'Innovation Economy' depends on healthy patent system

By Paul R. Michel
Everyone understands that the American economy depends heavily on invention — that is why it is referred to as the "Innovation Economy." Invention and innovation, in turn, depend critically on adequate incentives to invest, because most invention is very risky and very expensive. A well-functioning patent system then is essential to securing such investments, both of company revenues and outside funding from venture capitalists, private equity firms, pension funds, commercial banks and other like sources. But, money managers in both worlds have many alternatives other than innovation.

So, if risks are lower and rewards higher in other countries or in other endeavors -- such as entertainment -- that is where the money will flow. The primary basis for most investment in useful innovation is the return on investment (ROI) assured by enforceable patents. The health of the American patent system is therefore of high national importance. On it depends the sufficiency of incentives to make the necessary investments.

With sufficient incentives, our country will see the following effects: Economic growth, creation of net new jobs (at good salaries), productivity increases , enhanced global competitiveness, increased family and individual incomes, increased tax revenues to support crucial upgrades in citizen welfare and physical infrastructure, technological leadership, and economic and national security.

We have seen all these effects in recent decades under a healthy patent system. What about at present?

Well, in just the past three to four years the patent world has been turned upside down. The combination of how the Patent and Trademark Office's Patent Trial and Appeal Board shaped and implemented procedures governing the AIA (America Invents Act) reviews, unintended consequences of a few design feature in the AIA itself, continuing, aggressive interventions by the Supreme Court, particularly on eligibility, and rules and practice changes in the lower courts has totally changed perceptions of the current patent system. It is no longer viewed as reliable.

Patent values have plummeted, by as much as 60% according to several studies by economists, based on public sales and licenses. Venture investing has shifted heavily out of America to overseas competitors, particularly to Europe and China where eligibility is broader than here and enforcement far faster and cheaper, with injunctions, now rare here, routine there.

America is already suffering a massive money-drain with the portion of venture funding staying here dropping from 83% to 54%, with the rest going overseas, often to China.

In some technologies it has all but dried up. Start-ups, the source of most new technologies, most economic growth and most net new jobs, are shrinking in number. More now die each year in America than are born, for the first time ever.

Enforcement of valid and infringed patents, always very slow, and very expensive, has become much more so. Inter partes reviews have become less than Congressionally-intended "alternative to expensive court litigation" than the prelude to court action, adding some $500,000 per challenge and typically 2.5 years of delay, as suits are routinely stayed for the duration.

Eligibility law under the Alice/Mayo regime has become highly uncertain and unpredictable. And results have been as inconsistent as unpredictable. The net impact of these and related changes has convinced most investors that patents are now too unreliable as to validity, and too difficult to enforce, with excessive risk, delay and weak remedies.

Indeed, most owners of patents can no longer afford to enforce them. The majority have been priced out of our justice system. Experts opine that to enforce a small portfolio an owner needs $15 million in cash and $3 billion in market cap. So, wags now say that the "sport of kings," horse racing, has been replaced by patent litigation.

The impacts on start-ups, research universities, university spin-offs, small and medium sized businesses and nearly all but giant multi-national corporations has been devastating. Even large companies, such as pharmaceutical firms, are hurting, many shrinking labs and decreasing or out-sourcing R & D, sometimes to foreign nations.

In sum, the health of the American patent system is not good, but has declined sharply in just the past few years.

Why? With the best of intentions, the three stewards of the patent system, the Supreme Court, the Congress and the PTO have worked so hard to root out invalid patents, stem frivolous suits, and curb abusers of the patent system that its efficacy has been diminished or destroyed for the majority of owners who are responsible actors. That seems an absurd and unnecessary price for America to pay. Abusers can be punished and deterred by surgical means and weakening the entire system is surely unnecessary and unwise.

How then did we arrive at this worrisome circumstance? Three myths pervaded the policy debates even before and particularly since passage of the AIA. The first myth is that most asserted patents are "bad." Not so. The second myth is that most suits are frivolous. No so. The third myth is that the courts are unwilling or unable to deal with the limited number of actual abusers of the patent system. Also not so.

Another phenomenon was that the three branches of government did not adequately coordinate their interventions to improve performance of the system. So, the PTO implemented the AIA reviews with procedures that, in certain respects, departed from Congressional intent.

The Supreme Court revolutionized the law of patent eligibility, but provided wholly inadequate guidance for those who must apply the new standards: 8,300 examiners, 1,000 district judges, 263 APJs on the PTAB and many thousands of private and corporate attorneys who advise business decision-makers.

They, after all control much of the money that could go into R & D and follow-on commercialization that actually puts cures in the hands of physicians and new products on store shelves for consumers, or not.

The PTO appears to have been so worried about missing the Congressionally-required deadline of one year for a Final Written Decision in an AIA review that they never used the extra six months the Congress provided to them and made the procedures for AIA reviews so difficult for patent owners as to be unfair or, at least unjust compared to procedures in a court of law.

For example, Congress wanted owners to be able to amend claims in IPRs (Inter Partes Reviews), but the PTAB virtually always denies amendment. Courts of law require patents to be correctly construed, but the PTAB applies a broader, laxer, inaccurate construction, called Broadest Reasonable Interpretation. So, there was not much follow-up on PTO implementation by the Congress. Similarly, Congress worked hard to assure that repetitive challenges to a patent on the same ground would be barred by legislatively-required estoppel. But, as implemented by the PTO Director and the PTAB, estoppels are so weak as to be almost meaningless, with a challenger being permitted to file multiple petitions against the same patent and numerous other parties to file petitions on the same or very similar grounds. Again, with its other duties, follow-up by Congress, understandably has not, so far, been a priority.

Paul R. Michel is former Chief Judge of the U.S. Court of Appeals for the Federal Circuit. This commentary is excerpted from his recent testimony to the House Judiciary Committee's Subcommittee on Courts, Intellectual Property and the Internet, which is chaired by Rep. Darrell Issa, R-Vista.