March 19, 2013

The End of Innovation?

A new and unnecessary law restructures the U.S. patent system for the worse.

This past week, patent lawyers were feverishly preparing reams of new patent applications to be filed under the 2011 America Invents Act (AIA), which took effect on March 16, 2013, a year and a half after Congress passed that unwise measure. The AIA replaced the old First-to-Invent standard with a First-Inventor-To-File standard. To the outsider, that shift in legal rules may seem like no big deal. But there are firms to which patent priority is worth many millions of dollars. Under the new paradigm, firms must ensure that they “file as early and as completely as [they] can!

Epstein
Illustration by Barbara Kelley

Structuring a patent system is no easy business, for it requires a delicate balance between two competing imperatives. The first is to give inventors the incentive to create new products; the only reliable device here is the exclusive right to market the product for a limited period of time. The second is to ensure that the invention is disseminated widely, which requires limiting the scope and duration of the inventor’s monopoly. In general, the first function is more important for it incentivizes innovation. After all, it is not possible to widely disseminate inventions that were never made.

In large measure, the huge political fight over the AIA (in which I participated for my client DataTreasury on the losing side) is over the calibration of that balance. The powerful industry coalition in favor of the AIA sought to displace the more property-protective Patent Act of 1952, which the AIA supporters denounced in these harsh terms:

Much-needed reforms to our patent system are long overdue. The last major patent re­form was nearly 60 years ago. Since then, U.S. innovators have developed cell phones and launched the Internet. And yet the laws protecting the technologies of today are stuck in the past.

Our outdated patent system has been a barrier to innovation, unnecessarily delaying American inventors from marketing new products and creating jobs for American workers. It takes over three years to get a patent approved in the U.S. American innovators are forced to wait years before they can hire workers and market their inventions. Meanwhile, our competitors are busy developing new products that expand their businesses and grow their economies. . . . We need a system that ensures patent certainty, approves good patents quickly and weeds out bad patents effectively.

The Leahy-Smith America Invents Act is one of the most significant job creation bills enacted by Congress this year.

This overheated rhetoric cannot withstand any scrutiny.

A Brief History of Patent Law

To see how and why the AIA will flounder, it is useful to understand the history of patent law in the United States.

The creation of a national patent law in the United States virtually coincides with the founding of the country. One of the enumerated powers that the Constitution conferred on Congress is “the power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Congress wasted no time in putting this law into effect with the Patent Act of 1790, which gave to the patentee, for any term not exceeding fourteen years, “the sole and exclusive right and liberty of making, constructing, using and vending to others to be used, the said invention or discovery.” This set a precedent that continued to govern patent law for 225 years. The excellence of American patent law was guided during the first part of the nineteenth century by the unquestioned genius of Joseph Story, a long-time Justice of the United States Supreme Court.

Since Story’s death in 1845, the breadth of patent protection has ebbed and flowed, often in line with the level of respect given to other property rights. Patent rights received, for example, extensive protection during the first third of the twentieth century, at a time when the “old” Supreme Court generally afforded property rights extensive protection. As property protection waned during the New Deal, so too did the Supreme Court chip away at patents. That downward course provoked the passage of the Patent Act of 1952, which reversed that trend.

Unlike the multi-million-dollar lobbying circus that surrounded the passage of the AIA, the Patent Act of 1952 was drafted by a distinguished committee of just two lawyers. The first was Giles Rich, the patent genius of the twentieth century, who later served for 42 years on the two patent courts of the United States. The second was Pasquale Joseph Federico, the chief U.S. patent examiner, with vast patent experience and genuine mathematical achievements. Their joint bill was enacted into law, as is, without debate, by a unanimous vote in both houses of Congress. Why, then, did Congress decide to revamp the entire patent system a year and a half ago?

The first rule of legal reform, like the Hippocratic Oath, is to do no harm. In more colloquial language, “if it ain’t broke, don’t fix it.” The reason for that principle is that change is costly. Before the passage of the AIA, squadrons of patent lawyers had learned how to live with the oddities and intricacies of the 1952 system. That experiential knowledge allowed them to steer clear of dangerous quagmires in preparing new patent applications before the Patent and Trademark Office (PTO), and litigate them knowledgably thereafter.

Unfortunately, the AIA complicates the system. It does not eliminate the need to master the details the 1952 Patent Act. Even if future applications are governed under the new rules, patents filed before March 16, 2013 are still governed by the 1952 Act, which means it will remain relevant for patent litigation for some time. Under the AIA, all patent lawyers must master two complicated legal systems, not just one.

It only makes sense to make this transition if we are confident that the AIA will improve the overall performance of the patent system sufficiently to counterbalance the transition costs. That can’t happen with the AIA. Its length and complexity give two sure signals that, even putting transition costs aside, the new law will prove inferior to the 1952 Patent Act.

Bad Arguments for Legal Reform

The four key arguments put forward by AIA supporters are full of problems.

Job Creation. It is absurd to claim that the AIA legislation is a boon to job creation. Even assuming that the AIA incentivizes new inventions, they will take years to reach the market in bulk. Ironically, the less patent-protective aspects of the legislation will in fact induce more litigation with less finality over the disputed patents.

The new First-Inventor-To-File standard is touted for getting rid of some of the ongoing current disputes under the First-To-Invent standard: For example, does an inventor, who was not the first to file, keep his priority by consistently developing his inventive idea before a competitor files his application?

The First-Inventor-To-File rule, moreover, expands the kinds of “prior art” that a patent opponent can introduce to undermine an asserted patent. Generally, prior art consists of any information disclosed to the public in any form, or any prior practice, that negates the claim that the patent covers new material. Unfortunately, the AIA largely eliminates the older rule that only prior art developed more than one year before the filing date can count against the patent. Thanks to the new uncertainties arising from that one-year grace period, firms are being advised to file as soon as possible lest the patent in question be scooped.

The AIA also contains other nightmarish rules to create special havens for research use or for parties who have made use of a given invention before it was patented by another. These complex rules often turn on private information of the infringer, which is an open invitation to litigation. It is no wonder that the one group that most strongly opposed the AIA was the same group it was supposed to help—individual inventors.

Patent backlog. The second major argument for the AIA is that it will help cure the backlog in patent applications in the PTO in ways that will prevent foreigners from gaining a competitive edge. Wrong on both counts. First, the simplest way to reduce backlog is to keep the current rules and hire more patent examiners. Second, any foreigner who wants to acquire a U.S. patent from the PTO must go through the same hoops as a domestic applicant.

Statutory Obsolescence. Another argument for the AIA is that the 1952 Patent Act is somehow obsolete due to new technological innovations, such as mobile phones and the Internet. That argument gets matters exactly backwards. The innovations of the digital age occurred under the 1952 statute and that law had it right: It asked whether the invention was of a kind that merited patent protection—that is, did it deal “with any new and useful process, machine, manufacture, or composition of matter”? That phrase was understood, in the words of Federico and Rich, to “include anything under the sun that is made by man.”

In Diamond v. Chakrabarty, that formulation allowed for the patenting of oil-eating bacteria, which spurred enormous amounts of innovation. It also gave ample protection to persons who “isolated and purified” various forms of recombinant DNA research. Where then is the built-in obsolescence?

Anticommons and hold ups. One final argument made on behalf of the cumbersome AIA is that it helps combat the so-called problem of the anticommons. That now-standard phrase was introduced to the patent literature by law professors Michael Heller and Rebecca Eisenberg in their famous 1998 article in Science Magazine, which posited that the blocking position of many patents could retard levels of pharmaceutical innovation, and, by implication, innovation in other areas.

The only problem is that this is not true, at least not to any appreciable degree. Patent holders are ingenious, and do not want to be stymied. There have been almost no cases in which worthwhile research was held back by existing patent protections. In 2004, Bruce Kuhlik, now the General Counsel at Merck, and I argued that the economics of pharmaceutical innovation make the occurrence of biomedical anticommons highly unlikely. In later work, F. Scott Kieff, Daniel Spulber, and I (this time for Qualcomm) reached the basic conclusion that standard-setting organizations in high-tech have effectively avoided this same holdup problem.

Just because the AIA is a new piece of legislation does not mean that it is a good or useful piece of legislation. By the time the law is revealed to be the mess that it is, it will become so embedded in the legal order that it will be difficult to uproot it. Be prepared, therefore, to witness yet a further decline in the overall efficiency of the United States patent system, promoted by those whose stated intention was the opposite. Story, Federico, and Rich must be turning in their graves.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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