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Tuesday, March 21, 2006

What's Wrong with Our Patent System?

Adam Jaffe of Brandeis University and Josh Lerner from the Harvard Business School discuss how recent changes in the patent system have caused a breakdown in its ability to protect and encourage innovation, and how to fix the problems:

Innovation and Its Discontents, by Adam Jaffe and Josh Lerner, Commentary, WSJ: The problems of the U.S. patent system are under discussion ... with an urgency not seen in decades. ... Congressional subcommittees, with good reason, have recently held hearings asking ... about developments ... in the patent system. The importance of this long-overdue focus on patents cannot be overemphasized. The past decade has seen periodic uproars over particular patents... but the wrong lessons have typically been drawn. Commentators have tended to focus on the incompetence of the USPTO in allowing "bad patents." Others have concluded that the patent system is not working with respect to a particular area of technology. ... [c]oncerns about software awards ... for instance... others have suggested that biotechnology be excluded in various ways from the patent regime.

We believe, instead, that the problems with the patent system are ... the result of two congressional changes... At the time they were described as administrative and procedural...; but taken together they have resulted in the most profound changes in U.S. patent policy and practice since 1836. One set of changes has made it easier to enforce patents, easier to get large financial awards ..., and harder for those accused of infringing patents to challenge the patents' validity; another set of changes has made patents much easier to get. The combination has created a ... combination of factors that increasingly makes the patent system a hindrance rather than a spur to innovation.

Congress set us on this road in 1982 when it created a centralized appellate court for patent cases... Its decisions ... are largely responsible for the significant strengthening of the legal potency of patents. Then, a decade later, Congress turned the USPTO into a "profit center." The office has been pushed to return "excess" revenue to the U.S. Treasury. This shift led to pressures to grant more patents, difficulties in attracting and retaining skilled examiners, and a torrent of low-quality patent grants. These include such absurdities as patents on wristwatches (paw-watches?) for dogs, a method of swinging on a swing ("invented" by a five-year-old), and peanut butter and jelly sandwiches. But they also include the patents on broad ideas related to mobile email -- virtually devoid of any details of implementation -- that have imposed a $612 million tax on the maker and users of BlackBerries.

The combination of making patents easier to get and simultaneously more potent when enforced has led to an explosion in patent litigation. Holders of dubious patents ... established firms or "trolls" whose only business is patent enforcement -- routinely threaten firms that sell valuable products with shutdown based on alleged patent infringement. Even if the target firm believes that it does not infringe..., the cost and risk of proving this in court may be too high. Innovators may choose simply to drop the allegedly offending product, or to settle and pay ransom rather than fight. This is not a problem confined to any single industry. ...

It might be tempting to view patent law as just another area where litigation has spun out of control. But ... its effects are particularly worrisome, because a faulty patent system can have profound impact on the overall process of innovation. ...For all its deficiencies and periodic stumbles, our free-enterprise system has demonstrated a unique ability to generate new technology: ... The basis for this advance is the pursuit of profit, which forces firms to innovate. But the profit-based incentive to innovate depends fundamentally on the institutions governing ownership of the fruits of innovation. ...

The legal protection patents provide is supposed to mitigate the risks of these investments, but the flood of dubious patents that nonetheless have amplified legal force is increasing rather than mitigating the risks associated with investments in innovation. ... We believe that the incentives of the existing system induce all participants ... to invest in abusing the system rather than innovating. Reform of the system must change these incentives by (1) changing the USPTO review process...; and (2) leveling the playing field between litigants so frivolous patent holders cannot intimidate true innovators into paying protection money.

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the USPTO. ... Most patents would never receive anything other than the most basic examinations. But for those applications that really mattered, [competing] parties would have an incentive and opportunities to bring information in their possession before the USPTO...

If bad patents with important consequences were weeded out by the USPTO, the incentive to file frivolous applications in the first place would be reduced. ... But there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. ... The right to a jury of one's peers is a venerated concept in Anglo-American law. But there is ample scope for judges to use pretrial rulings and reports of special "masters" commissioned by the court to resolve more of the most technical issues that determine the outcome of patent litigation. While litigation will always be uncertain, it has to be structured so that complex technical issues are addressed in a way designed to elucidate rather than obscure. ... As much as the USPTO needs to do a better job, it can only do so if the system is modified so that all parties have incentives to help with the job, and the courts provide a reliable backstop when mistakes are made.

    Posted by on Tuesday, March 21, 2006 at 12:07 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (4)


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