Fixing the patent system requires a return to strong patent rights

The patent system our government has created over the last decade incentivizes stealing patent rights rather than engaging in an arm length negotiation. This is antithetical to basic, fundamental principles embedded throughout American law. The laws in the United States are supposed to be certain, stable and understandable. By minimizing externalities and keeping transaction costs low bargaining of rights will ensue, which will lead to an efficient outcome.

The theory that law should maximize certainty and minimize transaction costs to facilitate an efficient, arms-length negotiation of rights is called the Coase theorem. The Coase theorem is attributed to Nobel Laureate Ronald Coase, who certainly would not approve of the mess all three branches of government have made of the U.S. patent system over the last decade. Wholesale changes to the law both through statutory changes and case law shifts have created sweeping changes to the underlying property right grant, as well as the overall desirability of obtaining patent protection, which drives innovation under ground as trade secrets and makes it ever more difficult (if not impossible) for individuals and startups to monetize innovation. This will lead to less risk taking because funding will increasingly dry up, which means less innovation – the exact opposite of what politicians say they want.

According to Coase, obstacles to bargaining and/or poorly defined property rights lead to an inefficient marketplace. You need to look no further than the current state of the U.S. patent system for proof. Given that all branches of government – the Legislature, the Executive and the Judiciary – have embarked on a decade long, top-to-bottom restructuring of the patent system it is no great mystery that the patent system in America is inefficient and private, arms-length bargaining between innovators and innovation users simply no longer happens. Patents are weaker, less capable of being enforced, and much more likely to be successfully challenged.

The entire government has essentially thrown out the old patent system that was responsible for revolutionary innovations and replaced it with a system that rewards copyists who ignore innovators and infringe patents without concern or consequence. “We used to have, for the most part in this country, what I’ll call an honor system where companies that were using technologies patented by others willingly took licenses without being forced by court orders to do so,” former Federal Circuit Chief Judge Paul Michel explained. “The honor system now is largely gone… So in the environment where the honor system is gone what really is a patent? It’s a ticket to file a lawsuit.”

Ignoring patent rights is called efficient infringement. It is efficient because patent rights are so weak, it costs so much to enforce patent rights, and those rights are so easy to invalidate, why would a reasonable businessperson do anything other than force patent owners to sue? Those engaging in efficient infringement know that at least some, if not many, innovators simply will not pursue them for infringing because of the cost and climate, which is inhospitable to innovators.

Unfortunately, with no real prospects at a fair, reasonable, arms-length negotiation innovators have little recourse other than suing. So non-existent is the market for fair, arms-length negotiations that without bringing a lawsuit those who use, or steal, the innovations of others simply refuse to deal. Patent owners are forced to either engage in high risk, costly patent litigation, or to simply watch as large entities make mountains of money going to market with an innovation they pioneered. This can’t be what our Founding Fathers envisioned; it wasn’t what President George Washington envisioned when he became America’s first patent licensee.

How did things go so wrong? Why has the Supreme Court declared war on software, biotechnology related innovations and medical diagnostics? Why has the Patent Office tolerated patent examiners who don’t show up for work and refuse to issue patents? Why has Congress created burdensome administrative procedures that make it easier for challengers to kill patent rights without the benefit of a trial in federal court? Why does Congress continue to seek further reforms that will weaken the patent system and make it increasingly impossible for those who innovate to find enough incentives to make innovation worthwhile?

Congress, the Obama Administration and the Courts have been misled. It is axiomatic that patent protection incentivizes innovation and creates jobs. Changing patent law in ways that make it nearly impossible for inventors and start-up companies to pursue innovation will have a substantial negative impact on job creation and the economy. As a result of misguided patent reform and bad judicial decisions a primary foundation of the great American economic engine is unnecessarily crumbling.

Over the past decade, the patent system has been turned on its head and patent rights have eroded year after year (see here and here). Once celebrated, inventors are now vilified. A crafty narrative has emerged.

There is a mistaken belief by some that our national innovation ecosystem is somehow fostered by a regime whereby patent and other intellectual property rights are ignored. Of course, to argue that patents get in the way of innovation is absurd. (See here, here, here, here and here) There is no evidence that can withstand even first level scrutiny that suggests patents inhibit innovation. Indeed, if patents get in the way of innovation you would expect countries without a functioning patent system, or weak patent rights, to flourish. What you see is exactly the opposite. Where there are little or no patent rights available there is little or no innovation, and truly little or no functioning economy. Such a reality is hardly surprising given the cost of innovation and the reality that it makes absolutely no business sense to invest in innovating if another can simply take your research and development without consequence. “At the end of the day if you do not own the exclusive rights to the problems you are solving you are going to get copied at an astronomical rate,” explains Jay Walker, a prolific inventor and the founder of Priceline.com. “If we can’t own the solution to the problem the last thing I want to do is invest in the solution.”

Without patent rights the free-rider problem is very real. The free rider will always succeed ahead of the pioneer because the free rider can charge less given they didn’t have to invest to innovate. We see this free-rider problem already. With few exceptions large corporations do not innovate, rather they take innovation from others. Sometimes they take innovation legally by acquiring innovative start-up companies, but increasingly given the patent climate in the United States they simply ignore patent rights and do as they please. They are bigger than the companies that innovate; they have access to the streams of commerce.

What can a small innovative company or independent inventor do when a large corporation steals their innovation out from under them? Nothing really. Unless this is fixed pretty soon there will be less innovation to steal because individuals and those small innovative start-ups won’t be able to get funding, which means they won’t be able to innovate in the first place. Making it harder for individuals and start-ups will lead to less innovation because large companies, with only a few exceptions, simply do not innovate.

The false narrative that patents harm innovation has taken root and is grounded on an erroneous definition of innovation. Innovation is doing something new. Through great effort and as the result of winning the linguistic battle, giant corporations have convinced lawmakers that innovation is not about doing something that has never been done before, but instead these copyists argue that innovation is about whether they themselves are able to sell a product that they have never before manufactured or sold. The fact that the product is new to them does not mean the product exhibits even a smidgeon of innovation. In fact, in many cases these allegedly new products are nearly identical to other products and offerings already in the marketplace. Simply stated: It is not innovative to offer something that already exists. This self-evident truth has been lost on, or flat out ignored by, Legislators and Judges.

Patents fulfill their role when they are strong and require those who seek to take a product or service to market to either reward the original innovator, or to engineer around the patent. When patents are weak there is no incentive to engineer around, and likewise no incentive to deal with the original innovator. Thus, a weak patent system guarantees lethargic, nearly static levels of innovation. If we want innovation to leap forward rather than crawl at a snail’s pace a functioning patent system that provides strong patent rights is absolutely required.

Despite what the critics will argue, there is no historical evidence to prove that weak patent rights lead to greater innovation. Absent even a scintilla of evidence that weak patent rights foster innovation those advocating for a weakening of the patent system and the patent grant should be forced to carry a heavy burden. Instead many policy makers and Judges, particularly Supreme Court Judges, seem to place the burden on innovators as if the patent system has had nothing to do with America’s innovative successes.

Samuel Clemens, better known as Mark Twain was an inventor and patent owner. Twain believed strongly in the value of the patent system. In his book, A Connecticut Yankee in King Arthur’s Court, Hank Morgan, the Connecticut Yankee, said “…the very first official thing I did in my administration-and it was on the very first day of it too-was to start a patent office; for I knew that a country without a patent office and good patent laws was just a crab and couldn’t travel anyway but sideways and backwards.” There is historical precedent to back up what Twain writes. In his first State of the Union speech President George Washington implored Congress to enact Patent Laws, which they did as the third Act of Congress. Abraham Lincoln also recognized the importance of a strong patent system, saying that the U.S. patent system was one of the three greatest innovations of all-time. Again, if you disagree with Washington, Lincoln, and Twain shouldn’t your assertions be viewed suspiciously?