Fed Chairman Bernanke tackles the “I” word:  Intangibles

There may be no better way to anticipate the future of IP value than by getting firsthand insights from an individual who can actually “move the mountains to execute.” That’s why IP Value Wire sat in first-hand to hear Chairman of the Federal Reserve Board Ben Bernanke’s recent remarks to a packed auditorium on the Georgetown University campus. Bernanke spoke at the New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value conference.

IP is the route to a sustainable US economy. Innovation and intangible capital are central to understanding how economic growth in the U.S. can be sustained, the Chairman stated. But, he went further to ask:

• What should companies do about their intangible assets?
• How should intangibles and innovation be fostered in companies?
• How can they be mobilized?
• And, if we can value intangibles better, how does, or will this affect R&D and debt?

Most IP Value Wire readers would agree these “long view” questions warrant considered thinking and discussion—perhaps outside of the box of accounting-dominated contexts.

Fed Chairmen’s speeches are typically devoid of tonal inflections, which one could misinterpret as a strategic (regulatory) sea change. Bernanke did not disappoint in this regard.  The importance attached to Mr. Bernanke’s speech was that the words “intangible assets” were actually uttered. A resulting sea change may not necessarily be on the horizon, but, the contributory and collaborative value intangibles add to companies globally is clear, it’s not going away, is recognized by the Fed, and there’s absolutely no evidence it will be reversed or even diminished.  That alone should prompt many of us to re-think our conventional characterizations of intangible assets.

To confirm the emphasis on intangibles, Bernanke said government should play a strong role because policies that protect intellectual property rights and the promotion of R&D directly promote innovation and technological change.

Recent research, Bernanke pointed out, has shed light on two things:

• the important role played by intangible capital, such as the knowledge embodied in a workforce, business plans and practices, and brand names; and
• the accumulation of intangible capital that accounts for well over half the increase in output-per-hour in the U.S. during the past several decades.

In other words, the Chairman pointed out, innovation changes how businesses are organized and managed today, particularly the connections between new ideas and  methods.

The rationale for government’s role in R&D. Bernanke emphasized government support for R&D, which includes the intellectual property regime and availability of financing for innovative enterprises.  But, he said, effective commercial application of new ideas involves much more than just pure research because there are other relevant factors, e.g., the extent of market competition.  There is a tendency, Bernanke suggested, for the market alone to supply too little of certain types of R&D, which he posited, provides a rationale for government intervention.

Market under-investment in R&D can be countered by strengthening the intellectual property rights regime in the U.S., Bernanke says. Extending and expanding patent rights would support this goal, he believes—though this approach can backfire by inhibiting further R&D.

Thus, governments have also turned to direct support of R&D activities—even though the track record here is mixed. (He cited the surge in federal investment in energy technology research in the 1970s in response to the energy crisis which achieved less than its initiators hoped.) In the best cases, Bernanke believes, initiatives and government support enabling the emergence of new technologies, particularly in the agriculture, chemicals, health care, and information technology arenas (including the space program), have produced high social rates of return.

Expanding government’s role in R&D.  Bernanke’s conclusion: government support of R&D at the right level today is important, but “what is that right level?” The answer involves not only difficult technical assessments, but also a number of value judgments about public priorities.  He pointed to the findings of some economists who argue that, because of the potentially high social return to basic research, expanded government support for R&D could, over time, significantly boost economic growth and in a time of fiscal stringency. “Congress and the Administration will clearly need to weigh competing priorities in their budgetary process,” he said, but his own concern is that investment in basic and fundamental research is declining.

Important to the U.S. R&D community, the Chairman said expanding government’s supportive role in R&D has to do with the importance of keeping pace with technological advances in other countries in part because:

• R&D has become increasingly international along with the ability to disseminate research results instantaneously; and
• The spread of scientific and engineering talent is now global, as is the transfer of technologies through trade, foreign direct investment, and the activities of multinational corporations.

While R&D spending in general is concentrated in the most-developed countries, as we know, R&D spending in emerging market countries has increased sharply, most notably in China and India.

That was a big question the Chairman posed to conference invitees. On the one hand, the diffusion of scientific and technological research globally can potentially benefit everyone and in the increasingly globalized economy, product and process innovations in one country can lead to employment opportunities and improved goods and services in other countries.

There’s another argument for, Mr. Bernanke said, and that’s the location of R&D activities themselves. For example, he said, technological capabilities may help a country reap the financial and employment benefits of leadership in a strategic industry by becoming a center of a particular science and/or technology which produces spillovers that promote intangibles such as innovation, quality, skills acquisition, and productivity in industries and communities in close proximity. 

So, if government gets more involved, what forms should support for R&D take?
First of all, governments should foster basic (foundational) research, Bernanke repeated, because most applied (commercially relevant) research will likely to be done by the private sector.

The Chairman asked:

“If governments decide to foster/support (more) R&D, what policy instruments should be used? …Direct funding of government research facilities? ... Grants to universities or private-sector researchers? …Contracts for specific projects? Or, tax incentives?” 

Of course, within each of these policy instruments, still more choices must be made, Mr. Bernanke said, about how to structure specific R&D programs. In this regard, Bernanke raised an interesting point:  economists know little about how to best channel government support for R&D.

That said, he implied that possibly a more decentralized model (of government R&D support through grants or contracts) would be most effective. Such a model relies on the ideas and initiative of individual researchers or small research groups. A significant challenge to policymakers, Bernanke pointed out, is to encourage experimentation along with a greater diversity of approaches to particular problems while ensuring that an effective peer-review process remains in place and, of course, executing quality of R&D. 

Ultimately, government support for R&D will be more effective, Bernanke said, only if it is thought of as a long-term investment, because gestation lags from basic research to commercial application to the ultimate economic benefits can be very long.  A reasonable strategy for the interim, he suggested, may be to continue to use a mix of R&D support policies.

Bernanke concluded with this, “Finally, as someone who spends a lot of time monitoring the economy, let me put in a plug for more work on finding better ways to measure innovation, R&D activity, and intangible capital. We will be more likely to promote innovative activity if we are able to measure it more effectively and document its role in economic growth.”
IPVW agrees—but of course we hope for more…

Current Legal Developments: Federal Circuit alters the infringement defense landscape

Inequitable conduct is frequently raised as a defense to patent infringement. (One academic study contends that as many as 80 percent of federal patent suits include an assertion of inequitable conduct.) The doctrine of inequitable conduct originates in USPTO Rule 56, which details the duty to disclose material information placed upon the inventors and other individuals substantially involved in the preparation or prosecution of a patent application.
 
On May 25, 2011, the U.S. Court of Appeals for the Federal Circuit issued an en banc opinion in Therasense, Inc. v. Becton, Dickinson & Co. which significantly tightened the standards for both intent and materiality that courts must use to find a patent unenforceable for inequitable conduct.

Intent: Now “…the accused infringer must prove that the patentee acted with the specific intent to deceive the PTO”… proving “by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.”

Materiality:  Prior to the Therasense decision, courts were allowed to measure intent on a sliding scale, i.e., the more material a reference, the less evidence required to prove intent to deceive, and vice versa, in effect treating the proof as a zero-sum game. The “sliding scale” exists no more. The Federal Circuit explained, “a district court should not use a ‘sliding scale,’ where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa. Moreover, a district court may not infer intent solely from materiality…a court must weigh the evidence of intent to deceive independent of its analysis of materiality.”
 
Clearly the USPTO thinks this decision is a game-changer, especially with respect to Rule 56. They followed the release with one of their own:

Press Release, 11-36

USPTO Studying Therasense v. Becton, Dickinson Decision to Assess Impacts on Agency Practice and Procedures; Expects to Issue Further Guidance to Applicants Soon

Washington – Today the United States Patent and Trademark Office (USPTO) announced that it is carefully studying the important en banc decision by the U.S. Court of Appeals for the Federal Circuit in the case of Therasense v. Becton, Dickinson to assess how it may impact agency practices and procedures. The agency also announced that it expects to soon issue guidance to applicants related to the prior art and information they must disclose to the Office in view of Therasense. “We are now studying the potential impact of Therasense v. Becton, Dickinson on Office practice, and we expect to soon issue guidance to applicants regarding the materials they must submit to the Office under their duty of disclosure,” said Under Secretary of Commerce for Intellectual Property and Director of the USPTO David Kappos. The Therasense decision concerns the standards for inequitable conduct, including the materiality and intent prongs.  The Court’s decision resolves uncertainties in many aspects of how district courts must apply the inequitable conduct doctrine. It also directly affects applicant behavior in front of the USPTO and, in particular, their disclosure of information relevant to the patentability of their inventions.