[A2k] Adam Jaffe and Josh Lerner in the Wall Street Journal (March 21, 2006): Innovation and Its Discontents

[Thiru Balasubramaniam]

http://online.wsj.com/article/SB114290663621603691.html

Innovation and Its Discontents

By *ADAM JAFFE * and *JOSH LERNER*
March 21, 2006; Page A14

The problems of the U.S. patent system are under discussion today with
an urgency not seen in decades. The Supreme Court will soon hear oral
arguments in /eBay v. MercExchange LLC/, which promises to be its most
far-reaching examination of patent law in many years. Today the court
will also consider /LabCorp v. Metabolite Laboratories/ -- the contested
matter is whether a patent can be issued for the correlation between a
disease and a naturally occurring substance in the human body. That is:
Can you actually patent the laws of nature? And shockingly, Research in
Motion has been forced to pay $612 million to prevent all of our
BlackBerry handhelds from going dark, even though the U.S. Patent and
Trademark Office (USPTO) has indicated that it is likely to find all of
the patents behind this ransom demand invalid. Congressional
subcommittees, with good reason, have recently held hearings asking
fundamental questions about developments like these in the patent system.

The importance of this long-overdue focus on patents cannot be
overemphasized. The past decade has seen periodic uproars over
particular patents, such as Amazon's "one click" patent for online
shopping. The troubling patents have been well publicized, but the wrong
lessons have typically been drawn. Commentators have tended to focus on
the incompetence of the USPTO in allowing "bad patents." Others have
concluded that the patent system is not working with respect to a
particular area of technology. Concerns about software awards led, for
instance, Jeff Bezos of Amazon to propose a new patent type for
software; others have suggested that biotechnology be excluded in
various ways from the patent regime.

We believe, instead, that the problems with the patent system are
systemic and fundamental, the result of two congressional changes to the
patent system. At the time they were described as administrative and
procedural rather than substantive; but taken together they have
resulted in the most profound changes in U.S. patent policy and practice
since 1836. One set of changes has made it easier to enforce patents,
easier to get large financial awards from such enforcement, and harder
for those accused of infringing patents to challenge the patents'
validity; another set of changes has made patents much easier to get.
The combination has created a perfect storm: a complex and intensifying
combination of factors that increasingly makes the patent system a
hindrance rather than a spur to innovation.


      * * *

Congress set us on this road in 1982 when it created a centralized
appellate court for patent cases, the Court of Appeals for the Federal
Circuit. Its decisions -- which advocates argued would simply ensure
judicial consistency -- are largely responsible for the significant
strengthening of the legal potency of patents. Then, a decade later,
Congress turned the USPTO into a "profit center." The office has been
pushed to return "excess" revenue to the U.S. Treasury. This shift led
to pressures to grant more patents, difficulties in attracting and
retaining skilled examiners, and a torrent of low-quality patent grants.
These include such absurdities as patents on wristwatches (paw-watches?)
for dogs, a method of swinging on a swing ("invented" by a
five-year-old), and peanut butter and jelly sandwiches. But they also
include the patents on broad ideas related to mobile email -- virtually
devoid of any details of implementation -- that have imposed a $612
million tax on the maker and users of BlackBerries.

The combination of making patents easier to get and simultaneously more
potent when enforced has led to an explosion in patent litigation.
Holders of dubious patents -- be they established firms or "trolls"
whose only business is patent enforcement -- routinely threaten firms
that sell valuable products with shutdown based on alleged patent
infringement. Even if the target firm believes that it does not
infringe, or that the patents at the basis of the claim are invalid, the
cost and risk of proving this in court may be too high. Innovators may
choose simply to drop the allegedly offending product, or to settle and
pay ransom rather than fight. This is not a problem confined to any
single industry. Even in industries where patents have been
traditionally rare, such as financial services, patent filings and
litigation are exploding. Financial patents are being litigated at more
than 10 times the rate of awards more generally.

It might be tempting to view patent law as just another area where
litigation has spun out of control. But there is more at work here than
a general increase in litigation; and its effects are particularly
worrisome, because a faulty patent system can have profound impact on
the overall process of innovation. The hugely successful BlackBerry may
be able to bear an enormous "innovation tax" and still succeed, but
other valuable but not-quite-blockbuster innovations may be driven from
the market entirely.

The continued advancement of commercial technology is the basis for the
long-term ability of our society to continuously improve our lives -- to
promote health and longevity, protect and clean up the environment, and
secure our safety against terrorism and other external threats. For all
its deficiencies and periodic stumbles, our free-enterprise system has
demonstrated a unique ability to generate new technology: Industrialized
economies have increased their economic productivity more in the last
two centuries than in all the millennia of previous human history. The
basis for this advance is the pursuit of profit, which forces firms to
innovate. But the profit-based incentive to innovate depends
fundamentally on the institutions governing ownership of the fruits of
innovation. Specifically, taking new ideas from the notebook to the
market often requires huge investments in research and development. This
is an inherently risky process, and risk is the enemy of investment.

The legal protection patents provide is supposed to mitigate the risks
of these investments, but the flood of dubious patents that nonetheless
have amplified legal force is increasing rather than mitigating the
risks associated with investments in innovation. While we have not yet
killed the geese that lay the golden eggs, we are increasingly hindering
and distracting the people and firms that must breed, feed and care for
the geese. If we continue on this course, it is inevitable that their
output will decline.


      * * *

We believe that the incentives of the existing system induce all
participants -- inventors, competitors and potential litigators -- to
invest in abusing the system rather than innovating. Reform of the
system must change these incentives by (1) changing the USPTO review
process so that the determination of whether a patent application is
really new is made with as much information as practical about what
related technology is already out there; and (2) leveling the playing
field between litigants so frivolous patent holders cannot intimidate
true innovators into paying protection money.

Our proposed reforms start with the recognition that much of the
information needed to decide if a given application should be approved
is in the hands of competitors of the applicant, rather than the USPTO.
A review process with multiple levels efficiently balances the need to
bring in outside information with the reality that most patents are
unimportant. Multilevel review -- with barriers to invoking review
increasing at higher levels, along with the review's thoroughness --
would naturally focus attention on the most potentially important
applications. Most patents would never receive anything other than the
most basic examinations. But for those applications that really
mattered, parties would have an incentive and opportunities to bring
information in their possession before the USPTO, and the USPTO would
have more resources to help it make the right decision. (Changes in this
direction are at the heart of the patent reform bill currently under
consideration in the House Subcommittee on Courts, the Internet and
Intellectual Property.)

If bad patents with important consequences were weeded out by the USPTO,
the incentive to file frivolous applications in the first place would be
reduced. This would break the current self-stoking cycle in which
inventors are induced to make marginal applications by their likelihood
of success, and the resulting flood of applications overwhelms the
patent office and makes it harder to separate the wheat from the chaff.

Breaking the vicious cycle of bad examination and bad applications is
the key to reform of the patent review process. But there are always
going to be mistakes, and so it is important that the court system
operate efficiently to rectify those mistakes, while protecting holders
of valid patents. Today, the legal playing field is significantly tilted
in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a
patent case can be highly technical, and the average juror has little
competence to evaluate it. Having decisions made by people who can't
really understand the evidence increases the uncertainty surrounding the
outcome. The combination of this uncertainty with the legal presumption
of validity -- the rule that patents must be presumed legitimate unless
proven otherwise -- is a big reason why accused infringers often settle
rather than fight even when they think they are right.

The right to a jury of one's peers is a venerated concept in
Anglo-American law. But there is ample scope for judges to use pretrial
rulings and reports of special "masters" commissioned by the court to
resolve more of the most technical issues that determine the outcome of
patent litigation. While litigation will always be uncertain, it has to
be structured so that complex technical issues are addressed in a way
designed to elucidate rather than obscure.

The protection for true innovators created by a workable patent system
is vital to technological change and economic growth. The problems in
the existing patent system are structural, and the fundamental solutions
need to be structural as well. As much as the USPTO needs to do a better
job, it can only do so if the system is modified so that all parties
have incentives to help with the job, and the courts provide a reliable
backstop when mistakes are made.

/*Mr. Jaffe is professor of economics and dean of arts and sciences at
Brandeis University. Mr. Lerner is Jacob Schiff Professor of Investment
Banking at Harvard Business School. They are the authors of "Innovation
and Its Discontents: How Our Broken Patent System Is Endangering
Innovation and Progress, and What to Do About It" (Princeton, 2004).*/