Patents Pending: Patent Reform for the Innovation Economy

For most Americans, knowledge of the U.S. patent system is limited to seeing the words "patent pending" on the back of a product or reading in the morning paper that their BlackBerry might stop working due to a patent lawsuit. Notwithstanding its opacity, the U.S. patent system provides key economic incentives that spur innovation by giving patent owners a temporary property right to their inventions while at the same time requiring them to disclose their patents to the public. Yet it is cases like the Network Technology Partners (NTP) lawsuit against Research in Motion (RIM-the maker of the BlackBerry) that have brought the patent system's deficiencies into the public eye. It suffers from three key problems.

First, the U.S. patent system is rife with delay. With over 700,000 pending patent applications in the U.S. Patent and Trademark Office (PTO), it can take 4 years to get a patent. As demand for patents has increased, resources at the PTO have not kept up.

Second, as the RIM case and countless others illustrate, the PTO has issued too many poor quality patents. Lack of sufficient PTO resources has contributed to patent examiners granting questionable patents that are overly broad and overlap with existing patents. Examiners have no more time to review patent applications than they had in the 1970s, even though the technology being patented is much more complex.

Questionable patents contribute to the third problem-the dramatic increase in patent litigation and awards, which impose a significant tax on the U.S. innovation system. Patent litigation increased 120 percent between 1990 and 2005 (while civil litigation in general rose just 5 percent). At the same time, damage awards have grown, providing windfalls to some patent holders at the expense of consumers who must pay higher prices for goods and services. For example, RIM felt compelled to settle with NTP for $612 million, despite the fact that many experts believe NTP's patents are invalid. If RIM had passed its settlement fees to the 7 million Blackberry users, each user would have paid a surcharge of nearly $90.

Addressing these problems does not require wholesale change in the U.S. patent system. In many respects it has significant strengths. Moreover, the PTO has been making strides to improve the system, including increasing hiring, patent examiner pay, and training, as well as encouraging applicants to provide more information about previous inventions (called "prior art").

Notwithstanding these changes, reforms to the patent system are needed. Senators Patrick Leahy (D-VT) and Orrin Hatch (R-UT), and Representatives Howard Berman (D-CA) and Lamar Smith (R-TX) introduced "The Patent Reform Act of 2007" (S. 1145 and H.R. 1908) that would provide significant needed reforms.

Additionally, the Information Technology and Innovation Foundation (ITIF) proposes certain targeted reforms-some of which are in the current legislation and some are not-that can make the U.S. patent system even better and in so doing enable the U.S. innovation system to be more effective. The ITIF's recommendations in this paper are not meant to be a comprehensive treatise on patent reform. Rather they focus on two key areas we think deserve particular attention: those that will improve pre-grant activity at the PTO and those that influence post-grant review in the Courts. To do that:

Congress should facilitate improvements in pre-grant activity at the PTO by:

• Statutorily ending the diversion of patent fees to the U.S. Treasury,
• Giving the PTO regulatory authority to raise fees,
• Requiring third parties submitting prior art to include statements of relevance, and
• Creating a post-grant opposition process to be conducted by the PTO.

Congress' actions will enable the PTO to improve the pre-grant process by:

• Hiring significantly more patent examiners to reduce the backlog,
• Giving patent examiners more time to examine complex applications,
• Giving applicants incentives to provide more relevant prior art statements, and
• Encouraging public participation in reducing questionable patents.

In addition, to reduce litigation in the post-grant process, legislation should:

• Require plaintiffs to provide clear and convincing evidence that defendants acted "reprehensibly" in order to show willful infringement,
• Require the courts to apply a reasonable royalty only to the economic value of the patent's contribution over the prior art and not on the entire market value of the infringing product,
• Require patent owners to file cases in the district where the defendant has committed acts of infringement and has a regular place of business, and
• Change the law to "first to file" and apply the 18-month publication requirement to all applications.

Innovation is a key driver of U.S. economic growth and patents are an enabler of innovation. While the U.S. patent system is not broken, it is out of balance. These reforms will restore the patent system's balance and increase innovation. They will significantly reduce the application backlog, help patent examiners to screen out poor quality patents, and reduce excessive litigation and damages, which will in turn enable companies to better innovate and create new products and services and the high wage U.S. jobs that support them.