July 21, 2013
On Reforming the Patent System
On Reforming the Patent System -Becker
The patent system as practiced in the United States is too broad, too loose, and too expensive. As Posner shows, excessive trolling is an excellent illustration of some of these weaknesses. Yet most of the largest patent disputes, such as that between Apple and Motorola, do not involve trolls, but rather expensive and time-consuming litigation between producing companies in the same industry who differ over patent priority (although Google and other producing companies collect patents too). Reforms of the system are needed that greatly narrow the granting of patents in order to cut down such costly and unproductive litigation.
Many individuals and small companies do not have enough resources to either develop their inventions into products and services, or to litigate against bigger companies that infringe their patents. As a result, they might sell their patents to bigger companies that use them, or to intermediaries that may in turn sell or license their patents. "Patent assertion entities", less flatteringly called "patent trolls", are intermediaries that sometimes litigate against companies they claim infringed on the patents they bought. With a well designed and functioning patent system, this type of intermediary would be valuable in the patent market, as they are in the housing and stock markets. The problem arises because a defective patent system creates opportunities for hold ups and excessive litigation by these intermediaries and by others that hold patents.
Major reforms to reduce these unproductive opportunities would include lowering typical patent length and the scope of innovations that are eligible for patents. The current patent length of 20 years (longer for drug companies) from the date of filing for a patent can be cut in half without greatly discouraging innovation. One obvious advantage of cutting patent length in half is that the economic cost from the temporary monopoly power given to patent holders would be made much more temporary. In addition, a shorter patent length gives patent holders less of an effective head start in developing follow on patents that can greatly extend the effective length of an original patent.
Even pharmaceutical and biotech companies, the main examples where patents are clearly necessary to encourage innovation, usually do not need more than about a decade of monopoly power to encourage their very large investments in new drugs. This is the case in many actual examples where after about ten years molecularly similar drugs often are patented and compete against drugs with the original patents.
Narrowing the type of innovations that can be patented is a more challenging task than reducing patent length. The first step is to recognize that many innovations presently cannot be patented. A major example is the inability to patent scientific theories and concepts, such as Einstein's theory of relativity, Darwin's theory of evolution, or Keynes' model of the macro economy. The presumption in excluding basic scientific knowledge from the patent system is that the cost of restricting open access to such discoveries far exceeds any gains in encouraging the development of scientific concepts through granting temporary monopolies to the creators. To offset the effect of this exclusion from patent protection on the incentive to discover, individuals and governments have created prizes and awards, like the Fields Medal and Nobel Prizes, for mathematical and scientific discoveries.
In narrowing the type of innovations that are patentable, one can start by eliminating the patenting of software. Disputes over software patents are among the most common, expensive, and counterproductive. Their exclusion from the patent system would discourage some software innovations, but the saving from litigation costs over disputed patent rights would more than compensate the economy for that cost. Moreover, some software innovations would be encouraged because the inability to patent software will eliminate uncertainty over whether someone else with a similar patent will sue and do battle in the courts.
Instead of relying on the legal system, creators of new software may then try to protect their innovations through secrecy. Even when their secrets might be learned and sold by employees, companies that innovate could gain because they then would pay less to employees in a position to profit from learning about these innovations by selling the information to competitors.
In addition to eliminating patents on software, no patents should be allowed on DNA, such as identification of genes that appear to cause particular diseases. Instead, they should be treated as other scientific discoveries, and be in the public domain. The Supreme Court recently considered a dispute over whether the genes that cause BRCA1 and BRCA2 deviations and greatly raises the risk of breast cancer is patentable. Their ruling banned patenting of human DNA, and this is an important step in the right direction.
Other categories of innovations should also be excluded from the patent system. Essentially, patents should be considered a last resort, not a first resort, to be used only when market-based methods of encouraging innovations are likely to be insufficient, and when litigation costs will be manageable. With such a "minimalist" patent system, patent intermediaries would have a legitimate and possibly important role to play in helping innovators get and protect their patent rights.
Patent Trolls—Posner
The term "patent trolls" is a colloquialism that denotes what the trolls themselves prefer to call "patent-assertion entities." A patent troll buys patents (sometimes thousands) with the aim not of making the patented product or process or licensing it to others to make but of finding companies or individual inventors that the troll can claim with more or less plausibility are infringing one or more of his inventory of patents. The troll demands a license fee from every such allegedly infringing company or inventor. If the target of the demand refuses, the troll may drop the matter or may sue the refuser for patent infringement, hoping that if the threat is plausible this will induce a favorable settlement. If the target refuses to settle, the troll, to maintain the credibility of its threats, may litigate the suit to judgment. The troll does not practice the patent; but, in its own terminology, "asserts" it.
Two recent articles in the New York Times (July 14, Sunday Business section, p. 1; July 17, Business Day section, p. B1) report the crescendo of criticism that the trolls are attracting, as the magnitude and consequences and visibility of their activities grow. Last year 61 percent of the patent suits filed were filed by trolls. Trolldom is becoming increasingly profitable—one of the articles is about a troll who earns $25 million a year from trolling—and is therefore growing. There is little if anything that will stop their growth except saturation of the market (which will put a ceiling on troll activity, but at a very high level) or action by Congress.
It is extremely difficult to discern any possible social benefit from trolls, and extremely easy to discern substantial social costs. The purpose of patent protection is to encourage innovation by giving the creative inventor temporary insulation from competition, to enable him to recover his upfront costs. In the the case of phamaceutical drugs, the testing on animal and human subjects for safety and efficacy, testing required for approval of a pharmaceutical drug for sale, may cost hundreds of millions of dollars incurred a decade or more before the drug is approved, goes on sale, and thus begins to earn money for the manufacturer. Yet the cost of making the drug once it is approved may be modest. As a result, the inventor could not hope to recover its upfront costs if competitors were allowed to duplicate and sell the drug as soon as it appeared on the market; and to forbid them it needs a patent. Actually few markets have the characteristics of the pharmaceutical drug market. It seems to be the lone poster child for the patent system. There is a widespread belief among economists, scientists, and business people that the patent system is vastly overextended—patents granted too casually, patent terms too long, patent litigation too expensive and unreliable.
The patent system has serious problems; the troll problem is among the serious problems and happens to be the one easiest to solve (were it for the usual political obstacles—like class action lawyers, patent trolls have deep pockets that they can draw from to influence Congress). All that would be required is a rule that barred enforcement of a patent that was not reduced to practice within a specified time after the patent was granted, with extensions allowed for inventions that required an unusual amount of post-patent development to reduce to practice. There is no reason to allow the enforcement of a patent that was obtained by its current owner for the sole purpose of shaking down alleged infringers. Remember that the purpose of patent protection is to encourage invention by enabling the inventor to recover his upfront costs of invention, which he might not be able to do if anyone could copy the invention and, not having incurred any upfront costs, undersell the patentee. There are no upfront costs if the patented invention is never produced, but serves merely as an excuse for a threat to sue.
It's not just that patent trolls don't do anything that encourages innovation; they impair innovation. Trolldom requires inventors to invest more resources in searching the files of the patent office before applying for a patent (and for safety's sake again after they begin making the patented product or process), to avoid being hit by a license demand from a troll. This makes trade secrecy a more attractive alternative to patent protection than it would otherwise be. And trade secrecy not only is often a costly or even infeasible alternative to a patent; it also conceals information that a patent is required to disclose. The patent must disclose enough information to enable a person with the relevant technical skills to duplicate the patented invention. Not that he is permitted to duplicate it without the patentee's permission. But the disclosure fosters innovation by adding to the stock of technical information. It enables "inventing around," the lawful practice of using information in a patent to create a substitute for the patented invention that is different enough not to be deemed infringing.
The problem of patent trolls is a function in part of the promiscuity with which the patent office has issued patents in recent years, and the encouragement that such issuance has received from the U.S. Court of Appeals for the Federal Circuit, the federal appellate court that has exclusive appellate jurisdiction over patent cases. The court has long played a promotional role in the patent system, having been created at a time (the early 1980s) when there were fears that the United States was being overtaken on the technological front by Japan. Those fears of course proved groundless. But the idea that American inventors needed more encouragement and therefore that the standard of patentability should be relaxed persisted. The result today is a vast number of patents in force—some 2 million—providing a rich source of inputs for the patent troll industry.
President Obama criticized patent trolls last month and promised action to curb them. Such action is overdue.