The Problem With Patents

I've written about copyrights and argued that the copyright system is broken. By that I mean that it is not serving the purpose for which it was designed, it is more harmful than helpful.

For contrast, I don't think the patent system is broken. It is just seriously messed up, and needs some massive overhauling. Not as bad as a copyright system that allows enforcement of over 100 years - do we really need to protect stuff for that long to get people to invent???

I don't know how to fix copyrights, other than drastically decrease the length of a copyright, perhaps require a fee of $1 every 5 years to get rid of the 'orphaned works' problem. I do have better ideas on how to fix the patent system. They'll be at the end, after I try to convince you that it needs fixing of course.

What is a patent supposed to be?

A patent is supposed to be a well defined property right that gives an owner (not necessarily inventor) a monopoly, or significant competitive advantage, on a device. It should be clear what the patent covers, enforceable, innovative and temporary.

Why give monopoly power?

Innovation has positive externalities. Meaning it benefits more than just the creator. A negative externality means that it is under-produced. To get around this problem, we give away temporary monopolies so that creators capture more (not all) of the benefits they produce for others. The temporary monopoly with the new invention makes people better off than not having the invention would.

The trade off is that the workings of the invention must be public. Any expert in the field should be able to use your patent application to recreate your invention. That way, when the invention falls into the public domain, everyone may benefit. This is why the government offers patents.

What are patents currently?

Patents today are the right to TRY to exclude others from using a property right granted exclusively to you. They are not often innovative (prior art issues)¹, often held invalid and most of the time not very well defined.

Why do we care?

This is actually a great question to always ask. So patents aren't doing what they were designed to do. So what? I argue there are many problems. Patents are designed to incent innovation. They may in fact discourage it (as we'll see later). Legitimate patents may be invalidated and the uncertainty with not knowing the validity of a patent has negative externalities (so it causes harm to many, so we have too much of it). Patents may deter entry into markets, so monopolies can be extended. Patents may harm consumer welfare. All these things are bad.

Why are we so far off?

In brief, because of a poor incentive system. It was designed just fine, but some problems crept up, weren't fixed and it has gotten worse. Don't believe me? Here are some statistics. In the United States there are 350,000 patents filed each year, and 200,000 accepted. That isn't to say that 150,000 are rejected, there is a backlog of about 750,000 patents as of 2004. Does anyone think there is that much innovation going on in the United States?

Over-Patenting

One of the biggest problems is over patenting. As the previous statistics should show, we are filing and receiving way too many patents. I don't know what the right number is, but we'll see that 350,000 a year must be too high.

Over patenting is bad for a lot of reasons. Worthless patents swamp valuable ones in the examination process. Which patents are worth carefully examining? Patents on non-innovative ideas are terribly harmful to competition. The value of a patent (and enforceability) is diluted with frivolous patents.

Problems with Filing a Patent

Because patents are first come first receive, there is the incentive to file early to beat out competitors. Many patents are filed just in case a discovery turns out to matter in the future. If the inventor (usually a firm) doesn't know the value of a patent, there really is no way the PTO can know.

The PTO bears the burden of proof. Meaning your application is considered valid until proven invalid. Patents are relatively inexpensive to file for (the fees differ on a number of factors) but since the PTO spends an average of 18 hours on each patent, they are relatively expensive to handle for the PTO. So when the PTO cuts costs, they examine patents less thoroughly. In addition, rejections are easily appealed and may be appealed indefinitely.

So many ridiculous patents have been accepted,² that many patents are not filed with a serious expectation of being accepted, but more so “on the chance.”

Problems with Acceptance

Patents are accepted too often. The problem with over acceptance is that invalid and non-innovative patents are granted. These can be very dangerous to existing/potential businesses. They harm competition and thus consumers unnecessarily.³

Many things are causing this problem. First, there is a high examiner turnover first of all. If you are a good patent lawyer, would you rather work for the government or a private firm for triple the pay? Government patent lawyers are overworked and underpaid. Is there any wonder the experienced lawyers go to private firms? This is bad because it leaves the bad patent lawyers determining the validity of patents written by good patent lawyers.

Even if the PTO can keep it's good patent lawyers in existing areas, they will always have a lack of specialty in new areas. The PTO sorts and distributes the patents according to specialty, but if an invention is really innovative, it is new by definition. Thus it is hard for the PTO to maintain experts in each rapidly developing field.

Perverse incentives push PTO attorneys to accept patents too readily. Since the burden is on the PTO to find prior art, determine inventiveness, and determine validity, it is easier to accept a patent than challenge it. The vast backlog of patents puts pressure on PTO attorneys to work quickly, not carefully, as well.

Uncertainty Causes Overpatenting

Because no one is exactly sure what will hold up under litigation, many firms take the 'shotgun' approach, of filing for everything on a device. So if I build a new machine, and I'm not sure what I can really get a patent on, I may try try to patent all it's parts. If 10 of my 20 applications are turned down, I still have 10 covering my invention. And if 9 of my 10 patents are declared invalid, I can still hold a monopoly on my invention. But if I only file a single patent for my invention, and it is declared invalid or my application is turned down, I'm up a creek without a paddle!

Strategic patents are problematic - defensive patents and offensive patents. This is what a defensive patent is: if I am afraid someone will patent a practice I am already using (a reasonable fear), even if the idea is non-innovative, I may file a patent to protect myself from a potential lawsuit. An offensive patent is just the opposite: if I know a firm is using an unpatented process (no matter how obvious and trivial it is) I may try to patent it and earn royalties from licensing it. Both lead to overpatenting, legal complexity and greater uncertainty.

The scope of a patent is problematic as well. The “doctrine of equivalents” states that patents also cover 'equivalent' inventions. This adds to legal uncertainty, is a workaround and equivalent? Is a competing platform/standard/invention equivalent? Just as bad, an applicant can add to the scope of his patent after they have filed. So if a related technology develops, anyone could amend a current patent application to cover the new technology. This way their patent would be ahead of the true inventor in the patent queue.

Since mankind continues to push into new frontiers of knowledge, the PTO has been right behind offering patents. So if a certain technology (ie software) isn't patentable now, it might be by the time the PTO gets to your application.

95% of patents are never licensed, litigated or produced. That means that 95% of patents are completely worthless. Since inventors can't always tell if an invention is valuable it is better to file than not to file.

One issue that has been resolved is what was called “submarine patents.” This was the practice that allowed for 'secret' patents to be filed. This was previously allowed so that a larger competitor couldn't develop a competing idea and obsolete your idea before the patent could be granted. The real effect was that anyone could file a secret patent so no one would know what it covered. After a firm had implemented a certain technology using the secret patent, the patent holder could pull out the secret patent and hold the firm ransom for royalties., even though there was no way the firm could have known about the patent. Even more deviously, a patent holder could file a secret patent, and amend it (or add to the scope) secretly to cover a new idea the inventor hadn't thought of. This policy was done away with in the late 90s.

Firm Incentives causing overpatenting

Firms have the incentive to hold a lot of patents. Valuable or not, IBM holding 3 trillion patents is pretty daunting. With these patents, IBM can keep out entrants, signal value to investors, boost company value and gain bargaining leverage. None of these goals have anything to do with the purpose of patents.

Litigation causing over patenting

I know this is blasphemous, but I claim there isn't enough litigation over patents. How about this – only 1.5% of all patents are litigated, and only .1% are litigated to trial. This is far too little.

We know it is too little because of positive externalities associated with litigation. Invalidating a patent benefits everyone, not just the firm that sues for the invalidation. Clarity in validity also benefits others. So there is a free riding problem with litigation (especially since it is so costly).

Lets say I hold a patent on tennis shoes and I make a million dollars a day on that patent. If a new upstart shoe maker named Nike sues me over the patent, how much would I be willing to spend to defend the patent? $999,999 a day. How much would Nike be willing to spend to invalidate the patent? Invalidating the patent doesn't give Nike a monopoly, so assuming in a competitive model there are no (or lower than monopoly) profits, Nike would be willing to spend less than me. Thus it is probably in their best interests to just license a completely ludicrous patent.

Not only is this litigation costly, but anyone found infringing on a patent in court pays TRIPLE the claimed damages! That is high stakes in deed. To add to this problem, the alleged infringer bears the burden of proof, that the patent is invalid or that they didn't violate the patent. The wording is “clear and convincing evidence.” that is strong wording. So it shouldn't be surprising to find that 95% of all defendants settle without going to court.

Current Workarounds

Currently, the only common practice that alleviates some of the problems is a system of patent exchanges. Microsoft, IBM, Sun and a few other firms swap patent immunity. IBM won't sue Microsoft, Sun won't sue IBM. This helps large firms quite a bit, but it favors large incumbents and makes it difficult for startups to compete with these firms. If I develop the perfect operating system, odds are it treads on some existing patents, lets say IBM holds them. If I wanted to license them, I'd have to get IBM to agree. How much should IBM license them for? $1 less than the profits I will make by having the patents. What if I need a patent from Microsoft and IBM and they both demand $1 less than my potential profits? This is called the double marginalization problem.

Potential Reforms

Have I convinced you the patent system is messed up? I hope so.

Reforms may be grouped into two main ideas: weaken existing patents, or strengthen them. Weakening patents would make invalidation easier, that way the PTO could continue to accept and approve as many patents as they currently do. Only the truly inventive and valuable patents will stand court scrutiny. Exactly opposite, strengthening patents would make it harder to recieve a patent, but any patent granted this way would stand better to court scrutiny.

Weakening Patents

Weakening patents is best done through legislative reforms. Lowering the burden of proof for invalidating patents. Shifting the burden to the patent holder is probably too strong a move, but rewording "clear and convincing evidence" to "a preponderance of clear evidence" might be a good start. Sounds legal too!

The goal is to provide clarity about the validity of patents, by invalidating stupid patents. One way to encourage litigation More importantly, litigation costs must be lowered. The 3x payout for "willful infingement" must go. We can't legslate lawyer fees, but we can speed up the litigation process. The "doctrine of equivalents" must go, it provides only uncertainty.

A good way to produce more clarifying litigation is to create incentives to litigate. One idea (which I think is a bad one) is to allow the government to challenge patents. A better idea is to offer a bounty on invalidated patents. One problem with the bounty idea is that mostly worthless patents would be invalidated this way, but if you limited the bounty to licensed patents, you could eliminate a lot of this problem. The bounty could be granting the patent to the challenger for a few years, or a flat rate payment. Lastly, there are public interest groups already doing great work towards this end (such as the EFF and Public Patent Foundation), by funding them with incentives or grants we could improve the situation.

Another way to provide clarity is to force firms to litigation. By capping the dollar value of "settling," firms my opt for a court remedy rather than an out of court secret agreement. Limiting settling and other forms of collusion makes more information public, which can benefit more people.

Strengthening Patents

If we were to strengthen patents, we would have to make the acceptance process far more rigorous. Improving the review process is easy, but costly. Ideas include hiring more examiners (and paying them better) and opening patent applications up to third party opposition. The third party opposition would allow those who would be potentially hurt by a bad patent to challenge it before it is granted. This would reduce the USPTO's costs, but since it benefits more than just the challenger, there will be a freerider problem. Regardless of this problem, third party challenges can only make things better.

Another idea is to focus PTO attorneys on more the valuable patents. There are a number of ways to do this. First is by raising application costs. Increased fees are one way, but a more clever way is to require the inventor to find all instances of prior art, and condition the validity of thier patent on the thoroughness of thier search. Even more drastically, we could shift the burden of proof from the PTO attorney to the inventor. Which makes sense, forcing the inventor to prove why thier invention deserves a patent.

Focus can also be attained through statistical methods. Valuable patents have certain characteristics more frequently than non-valuable patents. Certain fields for example are more lucrative than others. The length of the list of prior art and the number of claims made are also postively statistically related to the value of the patent.

A Mixture?

As in most things, a mixture of both is probably best. One additional idea encompasses a bit of both ideas. That is the superpatent.

A superpatent would be a stronger patent. Meaning it would hold up better legally (increased presumption of validity). It would also go through a more stringent acceptance process. A superpatent would be a new type of patent, and inventors could choose if they wanted a normal patent or a superpatent. Normal patents would be relatively weaker, while a stronger option would be available to those who are certain they have created something truly innovative.

This would sort commercially viable (and inventive) patents from frivolous ones. True inventors would get better legal protection, silly patents would be weaker, and no one is forced to do anything they don't want to. This seems like the best option to me.

1Prior art is an instance of someone creating/using your 'invention' before you 'invented' it.

2Examples of such are: Crustless PB&J, Double Clicking, Online Histories, Perpetual Motion Machines, and Hierarchical Displays.

3By definition, all patents harm competition. Sometimes they kill it. We want to prevent this when there is no offsetting benefit.