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New York TimesA lucid, entertaining and sobering look at the American patent system.
— Hal R. Varian
The United States patent system has become sand rather than lubricant in the wheels of American progress. Such is the premise behind this provocative and timely book by two of the nation's leading experts on patents and economic innovation. Innovation and Its Discontents tells the story of how recent changes in patenting—an institutional process that was created to nurture innovation—have wreaked havoc on innovators, businesses, and economic productivity. Jaffe and Lerner, who have spent the past two decades ...
The United States patent system has become sand rather than lubricant in the wheels of American progress. Such is the premise behind this provocative and timely book by two of the nation's leading experts on patents and economic innovation. Innovation and Its Discontents tells the story of how recent changes in patenting—an institutional process that was created to nurture innovation—have wreaked havoc on innovators, businesses, and economic productivity. Jaffe and Lerner, who have spent the past two decades studying the patent system, show how legal changes initiated in the 1980s converted the system from a stimulator of innovation to a creator of litigation and uncertainty that threatens the innovation process itself. In one telling vignette, Jaffe and Lerner cite a patent litigation campaign brought by a a semi-conductor chip designer that claims control of an entire category of computer memory chips. The firm's claims are based on a modest 15-year old invention, whose scope and influenced were broadened by secretly manipulating an industry-wide cooperative standard-setting body. Such cases are largely the result of two changes in the patent climate, Jaffe and Lerner contend. First, new laws have made it easier for businesses and inventors to secure patents on products of all kinds, and second, the laws have tilted the table to favor patent holders, no matter how tenuous their claims. After analyzing the economic incentives created by the current policies, Jaffe and Lerner suggest a three-pronged solution for restoring the patent system: create incentives to motivate parties who have information about the novelty of a patent; provide multiple levels of patent review; and replace juries with judges and special masters to preside over certain aspects of infringement cases. Well-argued and engagingly written, Innovation and Its Discontents offers a fresh approach for enhancing both the nation's creativity and its economic growth.
"A lucid, entertaining and sobering look at the American patent system."—Hal R. Varian, New York Times
"A disturbing analysis of how the patent system, the heart of the knowledge economy, is rotten. With plenty of examples, the authors explain how America's patent system has become slow and bureaucratic, awarding too many patents for the wrong sorts of things. As a result, it is a threat to this most innovative economy."—Economist
"This book sounds an alarm bell that is hard to ignore since this is a policy area, which is very important for the national interests of the United States. The authors maintain that the present patent system in this country is profoundly flawed."—Giuseppe Ammendola, American Foreign Policy Interests
"This is a timely and concise book that presents a comprehensive and convincing argument about the not-so-explicit changes in U.S. patent law beginning in 1982, changes that the authors argue have broken a patent system that worked previously."—Zainub Verjee, Leonardo Reviews
"Adam Jaffe and Josh Lerner have given us a wonderfully timely book—and also one that is beautifully executed. If Congress is to reform the system, the public ought to understand its current failings."—Rochelle Dreyfuss, Michigan Law Review
"The authors should be applauded for their straight-forward approach and their focus on definite practices such as the patent application process. With elucidating, often entertaining examples this book would be appropriate as supplemental text for students and scholars of intellectual property rights."—Erik N. Dean, Journal of Economic Issues
Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication, and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.
From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison's light bulb and the Wright brothers' airplane to the cell phone and Prozac were developed.
Beginning in 1982, the U.S. Congress made two adjustments to how the patentsystem operates. At the time, these changes were described as administrative and procedural rather than substantive. In 1982, the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court, rather than the twelve regional courts of appeal, as had previously been the case. And in the early 1990s, Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).
It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836. The new court of appeals has interpreted patent law to make it easer to get patents, easier to enforce patents against others, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents' validity. At roughly the same time, the new orientation of the patent office has combined with the court's legal interpretations to make it much easier to get patents. However complex the origins and motivations of these two Congressional actions, it is clear that no one sat down and decided that what the U.S. economy needed was to transform patents into much more potent legal weapons, while simultaneously making them much easier to get.
An unforeseen outcome has been an alarming growth in legal wrangling over patents. More worrisome still, the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are seen increasingly as major costs of bringing new products and processes to market. Thus, the patent system-intended to foster and protect innovation-is generating waste and uncertainty that hinders and threatens the innovative process. In the chapters that follow, we will see many examples of these issues:
Patents on inventions that are trivially obvious, such as the "Method for Swinging on a Swing," "invented" by a five-year-old (see chapter 1).
Patents that have become weapons for firms to harass competitors, ranging from Rambus' efforts to exploit a semiconductor industry standard-setting body to Smucker's steps to quash a small-time lunch caterer (see chapters 1 and 2).
Patents that enabled companies to win huge damages awards, and even put rivals out of business, such as Polaroid's instant photography patents (see chapter 4).
Patents in areas new to patenting, but covering purported discoveries familiar to practitioners and academics alike, such as the patents on previously well-known option pricing formulas (see chapter 5).
We will see that a tension between rewarding some innovators while potentially inhibiting the activities of others is inherent in the patent system. As we will discuss in chapter 3, there have been previous "crises," in which the patent system was seen to be dangerously out of control. But what is striking about the current situation is the clear connection between the system's pathologies and recent, seemingly innocent statutory changes. The impact of these shifts has been especially extreme in technologies that are believed to be key to current economic development, including electronics, software, and biotechnology. Approximately two decades after Congress began tinkering with the system, it is now urgent that we analyze what has gone wrong, and determine how to fix it.
It Is Not a Pretty Picture
A patent is a government-granted right to prevent other people or companies from making, selling, or using a product or process that you have invented. To get a patent, you have to file an application that explains your invention, and details how it differs from what others have done before. The government reviews the application, and (if things are working right) grants you the patent only if your invention is genuinely new. With patent in hand, you can stop others from using your invention, or you can allow others to pay you for the right to use it. If others use it without your permission, you can sue them in federal court, asking the court to make them stop, and to make them pay for the uses they have already made. The party you accused of "infringing" your patent will typically claim that what they are doing is not covered by your patent, and that your patent never should have been granted in the first place because your idea was not new. Unless you reach a voluntary settlement, a jury will decide whether the patent is indeed valid, and whether it has been infringed. As you might guess, resolving patent cases in court is an expensive proposition, often involving millions of dollars in attorneys' fees and other costs. (A more thorough and precise explanation of the patent process is presented in chapter 1.)
The previous paragraph describes the patent system today, and it describes the patent system as it was before 1982. What has changed is the likelihood that the various parties will succeed at different points in the process. Today, the applicant is much more likely to have the patent granted; the patent is much more likely to be held valid if challenged in court; and the party accused of violating the patent is more likely to be found to be an infringer and forced to pay a large monetary award.
What catalyzed these shifts? The 1980s were a time of great concern about U.S. "competitiveness," as well as a general movement to shrink government and make it more efficient and responsive. Streamlining the courts would make valid patents easier to enforce. Making the PTO run more like a business would make the process easier for inventors to use, and would also save the taxpayers money because the office would be supported by application fees rather than taxes.
These intentions may be admirable, but they have spawned some highly undesirable consequences. Many people and companies have received patents for trivial or even non-existent inventions. Moreover, many awardees have exploited the enhanced legal strength of their patents by suing (or threatening to sue) the true innovators in their industries. As a result, valuable technologies have become snarled in a web of litigation and licensing negotiations. And as young firms have found themselves unable to commercialize their ideas, economic growth has suffered. Consumers therefore have less access to new products-from lifesaving drugs to productivity-enhancing software-than would be the case if innovative companies were not distracted from innovation by litigation and fear of litigation.
How did it come to pass that these administrative and legal changes-which seemed benign when enacted-exerted such surprisingly damaging effects? Most analyses of the patent system are based on an idealized conception of that system. According to this conception, Congress establishes rules regarding which discoveries qualify for a patent, and how the rights conveyed by a patent may be enforced. The patent office and the courts simply apply and enforce these statutory rules. From this perspective, it is easy to argue that streamlining the patent process and making it easier for inventors to enforce their right to protection in the courts enhances a nation's overall innovation, creativity, and economic growth.
In practice, however, life is more complicated. Patenting rules are inherently ambiguous, and so actual patent practice depends on the decisions of the patent office. Changing the way that office is organized and funded alters its incentives; with different incentives, it produces different decisions, causing patent practice to change without any Congressional action to change the law. Similarly, the court's decisions have a tremendous effect on how the laws written by Congress are interpreted, and the composition of the court affects the kind of decisions it makes. Further, the impact of patent litigation goes far beyond the cases that are actually heard by the courts. Fear of litigation, along with threats made by patent holders, prompt some firms to sharply shift their behavior, even if these companies never appear in court. The accumulation of fees paid for the use of multiple patents makes the product development process more expensive, limiting the rate at which companies can bring new products to market. And some companies, given the choice of paying royalties or facing litigation on as-yet unproven new products, may simply drop the project altogether.
Thus, in changing administrative structures and procedures, Congress fundamentally altered the nature of substantive decisions about which patents should be granted, and which ones should be successfully enforced in court. This, in turn, has changed the behavior of inventors and firms that participate in the process. Now that it is possible to get a patent on unoriginal ideas, many more dubious applications are being filed. And with success now more likely for patent holders who sue their competitors, more such suits are filed or threatened. Increasingly, the firm with the best lawyers or the greatest capacity to withstand the risk of litigation wins the innovation wars-rather than the company with the brightest scientists or most original, valuable ideas.
Though controversies regarding particular patents have attracted the business media's attention, the fundamental changes in patent policy and their systemic implications have received little scrutiny. This book addresses that omission, systematically examining the changes in patenting since 1982 and the resulting implications for business, innovation, and society as a whole. Drawing on the experience of the past two decades, we show the changes that are needed in order to restore a healthy environment for innovation and progress.
Our approach is to analyze how the changes made by Congress have affected the incentives to all participants in the process-patent applicants, the patent office employees who review the applications, and the parties potentially involved in litigation. We show how the current system provides incentives for applicants to file frivolous patent applications, and for the patent office to grant them. It likewise encourages patent holders to sue, and those accused of patent infringement to give in and pay under threat, even if the patent at issue is of dubious validity. It does not provide good incentives for the information necessary to resolve questions about patent validity to be brought forward and analyzed appropriately. As a result, virtually all of the participants in this process, while acting in ways that make perfect sense given the incentives they face, end up collectively behaving in the pathological manner we have described.
By and large, other countries have not made the same kinds of changes in their patent systems that the United States has made. Patents in Europe and Japan remain harder to get and there is less patent litigation. But the problems that have surfaced in America are likely to be of interest far beyond the boundaries of the United States. First, dysfunction in the patent system of the world's largest economy affects innovation everywhere. Second, our basic analysis of how the rules of the patent system interact with the incentives of the people and firms involved is relevant to the improvement of patent systems everywhere, as the same pressures for stronger protection and for reduced examination costs are being felt around the world today.
Governments have long recognized the broad social value generated by new technologies, and hence have sought to reward inventors of important technologies. In some cases, they have offered prizes to those who solved important problems. In other cases, kings and parliaments have offered subsidies and rewards to those who came up with unexpected discoveries that proved important for commerce and defense.
But at least since the Tyrolean leaders recognized the manufacturers of superior mining equipment in the fourteenth century, the granting of patents has been an important tool to encourage innovation, and the economic growth and improvement in living standards that new technologies provide. The holder of a patent gets the right to exclude others from making a specified product or using a specified process for some period of time. Put another way, a patent is a "negative right": the patent-holder can prevent others from using his or her discovery. A patent thereby creates a kind of monopoly for its owner, although the breadth and hence significance of this monopoly depends on the breadth or extent of the patent grant.
At first, there was little rhyme or reason behind who got patents, or how broad their patent rights were. In many instances, patents were granted to people who did not make any discoveries at all. For instance, among the fifty patents granted by Queen Elizabeth I of England during the sixteenth century were awards that gave their recipients the exclusive right to manufacture and sell such basic materials as salt, sulphur, and paper. Many of these grants of monopolies over entire important industries went to royal favorites. Not surprisingly, these awards triggered widespread popular resentment: in fact, a patent providing exclusive rights to sell wine led to rioting in the streets of London.
By the eighteenth century, however, two guiding principles emerged in Great Britain and elsewhere: that patents should be granted only for new and important discoveries, and that the breadth of the patent grant should be proportional to the size of the discovery made. Inventors were increasingly required to submit descriptions of the discoveries, in which they carefully delineated what was truly new about their inventions. Government officials would then decide whether the discoveries were novel and determine how generous a monopoly they should award. In 1769, for example, James Watt was awarded a patent for his "new method for lessening the consumption of steam and fuel in fire engines," which led over the next several decades to the first industrial applications of the steam engine, thereby initiating the industrial revolution in Great Britain.
The economic logic of granting patent protection to inventors is straightforward. If there were no incentives for those who discover and develop new technology, it is likely that fewer innovations would be developed, slowing progress and the benefits it brings. Potential inventors realize that without adequate protection rivals will rapidly copy their discoveries, and that therefore innovation is at best an uncertain route to future profits. As a result, companies would be unlikely to spend significant amounts of money on the Research and Development (R&D) that is the source of new products and processes in a modern economy. They would instead choose to spend their money pursuing other activities (for example, marketing campaigns) or just pocket it as profit.
Excerpted from Innovation and Its Discontents by Adam B. Jaffe Josh Lerner Excerpted by permission.
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