On July 23, 2008, the USPTO published a notice intended to clarify its position on overseas outsourcing of patent drafting. It told us that outsourcing was illegal, contrary to export regulations. Zeev Fisher and Keith Jones, of Fisher Weiler Jones, take a look at this stance.
This is the story of how the US government “pulled the plug” on outsourcing patent drafting. We were told that national security was the issue, but many believe this was an excuse simply for keeping jobs in the US. Ironically, the impact may well be yet another hit to the competitiveness of the US market.
1. It all starts with cost
More and more US companies are choosing to outsource an increasing number of services out of the US, simply because they are cheaper.
In the past, the type of services outsourced typically did not require a very high skill level. Today, as the services offered from out of the US become more and more sophisticated, the motivation to outsource grows.
On July 23, 2008, the USPTO published a “clarification”, according to which outsourcing patent drafting, before receiving a foreign filing licence, was deemed contrary to export regulations that forbid the export of knowledge.
The overriding principle of foreign filing licences generally, and the new “clarification” specifically, is protecting national security.
2. Foreign filing licences
Some countries chose to limit, to some extent, the ability of applicants to file patents out of their home country, to prevent leakage of information which could potentially relate to national security.
Some countries chose to make the applicant responsible for refraining from filing patent applications which relate to security, while others chose to disallow, completely, an applicant from filing any application out-of-country until an official permit or licence has been granted.
We wonder why the US imposes a foreign filing licence requirement on patents when it gives freedom of speech such high priority and considering it is a country in which most of the largest corporations have enormous R&D activity out-of-country, which is not subject to licensing requirements.
The requirement for a foreign filing license for each and every patent application poses a serious procedural limitation on applicants. This is especially true, for example, when infringement occurs in a different country shortly after a patent application is filed. It is even truer in view of other developments in recent years. Lately, patent offices are encouraged to share examination information. Thus, an applicant who resides in the UK, for example, who enjoys the very quick services of the UK IPO, can request to accelerate his US application after his UK application has been quickly allowed. An applicant in the US is barred from using this option, since he must file his first application in the US.
As we all well know, ethical restraints are foremost in the minds of US patent attorneys. Against this background, is there truly a concern that if the applicants themselves had to determine if their applications were to do with national security, they would fail to do so?
3. Prohibiting outsourcing
Contrary to the “clarification” that the USPTO issued, it is not obvious, at all, that there will be a ban on outsourcing work out of the US when the “final product” is a US patent application.
In practice, a US inventor who works in a company that has R&D centres in Germany, Armenia and Israel does not ask, and it would be unreasonable to expect him to ask, for a clearance from the USPTO to speak about his invention with his non-US colleagues. Implementing the limitation to the word would make it practically impossible for multinational corporations to function.
And there is a significant difference between filing a patent application outside of the US and sending a disclosure to a patent attorney outside of the US, under strict non-disclosure rules, for the purpose of him preparing a patent application for filing back in the US. Patent attorneys all around the world are committed to maintaining confidentiality and, aside from the ethical requirement, the patent business is such that a patent attorney who fails to maintain confidentiality will have no work! Hence, patent attorneys, maybe more than anyone else, have a top interest to maintain secrecy.
It is quite ironic that, in today’s internet age, the USPTO forbids the transfer of work out of the US. That means that someone is not allowed to send patent work to a US certified patent attorney who resides out of the US, in any field, whereas an Iranian or North Korean diplomat who visits the US may draft patents on any type of technology (including nuclear technology), as long as he is physically in the US.
If the USPTO’s concern truly was national security, we would expect it to put procedures in place that would allow foreign patent attorneys to receive security clearance, in the same way that other suppliers who work on US secret matters do. The Office has not do so.
But as we said before, many believe the arguments of national security are nothing more than an excuse and that the real reason for keeping patent drafting within the US is to safeguard jobs in the US.
4. Low quality?
Recently, we have also heard quite a few US patent attorneys express the opinion that in essence the ban on outsourcing is to protect clients from what the USPTO perceives are the shortfalls in countries like India: poor work quality, low ethical standards and little respect for confidentiality (for example, see Gene Quinn’s post on his blog IPWatchdog[1]).
Is this reasonable?
There is no doubt that in a country as large, as rapidly developing and as immature in IP terms as India, service capabilities are hugely variable from provider to provider – although the same could be said of many “developed” countries – and that quality control is indeed a challenge. However, taking India as an example, many Fortune 500 companies have been well-served by Indian patent attorneys for many years, so proof of good quality must be readily available.
But also we must remember that even in relation to countries where the USPTO’s perception of quality may be better (take the UK or Australia, for example), the same applies; the USPTO’s embargo is worldwide.
In addition, the quality argument could be said only to apply to companies with unlimited IP budgets, and such companies are only a small part of the total number of patent application filers. Companies with limited budget may prefer filing more patent applications than “investing” in fewer, better-drafted patent applications. For example, take a very innovative start-up company with a 15K USD patent budget, trying to prepare itself for investment. Such a company could, for instance, have a single patent drafted and filed in the US or possibly ten patents drafted in India. Will a “superb” US-drafted patent truly guarantee better protection than ten patents, as low-quality as they may be, protecting different aspects of the company’s technology? It is no secret that sometimes IP protection is a game of numbers, and the “quality” argument misses this point.
Generally speaking, does not the whole “low quality” argument seems strange? Shouldn’t free market economy fix low quality anomalies? Shouldn’t the clients have a choice?
Another point to consider is that many US entrepreneurs, who are not able to meet the high cost of US patent attorneys, may be advised by their US counsel to prepare and file a patent application, usually a provisional one, themselves. Would a patent application drafted by a non-professional truly be better than one drafted by a trained patent attorney in a different country?
4. Who is the true victim?
“Why should we care about patent professionals in different countries?”, some of you may be asking at this point. “It may not be politically correct, but we want the authorities to use the law to protect our economy”.
The sad truth is that this policy is not good for anyone. It is good for patent attorneys in the US in the short term, but bad for them in the long run, and it is certainly not good for clients, or for innovation in the US.
It is indeed true that, for example, Indian patent attorneys suffer from the US policy, but India is growing fast, and the Indian attorneys are making up the loss with local work.
One problem of the US economy now-a-days, and one of the leading reasons for the growth of the diversion of business from the US to other countries, is the phenomenal cost of doing business in the US. Capital efficiency in other countries is so much better that many companies, local and foreign, choose to divert business overseas.
Any US service providers’ that lack flexibility or are reluctant to face reality risk hurting US business. At a recent lecture in Israel, a very experienced entrepreneur presented research proving that establishing a medical device company in the US costs between 30-60M USD, while establishing the same company in Israel will cost 6-33M USD. Where would you invest your money?
US patent attorneys cannot compete with, for example, Indian prices, but they can certainly reduce the difference and the motivation of companies to look outside the US. There is an assumption that many clients will be willing to pay a premium for a US patent attorney. But we are not sure they will pay any premium.
From the US patent attorneys perspective – yes, in the short run they will be able to maintain their high salaries thanks to this legislation, but this will only be the case as long as they will have clients willing to pay their fees. The Government can stop the outsourcing of patent services, but it cannot, or will not, stop the outsourcing of R&D. With the outsourcing of R&D, jobs will be lost anyway, and instead of a lower-priced work, the attorneys will have no work at all.
The problem may be exacerbated by a preference amongst US students to be lawyers, not engineers. The end result could be more lawyers providing expensive services to fewer companies with little R&D. How long can that possibly last?
Is there a “legal bubble” in the US? If so, we all know what happens to bubbles!
One view is that the US is so attractive that patent application and prosecution work will keep flowing in regardless of anything that the attorneys do. The same thing was said in the past of the European market, but there is a belief that the high fees of European patent attorneys and the European patent office caused a drop in European filings from Japanese and Korean companies, which now prefer to invest in the growing and more competitive China instead. The argument of quality, by the way, was and still is used in Europe frequently, but at the same time, there is a feeling that prices have dropped, and many new, small, firms, with low overheads are emerging.
5. The legality argument
Having said all of the above, outsourcing is still illegal, and we can safely assume that this feature will not convince the USPTO to make a U-turn. Is it all s purely academic matter, then?
In our view, the USPTO’s interpretation of the export rules is far too broad, and exceeds the original meaning of the legislation. Transferring information for a particular task, such as drafting a patent application under strict confidentiality rules, is not really an “export” of information, and, if it is, it should be stated specifically and not by way of interpretation. It is up to the legislature to decide if outsourcing patent work should or should not be illegal, and not the USPTO, which clearly has an interest, and does not have the authority to legislate substantive law.
Furthermore, if a ban was clearly legislated, it would surely not be as broad as the one presented by the USPTO. Surely setting measures in place that would prevent outsourcing of work on national security-related inventions, but would allow outsourcing, under some type of supervision, of work that has nothing to do with national security, would be the proportional way to go?
6. What should have been done?
There should always be work for good patent attorneys who are willing to accommodate to their clients. As a colleague of ours, Greg Kirsh, a US Patent Attorney of Ballard Spahr commented on this piece, drafting and prosecuting patent applications is as much art as it is science, an intimate process marrying law, technology and business, and the personal connection to the patent attorney handling the case is of high importance.
At the same time, outsourcing is a perfectly valid option and the USPTO should not fight it. On the contrary, it should be encouraging and supporting it. For example, the USPTO could offer training courses to foreign patent attorneys who wish to handle US work.
An approach of embracing cooperation with foreign patent attorneys would endear the US market to foreign patent attorneys, and encourage them to be ambassadors for the US patent system in their various foreign jurisdictions. The US market is no longer an automatic “go to” market for everybody. It must be attractive to foreign companies, and one of the ways of making it attractive is by making it easily accessible.
A policy of greater accessibility would probably result in some loss of patent drafting work in the short run, but would result in more US patent applications, and, in the long run, may result in more prosecution and litigation work for US attorneys.
The US patent profession is facing an important junction. The world is changing and the USPTO and patent practitioners can jump on the bandwagon or face the consequences of not doing so.
[1] http://ipwatchdog.com/2011/01/05/outsourcing-to-india-national-security-subversion-job-loss/id=14256/
Published on Intellectual Property Magazine
