you want to kick things off with a discussion or back and forth between the panelists?

 

Andrew F. Halaby:  Sure. Group, one of the things that emerges from your presentations is that some of the policy drivers for the Supreme Court's eligibility decisions appear to have come primarily or largely from computer and software and communications inventions. Yet, we're feeling the effects, perhaps most acutely in the life sciences.

 

Understanding that, ideally, the law should, where feasible, be technology neutral, what are your thoughts about the possibility of a legislative fix that would distinguish between life sciences on the one hand and computer and software-related inventions on the other in this space?

 

Hon. David J. Kappos:  Thanks, Andy. Dave here. I'll take a first run at that, and others will have their views, too. That, in fact, has been suggested in a recent interview that Senator Tillis gave to the AIPLA, for those of you who followed that. There has been some discussion about it.

 

It's the kind of thing where there are pros and cons. A pro would be you could fix the problem, one problem, where it's extremely acute for diagnostics, as we've discussed. But the con is that it has a tendency, that kind of fix has a tendency to Balkanize a patent system in the U.S. that, until now, for its entire history, has been a unitary patent system where the same rules apply to all innovations.

 

The principle behind that technology-neutral approach to our patent rules has served us well. Since the government, no senator, no congressman, no lawyer, no judge can really predict the next great area of technology, we've always thought it was improvident to try and discriminate between various areas of technology and instead treat them all exactly the same.

 

      That's the big con is we'd be breaking with our unitary patent system tradition. We'd be choosing favorites. We'd be putting our thumb on the scale of marketplace outcomes, as it were, between various technologies, and I think it's a real concern.

 

Prof. Paul R. Gugliuzza:  Yeah, this is Paul. I'll add to that. Another objection or issue, though, that always gets floated anytime you want to think about crafting, particularly legislatively, patent laws that differentiate between different sorts of technologies is that under our international obligations, treaty obligations—most notably the TRIPS Agreement, the Trade-Related Aspects of International Property Rights, the overarching treaty governing intellectual property issues among a host of the most developed nations in the world—we're kind of obligated not to discriminate between different sorts of technologies in terms of offering patent rights.

 

      That makes any industry-specific legislative fix a little bit tricky, but the courts can discriminate -- I don't know if they discriminate. They can differentiate between different sorts of technology, develop different sorts of patentability principles for different technological areas, and they can do it a little bit more subtly and implicitly.

 

That's why I came back to the Vanda example of allowing medical diagnostic patents so long as they also recite a particular treatment stemming from the diagnosis. That's one way to subtly push back a little bit on the Supreme Court's restrictions on patent eligibility but without affecting at all the computers/communications side where the eligibility requirement has been quite useful for invalidating patents. It simply takes a longstanding business practice, like hedging the risk of commodity price fluctuations, and just doing that thing on a computer. That law remains, and eligibility doctrine can be invoked to invalidate those sorts of inventions.

 

      There's a lot of work the courts are doing, and can continue to do, here. Director Kappos ended by saying we need to focus on the long term in thinking about COVID and the incentives that patents might or might not provide here. I think it's also important to focus on the long term in terms of how this doctrine is going to evolve. The Alice decision, the most recent decision to clearly articulate the two-step eligibility test, it's only six years old. So the courts are still grappling with how the decision should be applied to patents that issued before the Alice decision, and then the Patent Office is grappling with how does it examine patents now under these new standards.

 

      I understand the impetus for seeing cases like Ariosa and saying the issue's really bad; Congress needs to come in and fix it. But at the same time, courts deal with this, and it's not necessarily wrong to be a little bit patient with our lower court judges as well.

 

Andrew F. Halaby:  Paul, thank you. Greg, any questions in the queue?

 

Greg Walsh:  Indeed there are. So let's now go to our first question.

 

Don Huddler:  Thank you for taking my question. My name's Don Huddler. I'm a patent attorney in Pennsylvania and focus on the life sciences area of technologies.

 

It seems that the Supreme Court pretty much effectively read the word "discovery" out of the 101 statute. I was wondering if any of the panelists thought that with a renewed focus on textualism and the different composition of the Supreme Court, there might be some opportunities with the right sort of case to have some self-correction, perhaps, by the Court to focus more clearly on the express language Congress used with the term "discovery"?

 

Prof. David O. Taylor:  This is David Taylor. I agree with you, but we actually saw this recently, and this attempt did not work. I'll point you to -- there was a call for the views of the Solicitor General in the Vanda case and another case recently. And in January of this year, the Solicitor General's office filed a brief, joined by the Patent Office, by the way, where they attempted to make a textualist argument.

 

They characterized the problem with respect to patent eligibility as deviating from a textual analysis of the statute and reading in these implicit, basically common law exceptions and case law development of those exceptions. So they basically put on a platter the opportunity for the Supreme Court to take -- actually, they suggested denial of cert in the Vanda and Hikma case, and the Berkheimer case. But they actually recommended granting the diagnostic case, the Ariosa case, where the Supreme Court had not asked for their views. But they presented this textualist argument exactly like you're suggesting, and the Supreme Court very quickly denied cert in all of those cases.

 

Andrew F. Halaby:  Thank you. Greg, do we have another caller?

 

Greg Walsh:  It doesn't look like we do. Is there any more back and forth? Why don’t we -- oh, we just had one pop up. Should we go to that?

 

Andrew F. Halaby:  Yeah, go to that.

 

Greg Walsh:  Caller from area code 617, you're on the line.

 

David Olson:  Hi, this is David Olson. Thanks for a great discussion so far and for letting us know about some interesting academic articles that I look forward to reading.

 

My question is after Myriad, I recall Myriad saying that the cDNA protection that is allowed could be enough to still protect a lot of diagnostics because, at least at the time, Myriad was claiming that you can't really work with DNA in a way that's going to be diagnostic. So there could be a protection from their competitors because competitors would have to be using cDNA instead of wild-type DNA to do their work. I've been looking for some time for evidence that is the case or isn't the case. I'd be interested to hear panelists opine on that.

 

Hon. David J. Kappos:  This is Dave Kappos. I'll just start that and then I'm sure the other panelists will have comments, too. I think that is a fair characterization of the Supreme Court's view that working with human-modified DNA would be patent eligible versus working with natural DNA.

 

The ironic problem with that—and you referred some of the academic literature or life sciences literature—is that, as I understand it, innovators working with artificial or human-modified DNA have been finding all manner of dangerous side effects when they actually go to treat humans, and that has become a big setback for the personalized medicine bioindustry using genetically modified matter to treat humans.

 

Instead, what they're finding is that the discovery, isolation, and use of human DNA, naturally occurring DNA, is producing much better outcomes and is avoiding the side effects. So now you're left with a situation where you can comply with the Supreme Court's direction in its infinite wisdom as genius scientists, if I can be just a little bit suggestive, and then create patient treatments that will be dangerous to your patients because you started out with mouse DNA and then modified it.

 

Or you can start out with human DNA, naturally occurring DNA, and come up with treatments that will actually work in patients. But nobody would invest in that because it's not patent eligible. So that's the world we're left in resulting from that, if you will, cleavage between naturally occurring DNA as a starting point and modified DNA.

 

Andrew F. Halaby:  Thank you. Greg, do we have any other questions?

 

Greg Walsh:  We don't. Would you like to conclude with any thoughts?

 

Andrew F. Halaby:  Well, I want to pose one more question to the group, and then, mindful of the turn of the hour, we can conclude after that. I'm going to start it at least with Professor Taylor.

 

Professor, one of the premises on which the recent 101 decisions from the Supreme Court has been based, and then those, in turn, resting on Parker v. Luke and the cases from that timeframe was that over-granting patent rights would discourage innovation because first-in-liners would tend to enforce those patents against other inventors and discoverers.

 

We heard from Professor Gugliuzza that patent trolling in the life sciences space did not appear to be a problem. That's my paraphrase. But on the other hand, there has been enforcement of life sciences patents.

 

Did you get a sense from your research of any pushback from that direction, namely that there were those who responded to your survey who might've felt more able to innovate because they were not under threat of enforcement actions from big pharma or the like?

 

Prof. David O. Taylor:  Yeah, so it's interesting. I think I mentioned there was a difference of viewpoint between what I'll just say are the life sciences industries and I'll just say the software and internet industry. In the software and internet industry, there was much more mixed results in the survey and, in particular, I remember I had a comment section, kind of an open-ended comment section of the survey. The comments there were more mixed in the sense that some very strongly supported eligibility in those areas, but some very strongly disapproved of eligibility in those areas.

 

But in the life sciences, it was not nearly as mixed. It was almost all negative comments. In other words, your comment about this concern with over-granting of patents and patents being too broad, it was a more significant concern, and I would say it was a significant concern by a substantial portion of the respondents who actually answered that question with respect to software and internet. But in the life sciences, that was just not the concern that was articulated.

 

      Going back with Professor Gugliuzza, the concern with over-broad patents -- he even mentioned there's concern that there's over-broad patents and they're covering longstanding practices. Well, you can deal with those under other doctrines, like novelty and non-obvious. You don't need patent eligibility to deal with that. And to the extent parent claims are too broad compared to what we'll call "actually invented," we have the enablement and written description requirements.

 

      Those in particular, if they're treated as questions of law, could be dealt with early in cases. To the extent we have over-granting or over-broad patents, there's other doctrines in patent law that can deal with those, and some doctrines that can deal with those early in cases. Particularly, though, written description is question of fact right now, and I've advocated that we make that a question of law so we can deal with that at the Rule 12 stance in cases.

 

Andrew F. Halaby:  We're right up on the hour. So Greg, I'd like to thank each of our panelists, Director Kappos, Professor Taylor, and Professor Gugliuzza, for a really remarkable, informative, interesting, and entertaining discussion. And thank you to The Federalist Society for hosting this discussion on this important topic in the environment, and we hope our audience enjoyed it.

 

Greg Walsh:  Absolutely. On behalf of The Federalist Society, I want to thank our speakers for the benefit of their valuable time and expertise today. We welcome listener feedback by email at [email protected].

 

      Thank you all for joining us. We are adjourned.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.