Patent
Prescription
A
radical cure for the ailing U.S. patent system
By
Adam B. Jaffe & Josh Lerner
ALBIE'S
FOODS INC., a small grocery and catering company
in Gaylord, Mich., received an unusual letter in 2001
from the law firm representing jelly giant J.M. Smucker
Co. The letter accused Albie's—which sells pastries
and sandwiches in northern Michigan—of violating
Smucker's intellectual property by selling crustless
peanut butter and jelly sandwiches.
In particular,
Smucker's claimed that Albie's had infringed Smucker's
recently granted U.S. Patent No. 6004596, which gives the
Orrville, Ohio, company broad protection on its "sealed
crustless sandwich." In a move that undoubtedly surprised
the jam magnates, Albie's decided to defend itself in federal
court. Albie's law firm noted in its filings that the "pasty"—a
meat pie with crimped edges—has been popular fare
in northern Michigan since the immigration of copper and
iron miners from Cornwall, England, in the 19th century.
A battle
in federal court over peanut butter and jelly sandwiches
may seem merely funny and a little pathetic. But it is
symptomatic of the larger and more profound problems with
the U.S. patent system. We have reached the point where
serious lawyers are being paid serious fees by a big company
to shut down the PB&J operation of a grocery store.
The
U.S. Congress set us on this road in 1982, when it created
a centralized appellate court for patent cases called the
U.S. Court of Appeals for the Federal Circuit. A decade
later, Congress ordered that the U.S. Patent and Trademark
Office (PTO), which up until then had been funded by tax
revenues, instead fund itself through application and maintenance
fees. Both changes were described as administrative and
procedural rather than substantive.
But
now, after still another decade, it is apparent that together
these changes have resulted in the most profound transformation
in U.S. patent policy and practice since the Patent Act
of 1836. They make it easier to obtain patents, to enforce
patents against others, and to extract large financial
awards from such enforcement but harder for those accused
of infringing patents to challenge the patents' validity.
What's
more, the changes increase the risks associated with innovation—and
not just for U.S. companies and inventors. Of the 169 028
U.S. patents issued in 2003, nearly half were issued to
foreign entities.
Flawed
as it is at times, the free enterprise system has demonstrated
a unique ability to generate new technology. Industrialized
capitalist economies have increased their productivity
more in the last two centuries than in all the millennia
of previous human history. The basis for this advance is
the pursuit of profits, which forces companies to innovate.
This incentive depends fundamentally on the smooth functioning
of the institutions that determine and administer ownership
of the fruits of research and development—the patents,
trade secrets, and copyrighted material.
Instead,
our PB&J-friendly patent system costs companies and
individuals billions of dollars and millions of man-hours
annually to obtain patents and fight frivolous lawsuits.
More often than not, patent holders win in court, despite
problematic claims stated in their patents. In recent years,
as many as two-thirds of patent holders have succeeded
in litigation at the federal district court level, compared
with an average success rate of 32 percent in the decades
before the congressional reforms took hold [see graph, "U.S.
Patents Found Valid and Infringed"].
In other
cases—as in the Smucker's suit—the two parties
ultimately settle the dispute. Many times, a small company
like Albie's concludes it is just too difficult and risky
to dispute a patent and agrees either to pay for a license
or to stop producing the offending technology. The cost
of litigation is also a factor. A recent survey suggests
that the median cost of litigating a major patent case
today is about US $4 million.
These
facts have led observers such as the U.S. Federal Trade
Commission and the National Academy of Sciences (NAS)—both
of which have released major studies of the patent system
in the past year—to conclude that the U.S. patent
system has significant problems.
As the
NAS bluntly stated in its report: "[I]t is clear that both
economic and legal changes are putting new strains on the
system. Patents are being more actively sought and vigorously
enforced. The sheer volume of applications to the U.S.
Patent and Trademark Office—more than 300 000 a year—threatens
to overwhelm the patent examination corps, degrading the
quality of their work or creating a huge backlog of pending
cases, or both. The costs of acquiring patents, promoting
or securing licenses to patented technology, and defending
against infringement allegations in court are rising rapidly."
To stop
this waste and to inject some sanity back into the process,
we must create a more rational patent system. Our patent
policy reform agenda rests on three related proposals.
First,
create incentives and opportunities for parties to challenge
the novelty and nonobviousness of an invention before the
PTO grants a patent.
Second,
provide multiple levels of application review, with examiners
devoting successively more time and effort as an application
proceeds to higher levels. The goal would be to avoid wasting
money to meticulously examine unimportant patents, while
taking sufficient care to avoid mistakes where the stakes
are high.
Finally,
in cases involving claims of patent invalidity based on
the existence of prior art—that is, previously issued
patents or public disclosures covering the invention at
issue—replace juries with judges who could call on
experts, called special masters, for guidance. The change
would give parties threatened by invalid patents a better
opportunity to make their cases to the court.
The
first two proposals aim to make the PTO more effective
at a reasonable cost. The third addresses the reality that
since even the best of all possible PTOs will make mistakes,
we need a court system capable of correcting them.
THE
U.S. PATENT NIGHTMARE began with an apparently
benign change in the nation's judicial process. Almost
all formal disputes involving patents are tried in the
federal judicial system, with the initial litigation
undertaken in a federal district court. Before 1982,
appeals of patent cases were heard in the appellate courts
of the various circuits. These courts differed considerably
in their interpretation of patent law; some courts were
more than twice as likely to uphold patent claims as
others. The differences persisted because the U.S. Supreme
Court, which normally steps in to ensure national legal
uniformity, rarely heard "banal" patent cases.
This
judicial variety encouraged litigants to shop for the best
legal forum for their patent cases. Patent applicants would
crowd the hallway in the patent office in Arlington, Va.,
where the list of patent awards was distributed at noon
each Tuesday. On discovering that their patent was issued,
new patent holders would rush to the pay phones to instruct
their lawyers to file suit against some alleged infringer
in a patent-friendly district court.
Meanwhile,
representatives of firms that might be accused of infringing
the new patent would race to the phone bank as well, ordering
their lawyers to sue the new patent holder for infringing
an old patent of theirs or, occasionally, to seek to have
the new patent declared invalid in a district known to
be skeptical of patents. Such dueling lawsuits would usually
be combined into a single action, heard in the district
court in which the earliest filing was made. Often the
fate of the case—and many millions of dollars in damages—would
depend on which lawyer got an earlier date-time stamp on
the filing documents.
In 1982,
the U.S. Congress decided to address this situation by
establishing a central appellate court for patent cases,
the U.S. Court of Appeals for the Federal Circuit (CAFC).
The change was presented in congressional hearings as bringing
consistency to the chaotic world of patent litigation.
But
over the next decade, the new court significantly broadened
and strengthened the rights of patent holders. The share
of cases in which the CAFC upheld a district court finding
of patent infringement increased from 62 percent to 90
percent, and the share of cases in which it reversed an
earlier finding that a patent holder was not entitled to
damages rose from 12 percent to 28 percent [again, see
graph, "U.S. Patents Found Valid
and Infringed"]. The CAFC also made it easier to shut
down a rival's business even before a trial and to extract
significantly greater damages from infringers.
Decisions
of the CAFC encouraged more patent applications by expanding
the realm of patentable subject matter to include software,
business methods, and certain kinds of biotechnology. These
decisions also contributed to lowering the standards of
proving an invention's novelty and nonobviousness, which
made it easier to qualify for a patent and to enforce patents,
making the patents more valuable. As a result, the rate
of patent application and litigation in the United States
began to soar [see graph, "Annual
U.S. Patent Applications and Awards"].
As the
tide of patent applications rose in the early 1990s, Congress
intervened once again, but for another reason. This time
it converted the PTO from an agency funded by tax revenues,
which collected nominal fees for patent applications and
maintenance, into one funded solely by those fees. That
would have been a good move if the PTO used all of its
revenues to hire more examiners, experts, and administrators.
Instead, the patent office has become a profit center for
the government, collecting more in application fees than
it costs to run the agency at current inadequate staffing
levels. In some years, more than $200 million in "excess" PTO
revenues have been collected, but these funds have usually
flowed into federal general-revenue coffers.
These
general-revenue diversions are starving the patent office
of the capital it needs to hire more examiners at competitive
salaries, and most likely these diversions will continue.
In mid-September, the U.S. Senate Committee on Appropriations
voted to raise patent fees but rejected a proposed House
of Representatives initiative to place the additional revenues
into a trust fund that would be accessible only to the
PTO.
The
result is that today the PTO views itself as an organization
whose mission is to serve patent applicants quickly at
the lowest possible cost. Not surprisingly, given the number
of patent applications, there has been a widely perceived
decline in the rigor with which patent applications are
reviewed. Calculations by intellectual property attorney
Cecil D. Quillen Jr. suggest that, after adjusting for
the refiling of rejected applications, the acceptance rate
of patent applications is more than 85 percent. This perceived
lack of rigor, in turn, encourages more people to apply
for patents covering inventions of dubious value.
PATENT
EXPERTS AGREE on three broad goals for reform:
improving the quality of patents, reducing uncertainty
surrounding the process of innovation, and limiting patent
application, maintenance, and litigation costs.
Improving
quality: People today are getting patents for inventions
that are not new, are obvious, are laughably insipid,
or sometimes are all of the above. Some examples are:
- A
watch for "keeping animal time"—for dogs, it would
run seven times as fast as an ordinary watch (U.S. Patent
No. 5023850).
- An
accessory kit for a snowman, including lumps of coal,
a carrot, and a corncob pipe (U.S. Patent No. 5380237).
- A
patent covering a "method of swinging on a swing," which
was "invented" by a five-year-old (U.S. Patent No. 6368227).
An obvious
solution would be to make it much harder to get a patent
on anything. But the objective of ensuring the highest
possible patent quality has to encompass more than just
making sure invalid patents aren't issued. Any reform has
to ensure that inventors will still get patents when they
have a truly novel invention, that such patents will be
processed relatively quickly and reliably, and that, once
granted, they will provide ironclad protection for subsequent
investment in the invention.
Reducing
uncertainty: Companies and individuals will hesitate
to innovate if they fear that their research and product
development may come to nothing because someone might
assert an as yet unknown or untested patent against them.
Further, when one party accuses another of patent infringement,
uncertainty often prompts the accused to simply abandon
its claim to an allegedly infringing technology, or even
to agree to pay possibly unnecessary royalties or license
fees.
Limiting
costs: The PTO currently spends slightly more than
$1 billion per year for its operations. Given today's
budgetary realities, it is unlikely that resources for
the PTO will increase dramatically. Patent applicants
spend several times that amount, and patent litigants
spend billions more. Reforms should help limit such significant
expenditures.
THE
NEXT STEP TOWARD REFORM is to understand some
basic realities about the system. Patent examinations—and
examiners—will never be perfect. Therefore, while
we cannot hope to have a system in which no "bad" patents
are ever issued, we can strive for a system that produces
fewer bad patents. And, since there will always be mistakes,
it is crucial that the system function reasonably well
despite the issuance of some bad patents.
Most
patents are, and always will be, worthless and unimportant.
This is not a feature of the patent office; it is a feature
of the innovation process. The significance of a new idea
usually cannot be known when it is first developed, because
that significance depends on subsequent developments, both
technological and economic. The upshot is that many good
ideas are patented that never actually turn out to be worth
anything.
Most
days, patent examiners are like officials working the last
minute of a basketball game in which one team is winning
by 30 points. They go through the motions to make rulings
because rulings have to be made, but those rulings will
have little impact on the outcome of the game.
The
key difference between that basketball game and the patent
game is that much of the time no one involved with patent
decisions knows whether the development covered by the
patent is going to matter or not. It is as if nobody—the
officials, the players, or the coaches—has any idea
of the score of the game, or if the game even matters.
But they all take it seriously because there is some chance
that the specific patent being considered will turn out
(months or years later) to be important.
For
those that do turn out to be important, it will matter
a lot if the patents are granted. But for the others, the
vast majority of all applications, there would never be
important technological or economic consequences if bad
patents were issued. This fact suggests that it is inefficient
to spend a lot of time and money on the careful examination
of all patent applications.
To make
patent examination more efficient, we must go beyond thinking
about what patent examiners do to consider how the nature
of the examination process affects the behavior of inventors
and companies. The rate of applications has skyrocketed
over the last two decades, because patents are so easy
to get that people try to patent inventions that no one
would have bothered to patent before. This perception promotes
a vicious circle in which bad examination increases the
application rate and, in turn, the buildup in applications
overwhelms the examiners, further reducing examination
quality.
Similarly,
the CAFC's rulings that have increased the chances of patent
holders' prevailing in infringement suits have encouraged
patent holders to sue. The number of patent infringement
suits filed in 1981, the year before the CAFC was created,
was 795. In 2003, three and a half times as many cases
were filed—2814 [see graph, "U.S.
Patent Suits Initiated"]. At the same time, many alleged
infringers, knowing that the CAFC tends to side with patent
holders, don't bother to fight, even when they believe
that the patents being used to threaten them are not valid.
Much
of the information needed to decide if a given application
should be granted a patent is in the hands of an applicant's
potential competitors, sometimes in the form of trade secrets,
rather than in the hands of the PTO. This is especially
true of information about what related technologies already
exist that would invalidate an application's claims of
novelty and nonobviousness. There are strong incentives
for firms to share this information. If a competitor of
yours has filed a patent application, the last thing you
would want is for that company to be issued a patent on
an application that would have been rejected if the PTO
had known about your technology.
So you
would, of course, provide this information, if only the
PTO would give you an opportunity to do so, and if taking
advantage of such an opportunity would not lead to strategic
disadvantages for you down the road. Creating opportunities
of this sort is another way that the system could exploit
the incentives for private parties to help the patent office
increase its efficiency.
But
before swooning over the beauty of incentives, we must
recognize the potential for them to be misused. A company
could, with relative ease, throw some kind of speed bump
into a competitor's path and would probably be happy to
do so even in the case of a "good" application.
OUR
PROPOSED REVAMPING of PTO procedures starts
with the idea that a process with multiple levels of
review would most efficiently balance the need to bring
in outside information with the reality that most patents
are unimportant. Examination would begin as it does now,
with the review of an application by an examiner and
no participation by other parties.
If,
however, the examiner determines that a patent should be
issued, there would then be an opportunity for what we
call pre-grant opposition. A public notice of the intention
to issue a patent would be followed by a brief period in
which other parties could submit evidence that the patent
is not really new. This pre-grant opposition would not
give outside parties any opportunity to argue their cases,
and they would not have access to legal discovery processes
to produce additional evidence of prior art. It would simply
be an opportunity for parties to put information before
the examiner.
If,
after reviewing this evidence, the examiner decides to
issue the patent, there would be a final opportunity for
possible competitors to argue the patent award. This opportunity
would come in the form of a request for re-examination,
which would allow the competitors to make a case that the
patent is invalid. The PTO could decline to grant the re-examination
request. But if it agrees, an independent examiner would
completely review the initial decision and offer the party
requesting re-examination a chance to argue its case.
The
procedure would naturally focus attention on the most potentially
important applications. Most patents would never receive
anything other than the most basic examinations. But for
those applications that really mattered, parties would
have an incentive and opportunities to bring information
in their possession before the PTO, providing it with more
resources to help it make the right decision in the crucial
cases.
Breaking
the vicious circle of bad examination and frivolous patent
applications is the key to reform of the patent process.
But, as we have emphasized, there are always going to be
mistakes. So it's important that the court system operate
as efficiently as possible to rectify those mistakes, while
also permitting owners of valid patents to enforce the
legal rights the patents convey. The CAFC has significantly
tilted the legal playing field in favor of patentees.
A major
complaint of attorneys who defend infringement suits relates
to the right to a jury trial. They argue that the evidence
in a patent case can be highly technical and that the average
juror has little competence to understand and evaluate
it. Having decisions made by such a body increases the
uncertainty surrounding the outcome, which is a big reason
that accused infringers often settle rather than fight,
even when they think they have a pretty good case.
More
subtly, jurors' inability to grasp technical evidence may
interact with the presumption of validity—the rule
that patents must be presumed legitimate unless proven
otherwise—in a way that helps patentees and hurts
accused infringers. To prevail in an infringement case,
an accused infringer has to present clear and convincing
evidence that the patent is invalid. But if the jurors
are simply befuddled by the evidence, they will most likely
conclude that neither side has made a convincing case.
In effect,
the "clear and convincing evidence" standard combined with
decision making by juries makes it likely that the patent
holder will win on validity questions—which is why
most holders ask for a jury trial! Indeed, a study by Kimberly
A. Moore, a professor at George Mason University School
of Law in Arlington, Va., finds that juries are twice as
likely to uphold patent holders as are judges. [See graph, "U.S.
Patent Cases Tried Before Juries."]
The
right to a jury of one's peers is a venerated concept in
Anglo-American law. But there is no real sense in which
a patent jury is, in fact, a jury of peers. If we left
patent cases to judges rather than to juries, we would
still not have scientists and engineers, the true peers
of the inventor, deciding the case.
The
final part of our reform proposal is to let judges and
not juries decide the merits of a patent-infringement suit.
At least judges spend their professional lives evaluating
evidence in many different disciplines and have typically
developed some ability to sort through it. Further, a judge
may always appoint a special master, an outside expert
in the service of the court, who can rule on the judge's
specific technical questions.
The
CAFC has, in fact, put some limits on the role of juries
in patent cases. In particular, it is the job of the judge,
not the jury, to interpret—or construe—the patent's
claims: the judge assists the jury by interpreting the
technical language of the patent. But when it comes to
understanding when the subject of a patent application
lacks novelty or nonobviousness—which the accused
infringer must convincingly prove in order to invalidate
the plaintiff's patent—the jury gets no such help.
There
is no good reason that a lay jury is the appropriate decision-making
body for these questions. It would be entirely feasible
for the judge to construe the novelty and nonobviousness
of the patented invention relative to some other invention,
just as the judge construes the claims of the patents.
The ultimate question of patent validity could still be
left up to the jury.
If,
for example, the judge ruled that the plaintiff's patent
at issue is not original relative to the defendant's invention,
there might still be a dispute as to whether the defendant's
invention was, in fact, already discovered at the time
of the patent filing. The jury could then decide that question,
based on testimony and documentary evidence about the date
of the invention in question.
If the
PTO's examination and the trial processes were revamped
as we suggest, then patent litigation would be the last
resort when disputes over patent claims cannot be resolved.
There would still be patent suits, of course, and they
would still be expensive. And in areas where technology
is changing rapidly and there are numerous competing and
overlapping claims, there would still be considerable uncertainty
about who has the rights to what technology.
But
the revamping would reduce the pervasive and damaging fear
that almost any product or process is always at risk of
an infringement claim. When suits are filed based on patents
of questionable validity, accused infringers would negotiate
from a position where both parties could expect a reasonably
competent determination as to novelty and nonobviousness.
That fact alone would reduce the incentive for a defendant
to pay royalties and settle rather than undertake a risky
legal battle, no matter how questionable the validity of
the patent at issue.
We need
to make sure that before they can be used to restrict the
commercial activities of competitors, patents have received
the appropriate scrutiny to ensure their validity. Our
reform provides this, because it allows informed parties
to be involved before a patent is issued. At the same time,
we need to accept that the PTO will still make mistakes,
so our proposal creates a judicial system that deals with
those mistakes in a balanced way.
ABOUT
THE AUTHORS
Adam
B. Jaffe is the Fred C. Hecht Professor in Economics and
Dean of Arts and Sciences at Brandeis University, in Waltham,
Mass. Josh Lerner is the Jacob H. Schiff Professor of Investment
Banking at Harvard Business School in Cambridge, Mass.
They cowrote Innovation and Its Discontents: How Our Broken
Patent System Is Endangering Innovation and Progress, and
What to Do About It, which was published in November by
Princeton University Press.
ILLUSTRATIONS:
JONATHAN CARLSON
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