Technological Innovation and Intellectual Property

The government of Australia is considering overhauling patent laws, after a major report found that the ease with which patents were granted in Australia was hampering innovation. The report, Venturous Australia—Building Strength in Innovation, by a government review panel concluded

…in new areas of patenting such as software and business methods, there is strong evidence that existing intellectual property arrangements are hampering innovation. …The inventive steps required to qualify for patents should be considerable, and the resulting patents must be well-defined, so as to minimise litigation and maximise the scope for subsequent innovation.

We are pleased to note that the evidence mustered to support this conclusion (p. 84) includes this blog’s discussion of “Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry” by Iain Cockburn and Megan MacGarvie and also Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk

We (Bessen and Meurer) received a nice note from Judge Plager letting us know that he cited our book, Patent Failure, in his recent speech where he called for rethinking patent law by returning to its origins in property law.

Judge Plager writes that as a former law professor who taught property law for twenty-five years, he found our general thesis about analyzing patent law from a property law perspective “quite comfortable.” The book argues that many of the key institutional features and much of the economic performance (and many of the problems) of the patent system can be analyzed by treating patents as a property system. In his speech, Judge Plager suggested that this approach might require rethinking the patentability of software and business methods, doctrines of claim construction, patent scope and the doctrine of equivalents.

Judge Plager also pointed out a disagreement he has with us. In the book, we support the view of John Duffy and Craig Nard, who call for multiple appellate courts for patents (see Tim Lee’s recent summary). In a paper with Lynne Pettigrew, Judge Plager argues against this view.

Often, rethinking something is a lot harder than thinking it out in the first place. This is particularly true for judges, whose decisions are published and used as precedent. Indeed, this “path dependence” of the court is one of the concerns that Duffy and Nard raise.

In this light, Judge Plager’s call to rethink patent law is more than a little courageous. And I suspect that the willingness of Judge Plager’s colleagues on the CAFC to join in the project he proposes will shed light on the correctness of Duffy and Nard’s proposal.

A Time to Rethink

Patents as property was also front and center in the thoughts of one judge on the Court of Appeals for the Federal Circuit, the main appellate court for patent disputes in the US. Senior Judge S. Jay Plager, speaking at a symposium at George Mason University, called for a “rethinking” of several aspects of patent law by returning to its origins in property law.

According to the BNA, Plager “called for a renewed focus on setting recognizable patent ownership boundaries and on strengthening the notice function that patents are intended to serve. Such a reevaluation might require a reassessment of whether software and business methods are patentable subject matter, Plager said. It might lead to limiting a patent’s scope to what was known at the time of the application filing, and to an abandonment the doctrine of equivalents as a basis for patent infringement liability.”

In addition to rethinking claim construction,

Plager said he regretted the unintended consequences of the decisions in State Street Bank and AT&T. Those rulings led to a flood of applications for software and business method patents, he noted. If we “rethink the breadth of patentable subject matter,” he said, we should ask whether these categories should be excluded from patent protection.

This new thinking is certainly encouraging. Let’s see how it develops.

Last week’s big news in the patent world was the temporary injunction by Judge Cacheris of the United States District Court for the Eastern District of Virginia preventing the USPTO from implementing its continuation and claim limitation Rules. These rules would have effectively limited the number of claims in a patent application and the number of continuing applications from an original patent application. The court’s decision and its conclusion that “the likelihood of success on the merits factor weighs in favor of GSK” are hardly surprising and seem unexceptional given that the Rules, at least with respect to continuation applications, sought to limit privileges provided by statute, even though the USPTO does not have substantive rule making authority. One does wonder, however, why the USPTO sought to make these changes by rule making rather than by seeking legislation…

The decision was highly popular with the “patent crowd.” The PLI Patent Blog reports that 92.8% of those responding to its poll thought the decision was proper. The poll results, at least as reported on the PLI Patent Blog, do not reveal whether the respondents thought the preliminary injunction was proper because of administrative law principles, i.e., an agency without substantive rule making authority attempting to abridge privileges unconditionally provided by statute, or because they disagreed with the objective of the rules, i.e., to limit unjustified continuing applications and excessive numbers of claims.

This writer suspects it is the latter. And this writer also suspects that many, perhaps most, of the 92.8% are among those who have complained about the quality of patents issued by the USPTO (and proposed to remedy that “problem” by increasing the USPTO’s staff and budget).

There is a strong and unresolvable inconsistency between a concern about patent quality at the USPTO and opposition to limiting or abolishing continuing applications. People concerned about “patent quality” should want the USPTO to be able to obtain final decisions as to the patentability of applications it has examined. But the USPTO will continue to be unable to obtain such final decisions so long as applicants (or their attorneys) can avoid final decisions by refiling their applications. Thus the “patent quality” problem will persist so long as the USPTO remains unable to obtain final decisions as to the patentability of applications it has examined, and can rid itself of persistent applicants only by allowing their applications.

Hopefully the USPTO will change direction, and, rather than persisting in a problematic lawsuit, will seek discrete legislation to abolish all continuing applications except for divisionals filed pursuant to a Sec. 121 Requirement for Restriction, as the writer has proposed elsewhere. (see this) Such continuing applications comprised about 25% of the applications filed in 2006, whereas the proposed Rule would have affected only 2.7% of filed applications, and, thus, even if finally permitted, will have only a negligible effect.

Abolition would, in addition, increase USPTO resources available for the examination of original applications by about 1/3, without any increase in staff or budget, which should further enhance patent quality. And, of perhaps even greater importance, abolition would eliminate the abuses made possible by continuing applications that were identified by Professor Lemley and Judge Moore in their Boston University Law Review article (84 BU Law Review 63).

Such discrete legislation to abolish continuing applications, uncoupled from the patent reform morass presently in the Congress, would enable (force?) the “patent crowd” to face their contradiction and decide whether to resolve the inconsistency in favor of patent quality (and innovation), or in favor of their own convenience.

–Cecil Quillen

Friday I heard a talk by Brad Smith, Senior Vice President and General Counsel of Microsoft. He compared the recent problems of the US patent system to those during the period from 1865 to 1885, when patent “sharks” threatened farmers and railroads. There was rising discontent with the patent system and a push for legislative reform (some other countries actually abolished their patent systems during this period). But in the end, in the US, it was the courts, notably the Supreme Court, that changed the patent system then.

Brad argues that history is repeating. The Supreme Court has already fixed most of what Microsoft felt was wrong, including legal treatment of injunctions, non-obviousness, willfulness, and foreign patenting. Apparently, some other IT firms feel they have gotten much of what they were asking for. This has prompted Bob Armitage, General Counsel at Eli Lilly, to ask “Now That the Courts Have Beaten Congress to the Punch, Why Is Congress Still Punching the Patent System?”

Of course, what the IT firms asked for and what they really need might be two different things. It will be interesting to see how this plays out. Shortly after 1885, the patent system went into a nearly century-long decline in importance–the number of patents granted per capita decline until 1984, when the rate reversed and began rising sharply (see figure). Will 2007 mark the start of a similar decline in patenting rates and, more importantly, in litigation rates?

The initial indications do not seem to support the analogy. Patent application rates continue to rise despite these changes and despite a growing backlog at the patent office. And although litigation rates may have leveled off (see US Patent Lawsuits Increase Again), there is no evidence of a decline yet.

Indeed, Brad reported that after several years of defending 30-odd patent lawsuits each year, Microsoft is now defending over 50 lawsuits. Time will tell whether recent trends have reversed and these will indicate whether the problems of the patent system have indeed been fixed.

–Jim Bessen

Why, F. M Scherer asks, was there “an extensive tilt toward strengthened patent laws…during the 1980s and 1990s, even as economic research was revealing that patents played a relatively unimportant incentive role in most large companies’ research and development investment decisions”?

In a groundbreaking paper, “The Political Economy of Patent Policy Reform in the United States,” Mike Scherer tells the story of the interplay between political interests, policy and economics research over the last two decades, including the Bayh-Dole Act, the Hatch-Waxman Act, the creation of the Court of Appeals for the Federal Circuit and the role of US in TRIPs negotiations.

In a review of this paper, Robert M. Hunt and Cecil Quillen write, “Professor Scherer presents a historical perspective that rarely appears in this literature. The paper is worth reading simply for its references because they remind us how much empirical research on the effects of patent policy has been forgotten by contemporary scholars…”

We are pleased to bring our readers both this important paper and the review.