Ending the patenting monopoly.

• Author: Abramowicz, Michael

For nearly two centuries, an inventor applying for a U.S. patent has been required to obtain the opinion of an expert who has searched the prior art and determined that the inventor's application meets the standards of patentability. And for nearly two centuries, those expert opinions could be obtained only from a single office run by the U.S. government. This patenting monopoly, which is almost certainly undesirable, is now being eroded. Rising global trade and technological sophistication have increased the number of patent filings in every country; government patent offices here and abroad are thus being driven to rely on patenting opinions from other public and private entities. For demonopolization to be effective, however, entities determining patentability must have high-powered incentives to make accurate judgments. Two disciplining mechanisms may be particularly useful." (1) randomly selecting private patenting opinions for an intensive governmental evaluation, with fines imposed on any examining firm if its opinion is found to have led to the issuance of an invalid patent, and (2) authorizing legal challenges to patents by private attorneys general. This Article offers preliminary assessments of the optimal design of these and other disciplining mechanisms.

INTRODUCTION I. THE PATENT OFFICE AS GOVERNMENT MONOPOLIST A. The Production Problem B. The Mass-Justice Problem II. THE EROSION OF THE TRADITIONAL MONOPOLY A. The National and International Decline of the Patenting Monopoly 1. The Patent Cooperation Treaty: Undermining the Monopoly 2. The EPO 3. The Patent-Prosecution Highway 4. Prosecution Privatization: The PCT-Privatization and Peer-to-Patent Pilot Projects 5. Self-Search and Self-Examination B. Further Steps Toward Demonopolization 1. Intragovernmental Competition 2. Intergovernmental Competition 3. Private Examination III. MAKING DEMONOPOLIZATION WORK A. Private-Party Incentives 1. Traditional Approaches to Regulating Gatekeepers a. Tort Damages b. Decertification 2. Penalty-Based Approaches a. Penalties Based on Court Actions b. Randomized Board Review c. Private Enforcement 3. More Speculative Approaches a. Patentee Self-Certification b. Market-Based Peer-to-Patent B. The Continued Role of the PTO 1. Patent Provision 2. Filing, Publication, and Continuations 3. Patent Timing and Interferences 4. Reexamination CONCLUSION INTRODUCTION

For over 170 years, U.S. patent law has required that, prior to the assertion of any property rights in an invention, the inventor obtain a favorable opinion from a neutral expert who has examined the claim to invention and opined that it is valid. The expert opinion is not conclusive or unassailable. It may be held erroneous during subsequent litigation or administrative adjudication. Rather, the expert opinion is akin to an audit opinion from an independent accounting firm, which is required by law as a prerequisite for engaging in certain legal activities (e.g., for issuing public stock or maintaining a listing on a stock exchange (1)). Historically, however, there has been one major difference between audits of financial statements and examinations of claims to invention: Patent examination in this country has traditionally been monopolized by the government-run patent office. Audit opinions, by contrast, are produced by a private, albeit regulated, industry of competing accounting firms.

In this Article, we argue that the monopolization of patent examination has almost certainly negatively affected the U.S. patent system, contributing to decreased productivity, low-quality output, and reduced incentives to adopt innovations for examination of patent applications. Fortunately, the patenting monopoly is now being eroded. We argue that this change should be welcomed and accelerated.

Movement toward ending the patenting monopoly can already be seen in such developments as increased international cooperation and competition in the patent-examining function, experiments in public "peer" patent review, proposals to require that inventors evaluate their own applications for patents, and calls for establishing a more heterogeneous system of quality gradations in patent examination. This ongoing change is global in nature; at least one country, Israel, already relies on examinations performed by any one of twelve patent offices.

Further reform should permit private firms to provide expert examination opinions. (2) Private firms often hold out hope for a full transition from a homogeneous, one-size-fits-all patenting monopoly to a diverse but individually-tailored examination structure. Of course, an overarching regulatory structure would be essential for ensuring that the heterogeneous cadre of examining firms would have appropriate incentives to produce quality examinations. Some punishment must follow bad examinations, and there is good reason to believe that sufficient punishment could be devised to improve the quality of patent examination over today's standards.

The administrative problem of monitoring several dozen examination firms might be qualitatively less difficult than the current task of the U.S. Patent and Trademark Office (PTO). Today, the PTO must attempt to monitor and regulate the behavior of several thousand examiners, many of whom are with the agency for only a few years. Indeed, the agency's current administrative task can accurately be described as trying to create a set of rewards and punishments so that thousands of individual examiners have good private incentives for producing accurate examinations. Given the restrictions imposed by federal employment law, however, it is by no means clear that the agency is succeeding in this task--or even that it could succeed. For example, there is no evidence that the agency punishes, or currently could punish, examiners who issue patents later held invalid by the courts.

Demonopolization of examination would likely increase the agency's power to achieve the fundamental goal of ensuring that the experts (whether employed publicly or privately) reviewing patent applications have good incentives as they opine on patentability. While we consider a variety of possible mechanisms to provide such incentives, we highlight two ingredients that would likely be critical to a comprehensive solution.

First, some privately issued patenting opinions would have to be randomly selected for evaluation by a public body (e.g., the PTO or a court). Sufficient fines would have to be imposed in cases of invalid patents such that issuing firms would not ordinarily have an incentive to issue patents that the public body would likely find invalid. The profit incentive of the private firms would therefore be to anticipate the assessments of this body, which, because it would evaluate only a small number of patents, could do a better job than a governmental patent office charged with evaluating all patents. We discuss a formula that could be used to generate appropriate incentives, but we also recognize that an administrative structure and fines could be optimized only through repeated experimentation.

Second, to remove--or at least sharply limit--any residual incentive that a private patent-examining firm would have to opine in favor of an excessively broad or otherwise invalid patent, we would recommend a second stage of review at least as stringent as that in today's system. Currently, potential or accused infringers can challenge patents in at least two ways: (1) by filing a declaratory-judgment action or (2) by raising the patent's invalidity as a defense to an infringement action. Such a system should be continued, and, if necessary, even greater avenues could be created to foster challenges to issued patents. Three potential, powerful legal devices for ferreting out improperly issued patents are opposition proceedings, a lesser presumption of validity (or perhaps a presumption tailored to the private firm's reputation or the thoroughness of its prior art search), and the use of private attorneys general to challenge patents.

Change always has risks, and the end of the current patenting monopoly therefore has dangers. Such change, however, also brings a wealth of opportunities. Acknowledging the risks, we do not argue for a hasty transition to a new system. Rather, we seek to shed light on the forces behind the change, to predict the likely trajectory of the trend, and to encourage policymakers to undertake needed experimentation that will acquaint them with the already-emerging new administrative structures. In sum, skeptics should not allow fear of the new to block the way toward thoughtful experimentation with alternatives.

1. THE PATENT OFFICE AS GOVERNMENT MONOPOLIST

   The PTO has a monopoly over the grant of patents in the United States. (3) This does not mean that the Office acts like a private, corporate monopolist in all respects, however. Understanding the behavior of the PTO thus requires an analysis not of the monopolistic behavior of industrial organizations but rather of administrative agencies and the bureaucrats who run them. Administrative agencies are a varied lot; they perform tasks ranging from conducting foreign policy to regulating securities. While all agencies may share some commonalities arising from their similar political and legal constraints, we can better understand the PTO by considering administrative agencies that bear a relatively close resemblance to it.

   There are, of course, no perfect matches, but the most salient attribute of the PTO for comparison purposes is quite arguably its workload. The PTO receives a huge number of patent applications each year, a number that is largely beyond its immediate control. The PTO must process these applications at a rate approximately equal to the rate at which they arrive, or else it falls behind. In this sense, the PTO is an agency that must perform a production function on a mass scale, and it must exercise judgment in doing so. Other...