Innovation Will Lead Recovery if Patent System Allows

I was reading the March 30, 2009, edition of Fortune magazine today and there is an article titled After the Panic, Innovation, written by Glenn Hutchins, a co-chief executive of the technology investment firm Silver Lake.  His brief article chronicles how we managed to get into this economic crisis and concludes that, as always, scientific advances and entrepreneurship will lead us out of the economic haze and could well lead to several decades of prosperity.  Hutchins is, of course, completely correct.  It will be innovation and entrepreneurs who lead us out of these dark financial days if and only if the United States Patent and Trademark Office becomes willing to play their part in the recovery.  If the USPTO does not alter course and issue patents in a technologically and economically relevant time frame no amount of scientific advances, innovation and entrepreneurial spirit will solve our economic problems. 

The nasty little secret that so many seem to want to ignore is that innovation requires funding.  Without funding the best ideas that could lead to inventions of tomorrow that will spur economic growth, give birth to new industries and employ millions will simply not come to fruition.  Simply stated: Without issued patents there will be few, if any, investors willing to provide the capital necessary to commercialize and grow new businesses.  So instead of spending hundreds of billions of dollars to artificially prop up the economy, our leaders need spend a fraction of that sum, just a few billion dollars, on a overhaul of the Patent Office.  If there is no stomach for a few billion dollars then why not simply change the philosophy and direct the Patent Office to start issuing patents.  Issuing patents should be fairly cheap and easy to accomplish, even for the US Patent Office. Creating monetizable assets free of charge, at least from the government perspective, is a common sense approach to stimulus, but sadly for the USPTO it would be a revolutionary concept.

The Hutchins article in Fortune explains:

The answer resides where it always has — in innovation and entrepreneurship.  The way out of the doom and gloom of the ’70s — a period much like today’s — was a wave of technology innovation that spurred a generation of company formation, job creation, productivity gains, wealth accumulation, and GDP growth.  Today’s opportunities are just as big if not bigger.  For instance, we stand on the cusp of perhaps one of the mightiest technology trends of our lifetime in the field of wireless broadband mobility, with opportunities in a host of related industries.  Innovation is also rampant in green technologies, biotechnology and stem-cell research, nanotechnology, VoIP, virtualization, cloud computing, collaboration, software as a service, and social networking.  The economic and social benefits that will flow from this tsunami of innovation stand to propel another quarter-century of prosperity.

I would agree with Hutchins but for one thing — the US patent system is horribly dysfunctional and will stand in the way instead of acting to assist economic development.

Let us not forget that the recession of the 1970s did not end until well after Ronald Reagan was elected President.  According to the Joint Economic Committee’s report in 2000, it wasn’t until December 1982 that the period of economic growth and expansion first started.  The report explained:

In 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run. He proposed, and Congress passed, sharp cuts in marginal tax rates. The cuts increased incentives to work and stimulated growth. These were funda-mental policy changes that provided the foundation for the Great Expansion that began in December 1982.

The Reagan economic policies, including the dramatic reduction in tax rates, is widely accepted as fundamentally important to the largest era of peacetime economic boom in American history.  One thing lost from our understanding of what lead to such tremendous economic prosperity is the fact that patents became relevant thanks to the formation of the United States Court of Appeals for the Federal Circuit.  Recall that in an effort to promote greater uniformity in patent law, Congress established the Federal Circuit in 1982, making it the only US court of appeals defined exclusively by its jurisdiction rather than geographical boundaries. 

If you look at the number of utility patent applications filed in the United States dating back to 1963, it becomes clear that the tremendous growth in the number of patent applications filed did not start until about 1982-1983. 

The number of applications continued upward through the recession of the early 1990’s, continued upward despite the bursting of the dot-com bubble, and continued upward despite the terrorist attack on 9/11/01.  The fact that patent applications have continued to increase since the formation of the Federal Circuit is not a coincidence.  Patents were virtually worthless prior to the formation of the Federal Circuit because the outcome of a patent litigation was completely dependent upon what Circuit the litigation was brought in.  The Federal Circuit created uniformed and predictable patent laws, which lead to patents being quite valuable.  Investors understood this and provided capital for the formation of new companies and new industries regardless of the economic realities of the moment.  Unfortunately, this is all changing.  Patent application filings are down in calendar year 2009 by as much as 5% when compared to calendar year 2008, and that does not bode well for future economic growth.

There are many reasons why patent application filings are down, but assuming it is all due to the recession we are in now is not only naive, but is dangerously incorrect.  The facts are clear.  During economic trouble over the last 25 years patent application filings have grown, so there must be something else to explain this alarming drop in the number of patent applications.  Sadly, there is more than one explanation, but the short answer is that the US patent system has become so dysfunctional that we will not be able to look to innovation and entrepreneurship to lead us out of this economic debacle unless we quickly get our act together and form a national innovation strategy.

The Patent Office is now allowing only 42% of patent applications to mature into an issued patent, which is at least 25% lower than the historical average allowance rate.  Examiners are encouraged to “reject, reject, reject right now,”  Add this reject now philosophy to the ridiculous length of time applications remain pending at the Patent Office, and some are simply making the choice to keep innovation as a trade secret rather than lay it out for everyone to see and still not get a patent in a technologically relevant time frame, if ever. 

On top of Patent Office dysfunction, the Federal Circuit has seemingly outlived its usefulness.  Once upon a time we had a uniformed series of patent laws thanks to the Federal Circuit, but now the outcome of an appeal depends completely upon what three judges are on the panel hearing the case.  There is no uniformity, precedent is not obeyed, the Federal Circuit ignores the Patent Office definition of the duty of candor owed by applicants and inequitable conduct fears are crushing the patent system.  While I am not a fan of recent Patent Office initiatives, it is really the Federal Circuit who is to blame for the failure of the Patent Office.  The Federal Circuit forces patent attorneys and agents to game the system and bury the Patent Office with anything remotely relevant or risk any patent being declared unenforceable.  This nonsense is unsustainable and has crushed the Patent Office because they simply cannot look to or rely upon help from applicants because if the applicant says or does anything to assist the Patent Examiner in understanding the prior art and the invention it will be used against the patent owner during licensing and litigation and make the patent obtained worth less, if not completely worthless.

It is hard to argue with those making the choice to forego patent protection, although it is short-sighted.  If you file an application now it will be at least a couple years before a patent will issue, and in that time frame we will have to get our patent act together, or we are going to be in for a terrible economic downturn that will easily rival the Great Depression.  This is the undeniable truth because we have always relied upon American innovation to get out of tough economic times, and unless investors see assets worth betting on there will be much less funding for start-up companies that would otherwise be the next wave of job creators in the US.