Fixing our broken patent system.

• Author: Dratler, Jay, Jr.
• Position: Company overview - Report

ABSTRACT INTRODUCTION I. THE UNDERLYING ASSUMPTIONS A. Limiting Patentable Subject Matter to Concrete and Tangible Inventions Limits Both Blockage of Future Research and Innovation and Uncertainty in Patent Protection B. Innovation Is a Process, Not an Event, and Rational Patent Law Must Recognize That Fact C. When in Doubt, Lower Transaction Costs and Decrease Uncertainty II. A SUGGESTED PATENT STATUTE A. Section 100. Subject Matter B. Section 101. Utility C. Section 102. Novelty D. Section 103. Economic Requirements E. Section 104. Reduction to Practice F. Section 105. Disclosure and Claims G. Section 106. Claims and Their Construction CONCLUSION Introduction

In four articles over five years, (1) I have criticized today's patent law as economically irrational in important respects. I am not alone. The chorus of critics is loud and reached a crescendo some time ago. (2)

But it is one thing to be a critic and another to suggest improvements. The standard response to a vocal critic is to ask, "if current law is so bad, how could we make it better?" This Article is my attempt to answer that question.

The Article is short for two reasons. First, much of the substance of my criticism appears in earlier writing and need not be repeated here. (3) Second, and more important, the statutory text that I propose here is the centerpiece of this Article. For reasons explained below, I have tried to keep it short. This Article covers only the substantive "guts" of the patent statute--the provisions governing what is patentable and how it must be disclosed. Issues like infringement and remedies, which are more difficult both conceptually and politically, as well as procedural aspects, I leave to later work.

So this Article has only three parts. The first explains the principles on which I based the suggested statute and what kinds of provisions I left out. The second contains the suggested statutory language, with copious annotations explaining changes and correspondences with current law. The conclusion reiterates what is left out and suggests where we might go from here.

1. THE UNDERLYING ASSUMPTIONS

   Readers of my earlier critiques (4) will notice a consistent theme: although patent law is quintessentially economic law, our current law ignores economic reality, current economic theory, and relevant economic variables. Thirty years ago, I published an article (5) arguing that patent law has minimal effect on individual incentives for innovation because most individual inventors work under contracts that assign all their work to their employers. Young and idealistic, I had suggested some rather impractical ways to restore individual incentives.

   Yet, in the last three decades, real life has moved decisively in the opposite direction. It is now abundantly clear--despite cries and protests from diehards--that virtually all important innovation in our country occurs in a corporate setting in which patents provide little or no direct economic incentive to individuals, (6) although they do provide bragging rights and some indirect rewards. (7)

   So the primary economic function of patents today is now abundantly clear. They attract investment of risk capital, including venture capital, to technologically risky projects. (8) The paradigm, of course, is pharmaceutical development, whose cost (in the billion dollar range) (9) no one would float without the protection from free riders that patents afford. (10) Unfortunately, current patent law not only fails to recognize that central function; it does not even mention investment or risk.

   Moreover, in many ways the four-century history of Anglo-American patent law is a tale of a fall from grace. Unlike current law, the old English Statute of Monopolies, adopted in 1623, explicitly recognized the economic character of patents. (11) It did so by classifying patent monopolies as one of several explicit exceptions to the general rule that monopolies are economically bad and should be prohibited. (12) It also made the exception for patents narrow and tractable by limiting patents to "Manufactures," (13) i.e., concrete things that could be seen, felt, bought and sold, and have a tangible presence in the marketplace.

   In contrast, today's law permits patents on fuzzy abstractions without tangible form, which depend on semantics alone for their definition. Examples include the functions of and flow charts for computer programs, (14) business models, (15) and abstract early-stage biotech "inventions," such as genetic sequences, (16) exclusive rights in which block or hobble subsequent research and innovation.

   These sorts of patents on abstractions, which are economically pernicious and becoming more so each day, arise from two sources. First, they derive from attempts by generalist lawyers and judges with little training in science or technology to grapple with the abstract nature of invention from a purely semantic perspective. Second, they derive from a consistent failure to apply the teachings of economics as an empirical and quantitative science. The result is a patent system that, from the viewpoint of a scientist, engineer, technician, or economist, increasingly appears to lack common sense.

   One glaring example of both trends is patent law's obsessive focus on conception--a quintessential^ abstract act. (17) Scientists, engineers, and industrialists know that innovation is a complex, extended, nonlinear process, with many phases and many obstacles to overcome. That process begins with a concept--a question or a problem to be solved and an abstract idea that may provide a solution. But it culminates only when a new product or service reaches the marketplace. (18) In the entire lengthy process, conception is often the shortest, easiest, and least costly step. (19)

   Yet the law defines invention as the act of mental conception alone. (20) As a result, we have patents for abstract conceptions, unrelated to products except in future possibility, holding up the real work that brings products and services to the marketplace. (21) I have outlined how this counterproductive approach operates in a lengthy online piece and will not repeat the analysis here."

   A second glaring example is the semantic "more-than-novelty" requirement, which has become an essential part of patent law. In our country, it goes by the name of "nonobviousness;" (23) in other countries it is called an "inventive step." (24) But no one anywhere knows precisely what it means. Worse yet, scholarship is just beginning to grapple with the relationship between this vague and abstract concept and the patent system's economic purposes and effects. (25) So we have the spectacle of lawyers engaging in interminable and exorbitantly expensive disputes over whether one abstraction is "nonobvious" with respect to another abstraction, when that standard is itself a vapid abstraction with no direct relationship to any relevant economic variable.

   If all this were not bad enough, we have badly neglected the increasingly dominant effect of transaction costs. (26) Patent lawyers, who by and large are responsible for the shape of our patent statutes, have failed to consider the enormous costs that their system imposes on society and on innovation itself. The direct costs of litigation (attorneys' fees and court costs) are just a small part of the whole, the more so because only a tiny fraction of patents is actually litigated. (27) Other direct costs apply to virtually every patent, at least those with any commercial significance, even in a portfolio of thousands of patents. They include patent prosecution, patent searches, patent infringement and validity opinions, license negotiation and drafting, and the hard-to-estimate costs that uncertainty in all these endeavors imposes on business.

   Besides these obvious and important costs, there are numerous indirect costs. They include the innovative businesses that never get started because their way is blocked by private property in abstractions that never result in marketable products or services. They also include the indirect costs of the increasing concentration of industry that huge patent portfolios in the hands of industrial giants make possible.

   Sometimes fundamental patents on never-before-made products like the laser (which are rare and perhaps becoming rarer) can break through patent hedges. But huge patent portfolios in the hands of well-established and well-financed firms present a formidable barrier to a new entrant in an existing industry--even one with an imaginative and commercially valuable idea. (28)

   All these direct and indirect costs are a drain on scientific and technological progress, i.e., on the research and development sector of our economy. In accounting terms, the patent system is an item of cost, not income. Its costs may be spiraling out of control.

   Yet the fundamental premise of our patent system, and of the Patent and Copyright Clause that our Founders bequeathed us, is that the cost is worth it. (29) The benefit of economic incentives for innovation is supposed to exceed the cost of the cumbersome system that produces them. Accordingly, the story goes, the patent system's ever-rising costs are necessary evils, suffered for the purpose of providing incentives for innovation by protecting investment of risk capital in innovation from free riders.

   This all may be true, but there is one problem. Nothing in our patent statute so much as hints at any tradeoff of cost for benefit. Any economist worthy of the name--and perhaps any accountant--would consider that tradeoff crucial in designing any patent system.

   So our patent system has several economic flaws. First, it ignores the reality of the lengthy inventive process and real economic variables in favor of vapid legal abstractions like "conception" and "nonobviousness." (30) Second, it permits raw abstractions to be patented, in contravention of the supposed judge-made law that "laws of nature, natural...