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Patents: Getting More Than You Paid For

Is PTO an expert government agency in the same sense as other agencies? And what are the consequences of deferring to patent examiners?
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On June 9, the Supreme Court decided Microsoft v. i4i, upholding the Federal Circuit's rule that "clear and convincing evidence" is needed to invalidate patents in court. A preponderance of the evidence, the usual standard in civil cases, is not enough. Yet the patent examiner cannot be summoned to testify, and his or her credentials cannot be questioned. Moreover, the language in the Patent Act offers no hint of this special deference to the examiner's decision to grant the patent.

Is PTO an expert government agency in the same sense as other agencies? And what are the consequences of deferring to patent examiners?

As of this writing, there are 135 regulatory actions under review at OMB's Office of Information and Regulatory Affairs. However, there are 1.2 million patent applications pending at the USPTO, including 700,000 awaiting the first office action (the official "backlog").

These patent applications are proposals to regulate innovation within the area outlined in the claims. A granted patent is a franchise to regulate, tax or ban the particular function or product outright. When patents were limited to specific technology, this was no big thing. However, in 1998 in an extraordinary burst of judicial activism, the special appeals court for patents, the Court of Appeals for the Federal Circuit, eliminated the rule against patents on methods of doing business. The floodgates opened to a nearly infinite range of activity cutting across technologies, industries and markets -- and extending to services, marketing strategies, business models and methods of regulatory and legal compliance.

Yes, that's right; patents can regulate how people comply with government regulation. And in the current patent reform legislation, Congress has only cut back on one particular egregious problem, the patenting of tax strategies.

Ironically, Justice Sotomayor's opinion in Microsoft v. i4i exalts Congressional inaction to new heights. In 2003, after extensive hearings on the effects of patents on competition, the Federal Trade Commission concluded, "A plethora of presumptions and procedures tip the scales in favor of the ultimate issuance of a patent, once an application is filed."

Yet the Supreme Court concluded that because Congress had failed to act in spite of the FTC's recommendation, it had acquiesced in the rule.

But with plenty of controversy over patent reform as it is, Congress hardly wants to pick another fight with tens of thousands of patent owners, whose patents are more valuable than they deserve to be. The Federal Circuit had already created a massive constituency against any possible rollback of the gold-plated presumption.

Just How "Expert" Is The Patent And Trademark Office?

So with nearly 10,000 times as many proposals to regulate innovation as there are proposed regulations before OMB's OIRA, how are they handled? By rigorous expert scrutiny? By public hearings with ample opportunity for comment? With a cost-benefit review by OMB?

"None of the above" is correct. Under the statute, the applicant is entitled to a patent, unless the examiner can show otherwise. At the same time, the internal incentive system rewards the examiner for granting patents rather than continuing to contest the application.

The examination is strictly private. While most patent applications are published after 18 months, there is no opportunity for anyone other than the patent applicant to participate in the process. The examiner need only have a bachelor's degree in science or technology, and the degree need not be matched to the patent application. (In the case of a very junior examiner, a "secondary examiner" may be identified on the patent.) The examiner will spend an average of 17 to 18 hours on the patent -- and facing a patent attorney billing at hundreds of dollars per hour. The cost in legal fees for an attorney to prosecute a patent application of minimal complexity was reported to average $7,879 in 2008.

PTO fees up through examination (filing, search and examination) total $1,100 -- and half that for small entities. As shown in a GAO study, the patent examination actually costs the PTO twice as much, but it is heavily subsidized by issuance and maintenance fees that come only if the patent is granted. So unless it issues enough patents, the agency cannot recover the costs of examination!

Questionable Patents: Cheap, Powerful And Plentiful

Cheap patents with a high presumption of validity naturally build demand for more marginal or questionable patents. Inflated demand adds in turn to the immense backlog of patents at the PTO, as well as threats and litigation at the back end.

Strong patents on real inventions don't need an artificial presumption of validity. The problem is the hundreds of thousands of marginal and questionable patents regularly released into commerce. These are the patents that muddy the system making it impossibly costly to know who owns what, especially for complex products. The revenue model simply pushes real costs onto the private sector, where the costs of patent litigation can easily amount to millions of dollars per side. Of course, from the perspective of law firms, the costs take the form of income, and from the perspective of patent departments, it means a growing budget.

Unfortunately, much of the mainstream press saw the case as a David v. Goliath story. While Microsoft may not be the most sympathetic defendant, especially given its growing string of patent assertions, this rule helps patent thugs and opportunists of all kinds. It helps patent specialists browbeat website owners who have no idea that they are infringing some of the breathtakingly broad patents that emerge from the U.S. Patent and Trademark Office. See "Under the Radar: Two Tales from the Secret Life of Patents." Small companies asserting patents can get help from lawyers on a contingency basis, but small companies lack the resources to evaluate, let alone defend against patent assertions. For them, the enhanced presumption of validity is one more reason to capitulate quickly.

Who Fixes The System?

The Court could have affirmed that the statute means no more than it says -- an ordinary presumption of validity. Congress can only change the law prospectively, or it will face claims from owners of marginal patents that their property rights are being taken away. Even prospective change confronts the constituencies (law firms, patent departments, brokers and licensing companies) that have built a business around cheap but powerful patents.

The Supreme Court can say that the Federal Circuit is wrong without putting judicial jobs or the federal treasury in jeopardy. It did so when it struck down the Federal Circuit's rule giving automatic injunctive relief whenever patent infringement was found. There, too, the Federal Circuit had grafted its own rule onto a simple statute. There, too, Congress had failed to act to change the rule, but its inaction had not been highlighted by an FTC recommendation to act!

Companies and academic experts concerned about the mismatch between the examination process and the presumption of validity had hoped that the Supreme Court would again resolve the issue with some attention to underlying merits. It did not. So there will be more patents, more threats, more legal action -- and less real innovation as real innovators find their efforts diluted and jeopardized by swarms of deficient but gold-plated patents.