Proceed with caution when reforming America’s patent system

Font Size:

America is the world’s innovation engine. The modern world as we know it exists thanks to American innovation. From 100-plus year old inventions such as the airplane, to the internet delivering this article to the newest computer/tablet/smartphone you are reading it on, America’s contribution to global innovation tops the rest of the world put together.

A major part of America’s innovation infrastructure is its powerful patent system, which makes it possible for inventors to profit from their ideas for a fixed period of time before others can freely use the technology. According to a government study, industries that rely heavily on patents contribute $770 billion/year to the American economy and create over 7 million jobs.

The lobbyists for large companies that want to control key technologies themselves while squeezing out smaller players and individual inventors have convinced many members of Congress that there is a problem with “patent trolls” stifling innovation. They find a few small companies that have been attacked by scam artists to make it sound like they are on the side of the “small guy” and “innovation.”

The truth, of course, is much more complicated than the black and white picture painted by lobbyists.

The “patent trolls” that big tech is targeting are “Patent Assertion Entities” (PAEs). PAEs are companies that are specialists in protecting intellectual property. You don’t have to be Google or Apple to come up with a great idea for a smartphone feature. Individual inventors or small companies have developed a lot of exciting technology, sometimes investing every last bit of their savings, and their only protection is patents. But if you’re a small company and Google is stealing your ideas, you don’t have the millions of dollars it can take – or the specialized expertise needed – to sue Google.

Large companies and universities also spend millions on developing and patenting inventions, not all of which they can directly commercialize. So they also turn to PAEs and their specialized expertise for assistance in earning a return on their IP investment.

Big tech is working hard to convince the public that there is something wrong with getting a patent and choosing to make money simply through licensing the patent. Big tech claims there is something morally superior about enforcing patents for products you make.

But the American patent system was specifically designed to encourage invention without production.

When the Founding Fathers were crafting the section of the Constitution dealing with patents they started by looking at what was being done in Britain – and decided it was flawed. In Britain in the 1700s there was a requirement that if you had a patent you had to commercialize it yourself – you had to practice the patent, manufacturing whatever it was that the patent covered. What that meant as a practical matter is that any patent of any industrial value could only be owned by those wealthy enough to set up a factory. The Founding Fathers instead chose to democratize the patent system so that it would be available to all, not just the industrial elite. They consciously took away the requirement to manufacture the product covered by a patent, and enshrined that in the Constitution.  They believed – correctly – that this would unleash a great deal of creativity, to the benefit of society (and inventors and innovation).

We don’t require architects to be general contractors and build the buildings they design; we don’t require songwriters to sing and play their own songs, or to finance and produce a record. Why should an inventor be required to make his or her invention?

There are problems in patent litigation that could be addressed by Congress and/or the White House. We – IPNav, a company that works with patent owners to enforce their patents –  support ten out of 12 White House initiatives for patent reform. We support four out of seven of the major proposed reforms in Congressman Bob Goodlatte’s (R-VA) Innovation Act of 2013. There are “scam artists” who try and squeeze money out of companies on the basis of weak patents or non-existent infringement. Requiring companies filing patent lawsuits to provide more details about the patent and how the defendant is infringing the patent is a good idea – scam artists have been known to file lawsuits without ever having looked to see whether the defendant’s products actually infringe the patent.

But several of the proposals also squarely take aim at patent owners in general (big and small), and as such they would do serious harm to America’s innovation infrastructure. For example, another one of Goodlatte’s proposals calls for attaching companies that finance patent litigation to a lawsuit – which would make them responsible to pick up the tab for the other side’s legal fees if they lose. This proposal makes no sense. If you take out a loan to finance the massive costs of defending your patent, and the lender agrees to take payment out of a future settlement, why should the lender be treated as a party to the lawsuit? This will harm the ability of individual inventors or small companies to protect themselves and enforce their patent rights.  It will reduce the value of their patents in the secondary market, lowering the rewards for innovation.

America has the world’s strongest patent system – some of the proposals floating around Congress would harm the individual inventors and patent owners (small companies and big ones) that always drive new industries in favor of the big tech giants that have forgotten their innovative roots. Too many calls to “stop patent trolls” – such as a recent piece in the Daily Caller, The American Dream depends on patent reform, fail to differentiate between scam artists, who should be stopped, and legitimate PAEs that play a vital role in America’s innovation ecosystem, to say nothing of the broader impact on all patent owners.

The big tech lobbyists often cite a flawed study that claims patent trolls are a $29 billion “tax on innovation.” Even if you accept the number as valid – which we don’t  – the percentage of the $29 billion that is “abusive,”  based on weak patents and/or dubious infringement is small. So we’re talking about a “problem” that is almost certainly less than 1 percent of the value of the contribution of the patent intensive industries. Jeopardizing the innovation engine that drives so much economic benefit for the sake of stopping what is a relatively small problem is a misguided effort. The data being relied on is flawed or non-existent.

The America Invents Act took effect a little over a year ago. It was the largest overhaul of the American patent system in a generation. Before rushing through further patent reform it would make sense to wait and understand the true impact of the AIA. Once laws are put in place there can be unintended consequences. For example, a recent study IPNav has conducted shows that instead of impacting “patent trolls” one of the key changes in the AIA, inter partes review, is being used primarily against operating companies.

Before Congress rushes to do the bidding of the big tech companies behind “patent reform” we encourage it to remember the old maxim: do not throw the baby out with the bathwater. Enact only the reforms that stop scam artists without destroying the greatest innovation economy on the planet.