Patents Shrugged Redux

More than 50 years ago, Ayn Rand graphically illustrated the collapse of an economic system that failed to reward individual initiative. In Atlas Shrugged, innovators are penalized for their creativity, and their rewards are indiscriminately distributed to the worthy and unworthy, leading inevitably to the breakdown of the entire economic system.

The new patent bills being considered by Congress likewise interrupt the economic reward system initiated by the founders of the United States, create new delaying tactics to deny innovators their day in court, and unnecessarily eliminate laws favoring inventors and small companies. If enacted, these patent “reform” bills will wreak havoc on the American inventor community.

Ayn Rand, like Thomas Jefferson and George Washington, recognized the importance of individual effort, including patenting, and the societal benefits accrued by rewarding the creators. The United States Patent & Trademark Office (USPTO) is an innovation foundry where the raw, practical ideas of inventors are forged into legal rights, i.e., an issued patent. Because the USPTO is understaffed and underfunded — causing delays in processing of new applications, appeals and reexaminations — society does not benefit fully from this agency.

Indefinite Stalling

Although the USPTO, under the leadership of David Kappos, has made significant strides in addressing the backlog of initial review of patent applications, there are other proceedings within the USPTO that negatively impact the economic reward system of patenting. In particular, reexamination proceedings, in which the USPTO administratively reexamines an issued patent, are backlogged.

This is a problem because defendants in patent litigations generally invoke reexamination proceedings to have the litigation delayed or “stayed,” pending the USPTO reevaluation. More problematically, defendants can file multiple such proceedings to keep cases bottled up in the USPTO, denying patentees their day in court. Trial judges, already burdened with a plethora of cases, often have no problem deferring a lengthy jury trial involving complicated technologies.

Here, the title of “patent reform” becomes misleading. Sens. Patrick Leahy, D-Vt., and Orrin Hatch, R-Utah, have indicated that the patent system must be reformed to be more “streamlined and efficient.” Who could argue with that? President Obama has also recognized a need for reforming our patent laws, particularly since the last major changes were made in 1952. Yet the patent bills about to be passed into law include several entirely new proceedings to administratively challenge patents issued by the USPTO, without amending any of the abuses of the existing reexamination process.

Under these new laws, patent challengers will be able to invoke so-called opposition proceedings that can indefinitely forestall patentees from having their day in court. It stretches credulity that these new actions available to defendants will streamline procedures or make our patent system more efficient. This situation is particularly acute since the USPTO must hire and train hundreds of new examiners and judges for these new proceedings, amid current and serious budget shortfalls. With the title change from the “Patent Reform Act” to the “America Invents Act,” even George Orwell would cringe.

Another problematic provision in the patent reform bills is the elimination of the American “first to invent” paradigm in favor of a “first to file” system, which is used in the rest of the world. What’s wrong with harmonization? The issue here is that Americans are giving up a protocol in use for more than 220 years merely for the convenience of others. Twenty years ago, during treaty negotiations, the Japanese and other countries were demanding we change to “first to file,” and quid pro quo concessions were discussed for the benefit to Americans. Now, Congress is ready to scuttle these laws for no concessions whatsoever.

There is also concern that the laws proposed may be unnecessarily detrimental to Americans in various instances, and are even considered more preclusive than corresponding European laws. In practice, the small inventor community will face a race to the Patent Office, which naturally favors larger, better-funded companies.

Furthermore, as recently noted by Supreme Court Chief Justice John Roberts, although “much has changed … since the [1790] Patent Act, the basic idea that inventors have the right to patent their inventions has not.” Without a clear advantage to all Americans, there is no reason to make this change. There is also the very real possibility that a switch to first-to-file will generate lawsuits regarding the unconstitutionality of the change.

Maintenance, Yes – Overhaul, No

A key theme in the congressional hearings on patent reform was the creation of jobs. Unfortunately, those hearings did not include very many people from the small inventor community, a departure from past hearings. The deleterious impact of the proposed changes to startup companies and venture money, key sources of the wanted jobs, was thus sidestepped.

The erosion of patent rights in the small inventor community is serious. Equally serious, however, are the concerns of large companies that are subjected to numerous patent litigations for their products. Thus, we should tread very carefully in this delicate arena, and consider the true value of the patent system to the economy as a whole. Innovation comes in many forms, and the rights of all must be balanced for the system to survive, for the economy to flourish, and for jobs to be created in the U.S. instead of being outsourced.

Contrary to the bill’s original title, the patent system is not broken. The system may need some tweaking, but “reform” is a strong word. The USPTO needs adequate funding to ensure that issued patents are valid. The USPTO needs some authority to prevent fee diversion by Congress, eliminating the not-so-hidden innovation tax on patentees.

Indeed, last year, more than US$53 million was so diverted, with almost a billion diverted over the past 25 years. Fully enabling the USPTO to carefully review applications and issue higher-quality patents are laudable goals. Commissioner Kappos has many other programs to streamline the review process and make the agency efficient, thwarted by fee diversions. House Bill 1249 is now being contested regarding Congressional oversight over this effort to cut diversion.

The American patent system is the marvel of the world and is a key component of our success as a nation. As with any operating machine, it must be maintained and adjusted from time to time. The so-called patent reform bills, however, remove critical parts from this machine, threatening its continued operation. Careful and considered opinion is absolutely necessary before we damage this precious resource. As with physicians, Congress should first do no harm.

As stated by Ayn Rand in 1966, where “inventors’ rights are being infringed, eroded, chipped, gnawed, and violated in so many ways, under cover of so many non-objective statutes,” innovators will cease to patent and society will suffer accordingly.

“Those who observe the spectacle of the progressive collapse of patents — the spectacle of mediocrity scrambling to cash-in on the achievements of genius” will understand one of the provocative statements made in Atlas Shrugged: “Why should Reardon be the only one to manufacture Reardon Metal?” Denying Reardon or other innovators the benefit of their valuable ideas or their day in court to enforce their rights will indeed adversely affect the lives of all Americans.