Is the U.S. Patent System Broken?

The proponents of the most radical changes to U.S. patent laws in 50 years claim that such changes are necessary in order to reform a "broken" patent system. They claim that the patent office is handing out monopolies, in the form of poor-quality patents, to anyone who asks for them. They claim that the system is "rife with abuse" by crafty patentees and their lawyers, who are exploiting vaguely defined and overly-broad patents for their own benefit, to the detriment of the society at large. They evoke the fearful image of the "patent troll," a frightening creature who might drag an unsuspecting victim before a federal court waving an incomprehensible or ill-gotten patent. If the system isn't functioning as well as it could be, then it may make sense to investigate at least a "tune up" of our patent system, if not a complete overhaul. Changes to our patent system to correct abuses are, however, only a good idea to the extent that the benefits outweigh the harms. If the benefits outweigh the harms, they're not.

With respect to the problems discussed in connection with this "patent reform" bill, almost everyone agrees that there's a problem and almost everyone agrees on the best way to solve the problem. What's funny is that this bill would do almost NOTHING to solve the problem and almost everyone acknowledges that this is true. The most logical explanation for this state of affairs is that the proponents of the bill are pushing the bill for their own purposes and using the well-acknowledged "problem" as a scarecrow.

The Problem

The fundamental problem, upon which almost everyone agrees, is that the United States Patent and Trademark Office (USPTO) is overworked, underfunded and understaffed. Many people don't know that the USPTO, though it is a part of the Commerce Department, is funded almost completely by user fees and doesn't receive any substantial funding from the U.S. government. In fact, the USPTO's funding situation is worse than zero. Congress routinely siphons money out of the USPTO to fund other government programs, so that it doesn't even get to keep the user fees coming in.

To compound the problem, the overworked, underfunded and understaffed patent office is forced to deal with ever-increasing volumes of incoming patent applications. The massive and ever-increasing volume of patent applications is a reflection of the ingenuity and innovation that drives the American economy. For America, this paper tsunami represents continuing economic growth and a productive future. Unfortunately, the patent office strains under the weight of this massive daily tsunami of incoming paperwork. Fortunately, fee payments are interspersed with the other papers, making the burden easier to bear financially. As the volume of patent applications goes up, there is corresponding rise in the incoming revenue. If all this money could be retained in the patent office, the burden would be much easier to bear.

A tight money situation translates into problematic patents. As a result of the inadequate funding, the USPTO does not have the time or resources to adequately search the prior references to determine whether a claimed "invention" is really novel. The patent office makes a determination on each patent based on the results of one or more searches of prior references, which are collectively referred to as the "prior art." Inadequate time to search and review translates into relevant prior art references which are not identified and overly-broad patents which are allowed to issue. Further, inadequate funding means lower pay for patent office employees, making it difficult to retain the best and brightest.

Solutions Real and Illusory

While not doing anything to address the funding issue, Lamar Smith's "patent reform" bill attempts to correct the problem of inadequate review of patents by adding additional layers of privately-enforced "quality control" procedures. There are at least two problems to this solution. First, the private enforcement mechanisms built in to the system today are mostly ignored by third parties, as they are seen as a means to immunize, rather than weaken, bad patents. Second, private enforcement mechanisms, to the extent they are used, are themselves completely open to abuse by third parties whose true motivations are to harass and block competitors. These private enforcement mechanisms are most likely to be employed by the well-funded players against the start-ups, rather than vice versa.

In contrast, a fully-funded patent office would mean that patent examiners would have the time and resources to adequately examine the patent applications in front of them. It would mean that there is more time for training and education of patent examiners, and it would mean that patent examiners would have the time to conduct adequate searches of the prior art. These would all be positive developments, and they would dramatically improve the quality of the patents being issued by the USPTO. This would, in turn, serve eliminate the "bad patents" over which so many hands are apparently being wrung. Though this is an almost universally-supported reform which would go far in correcting a set of almost universally-acknowledged problems, it forms no part of the Patent Act of 2005. The controversial "reforms" which Lamar Smith is proposing would have no effect on the underlying problems within the patent office itself. If the problem really is "bad patents," then I suggest we look at, and improve, the patent-generating system itself. Reducing the strength and value of good patents is not a logical solution.

Another Good Summary of the Patent Law Reform Bill

Testimony of Nathan Myhrvold on Patent Law Reform

Comments of ABA IP Chair William LaFuze

Testimony of Dean Kamen on Patent Law "Reform"

Congress Takes on Pesky "Patent" System

America is the undisputed world leader in innovation, entrepreneurship and risk-taking. One of the reasons for this is our relatively strong legal protection for the intellectual property of America’s innovators. Given that we have a relatively workable system in place, it was, of course, only a matter of time before Congress stepped in to screw with it.

Rising to meet his destiny as a legislator, Rep. Lamar Smith has filed a bill in the House seeking to drastically change our patent laws. He himself has boasted that it is the most drastic change to our laws in over 50 years. As it stands today, patents are already an asset reserved for the relatively well-backed. Nonetheless, they do often serve to level the playing field between the small innovator and the large corporation seeking to take over the innovator’s market and the risk-taker’s reward. Certain large corporations are, understandably, annoyed by the fact that they sometimes have to pay damages for using someone else's patented technology. With Rep. Smith on the case, it's only a matter of time before their annoyance is reduced. With the changes proposed by Rep. Smith, patents are likely to remain tools available to wealthy corporations but increasingly out of the reach of the small company and independent inventor.

Weak patent protection means that companies are freer to move around as they please, reaping where they did not sow. In certain cases, this gives those companies the freedom to let the smaller players take the risks and test out new technologies and marekts. If a gamble pays off for a smaller player, the big player can then move in after the technology has been tested and a market has developed. A weakening of the patent rights of smaller companies obviously lowers the incentive for entrepreneurs and small business owners to take risks.

There are a number of changes in the bill. I've selected a few to highlight. These are my characterizations of the effect of the changes based on my reading of the language and summaries I’ve reviewed.

1. Change from First Inventor to First Applicant to File:

Under the current patent law, the first person to invent an invention is considered the ‘inventor’ and therefore, the person rightly entitled to the patent, even if another applicant gets to the patent office more quickly than the first inventor.

Under the law as it would be revised by Smith’s bill, an independent inventor who gets beaten to the patent office by another applicant would lose out and would not be considered the rightful patentee. The later applicant will receive the patent instead of the first inventor.

This change would tend to reduce uncertainty in the system, which would be a good thing. This represents a shift in advantage from the small inventor to the large player, but is not, on balance, a completely unreasonable proposition.

2. Change to “Absolute” Novelty, No Grace Period:

Under current patent law, an invention is unpatentable if it was known to the public more than one year prior to the filing date of the patent application. This provides a one-year “grace period” to allow a small inventor time to get backing for his invention and funding for the expense of a patent application.

Under the law as revised by Smith’s bill, the invention will be unpatentable if it becomes known to the public at any time prior to the filing of the patent application through someone other than the inventor.

Again, this element is a shift which tends to penalize smaller players more than it affects larger players, but it also represents a move to harmonize the U.S. patent system more closely with the practices of most other countries. It's not a particularly radical proposal.

3. Reduction in Royalty/Lost Profits Damages for Infringement:

Under the current law, a product incorporating a patented feature can give rise to damages in the amount of royalties or lost profits on up to net sales of the product, if the court finds such damages justified.

Under the proposed law, damages can only be based on the value/price of the specific novel feature rather than the product as a whole, even where the infringing sales were a result of that feature.

In certain cases, this change could represent a substantial reduction in the potential damages available to a successful patent holder. This is a good thing for accused infringers, but it also represents a reduction in the value of patents in general.

4. Reduction in Court’s Power to Enhance Damages in Exceptional Situations:

Under the current patent law, a court of law may impose enhanced damages of up to three times actual damages if the court finds that the defendant’s infringing conduct was sufficiently egregious.

Under Smith’s bill, the ability of a court to enhance damages against a blatant infringer is severely limited.

5. Reduction in Availability of Injunctions Stopping Infringing Activity:

Under the current law, a patent holder is entitled to an injunction against future infringement if it can show that its patent is being infringed.

Under Smith’s bill, the power of a court to grant an injunction against infringement is constrained.

Questions have been raised as to whether constraints on injunctions are even constitutional, given that the U.S. Constitution expressly guarantees an inventor the right to exclude.

6. Constraint of “Continuation” Practice:

Under the current law, an inventor is allowed to file multiple applications on a single product, owing to the fact that what is generally called an “invention” generally includes a variety of separate “inventions” and combinations of novel features. The inventor can receive multiple patents, each covering certain aspects of his invention, so long as those aspects are novel and non-obvious. The idea is that each of the inventions is entitled to protection, even if the inventor chose to write them up and submit them in a single patent application. This is a little bit of an arcane area of patent law, but it is a very popular practice, employed by both small inventors and big corporations.

Smith’s bill includes provisions to end this procedure, in order to restrict an inventor to only one patent on each product.

In addressing this procedure, Rep. Smith has described continuation practice as "gamesmanship." That reminds me of a negotiation I had one time with another patent attorney. We were discussing the meaning of a claim term in a patent. After extended discussion, he attempted to dismiss my claim arguments as nothing more than "mere semantics." In other words, the question of whether or not a particular product actually infringes a particular patent claim can't be reduced to "mere semantics?" Are we supposed to inquire as to the "spirit of the claim?" Do patent claims have "penumbras and emanations?" I submit that they don't. Continuation practice is a very valuable part of modern patent prosecution, as evidenced by yhe fact that pproximately 30% of patent applications filed are continuations. If my client disclosed a combination in a patent application, he or she should be entitled to claim it, even if he or she didn't claim it originally. This has long been a fundamental aspect of our patent system, and it is important in order to allow the patent applicant to protect the full scope of his or her invention.

7. Multi-round Third-Party Opposition Procedure:

Under the current patent law, there are a number of procedures available to third parties who wish to oppose a patent application. There is a pre-publication submission procedure and a post-publication submission procedure for use while an application is before the patent office. There is an ex parte reexamination procedure and an inter partes reexamination procedure for use once a patent has been issued.

Smith’s bill adds two additional post-issuance opposition procedures. The first can be filed at any time within the nine months after a patent has been issued. The second can be filed at any time within the six months after an accused infringer receives notice of an accusation of infringement.

8. The impact of the above:

An inventor seeking to acquire a patent will spend three or more years and tens of thousands of dollars in acquiring the patent. In the event that the patentee succeeds in convincing the patent office of its entitlement to a patent, the patent holder will likely find itself back in the patent office for some period of years in an opposition proceeding, either right after issuance or later if it threatens a company with enforcement of the patent. The opposition proceeding will proceed as a type of litigation, with discovery and testimony, and a likely cost of hundreds of thousands of dollars to each side. During this time, any patent litigation will likely be stayed. Once a patent holder emerges from the opposition proceeding, it will then be able to commence litigation again. If the defendant then chooses to assert that the patentee engaged in some form of inequitable conduct in acquiring the patent, the defendant can move the litigation back into the patent office for a second proceeding, which may take another period of years. Once the patent holder emerges from the second proceeding, it can commence with its normal litigation, which will take several years and cost millions of dollars. If the patent holder wins its patent litigation against the infringer, it will find its ability to recover damages and/or an injunction impaired as compared to current law, even in those cases where the court finds that the infringer’s conduct was egregious.