Can the Patent Office be fixed?

• Author: Lemley, Mark A.
• Position: The Fourteenth Annual Honorable Helen Wilson Nies Memorial Lecture in Intellectual Property Law

1. THE PROBLEM OF BAD PATENTS II. CAN THE PROBLEM BE SOLVED? A. What Won't Work 1. Preventing Fee Diversion 2. Fee-setting Authority 3. Retaining Patent Examiners 4. Outsourcing Search B. What Might Work 1. Second Pair of Eyes 2. Changing Examiner Incentives 3. Tiered Review 4. Oppositions and Adversarial Evaluations C. Living with Imperfection I. THE PROBLEM OF BAD PATENTS

   The Patent and Trademark Office (PTO) finds itself caught in a vise. On the one hand, it has been issuing a large number of dubious patents over the past twenty years, particularly in the software and electronic commerce space. It issues many more patents than its counterparts in Europe and Japan; (1) roughly three-fourths of applicants ultimately get one or more patents, a higher percentage than in other countries. (2) Complaints about those bad patents are legion, (3) and indeed, when they make it to litigation, they are quite often held invalid. (4) Even the ones that turn out to be valid are often impossible to understand; in the information technology industries, there is no lawsuit filed in which the parties don't fight over the meaning of patent claim terms. (5) The natural reaction is to say that the PTO needs to do more than it does to make sure it is awarding patents only to those who deserve them.

   On the other hand, it is not clear that we can or should weed out bad applications at the PTO. The vast majority of patents are never litigated or licensed; spending a lot of money to ensure their validity would be wasted. (6) And the structure of the patent prosecution process makes it very difficult for the PTO to do so. Patent examiners can never finally reject a patent application; applicants dissatisfied with the outcome can come back an unlimited number of times to try again through various mechanisms. (7) Efforts beginning in 2006 to change that rule upset patent lawyers a great deal and were ultimately abandoned. (8) And because of the inability of the PTO to finally reject applications, when the PTO started making it harder to get patents several years ago, the result was to create an enormous backlog of patent applications as examiners would reject applications and applicants would try again (and again, and again) to get a patent. That backlog in turn created its own set of problems, delaying the issuance of good patents and reducing certainty for both applicants and third parties.

   Some have suggested that those delays--and the use of continuation applications more generally--are the result of oddities in the system for evaluating and rewarding patent examiners. The so-called "count" system gave credit to examiners for certain acts; patent lawyers often complain that examiners "make" them file continuations in order to boost their counts. Whether or not that was true, however, it doesn't appear to be behind the growth of continuation applications. The PTO changed the count system in 2009 to try to address this problem. And it has been issuing record numbers of patents in recent months. But preliminary data from Dennis Crouch suggests that the number of continuation applications is still on the rise, up 27 percent from 2009 to 2010, (9) suggesting that the use of continuations is largely applicant-rather than examiner-driven.

   The evaluation of patent applications in the PTO is further complicated by recent empirical evidence. One recent study shows that junior patent examiners are a lot more zealous in weeding out bad patents than senior examiners. (10) The longer examiners spend in the PTO, the less searching they do, the more likely they are to grant patents, and the more likely they are to grant patents on applications that their counterparts in other countries have rejected. (11) A second study shows that, whether senior or junior, examiners pay attention almost exclusively to prior art that they find themselves, and not to information submitted by patent applicants, even applicants who are passing on art found by patent examiners in other countries. (12) The implication of this evidence is that we need to pay attention not only to legal rules but also to examiner behavior and reward systems.

2. CAN THE PROBLEM BE SOLVED?

   How, then, can we fix the PTO, allowing examiners to distinguish between patentable and unpatentable inventions effectively, without slowing the process to a crawl or wasting a bunch of money?

   1. What Won't Work

      First, some things that likely won't work.

      1. Preventing Fee Diversion.

         The PTO is funded through user fees imposed on applicants and owners of issued patents. For much of the last twenty years, some of that fee revenue (typically 10 to 20 percent of it) has been diverted by Congress to general federal revenue. It is a commonplace among patent lawyers that the way to solve the PTO's problems is to stop fee diversion, "fully funding" the PTO.

         Stopping fee diversion is certainly a good idea. Whatever the merits of government user fees over taxes as a general matter, it seems particularly foolish social policy to tax innovators in particular to raise general revenue. But stopping fee diversion is hardly a panacea. In the last several years, the PTO has been fully funded--that is, Congress didn't divert fees. (13) Nonetheless, the backlog grew. The addition of 10 to 20 percent of operating revenue wasn't enough even to enable the PTO to hold steady.

      2. Fee-setting Authority.

         In recent years the PTO's efforts have shifted to seeking permission from Congress to set their own fees. (14) This would allow the PTO to raise fees on applicants and patentees, using the money to pay for a more intensive examination. There is some reason to believe that fee-setting authority, if nothing else, may result from the six-year patent reform effort in Congress. (15)

         Giving the PTO the authority to set its own fees might or might not be a good idea, depending on the relative incentives the PTO and Congress have to set fees rationally. But as noted above, it is likely not a good idea simply to spend more money to weed out bad patents. Most of that money will be wasted on applications that are of no consequence to anyone. And because of the structure of the examination system, it might not even succeed in weeding out bad patent applications.

         Even if it did, however, the current fee structure makes patent quality self-limiting. The PTO is paid by applicants to process their applications at each stage. But those payments are not enough even to sustain the limited examination that now occurs. The difference is made up by patent "maintenance fees"--periodic payments made...