Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It.

• Author: Dreyfuss, Rochelle C.
• Position: Book review

INNOVATION AND ITS DISCONTENTS: HOW OUR BROKEN PATENT SYSTEM IS ENDANGERING INNOVATION AND PROGRESS, AND WHAT TO Do ABOUT IT. By Adam B. Jaffe and Josh Lerner. Princeton and Oxford: Princeton University Press. 2004. Pp. ix, 236. $29.95.

INTRODUCTION

The Patent Act was last revised in 1952. The hydrogen bomb was exploded that year, vividly demonstrating the power of the nucleus; in the ensuing postwar period, the Next Big Thing was clearly the molecule. (1) Novel compounds were synthesized in the hopes of finding new medicines; (2) solid-state devices exploited the special characteristics of germanium and other semiconductors; (3) as investments in polymer chemistry soared, advice to the college graduate soon boiled down to "one word ... just one word[:] ... Plastics." (4)

Over the next half-century, things changed dramatically. "Better living through chemistry" has begun to sound dated (if not sinister). (5) Genomics and computer science have come into their own. The molecule is still valued, but not so much for its reactivity as for its informational content. Even the business of knowledge production has evolved. Once the border between science and technology was clear; now it is a blur. (6) There are scholars who patent fundamental research, and commercial firms that are run like academic departments. (7) And while knowledge has always grown cumulatively, the relationship among inventions has become more complex as products have become interoperable, functionality has converged, and markets have globalized. (8) With the character of inventiveness changing so drastically, the need to reexamine the patent system has become evident. In the last three years, the Federal Trade Commission, the National Academy of Sciences, and even the Patent and Trademark Office ("PTO") have suggested that it is time for reform. (9) As I write, Congress is contemplating significant revision of the system. (10)

Given this context, Adam Jaffe (11) and Josh Lerner (12) have given us a wonderfully timely book--and also one that is beautifully executed. If Congress is to reform the system, the public ought to understand its current failings. Interest group politics have played an especially corrosive role in this field because the law is complex and creates substantial economic benefits on behalf of particularly well-organized parties. Further, as the authors note, the "second class status" of patent law within the academy has meant that the perspective usually provided by legal scholars has largely been absent here (p. 161). Their book is a splendid antidote. It lays out the basic structure of patent law in a manner that is sure to educate and intrigue both readers unfamiliar with law and lawyers unfamiliar with the patent system. It uses as examples patents on inventions that are accessible to even the congenitally innumerate: the ubiquitous peanut butter and jelly sandwich, the oxymoronic comfortable high-heel shoe, and (of course) the proverbial better way to "catch[] ... mammalian pests not exceeding 100 grams" (pp. 32, 52, 28). There is also a nice historical section demonstrating that there are no easy answers and that the debates over the patent system are enduring and cyclical (pp. 78-95).

Neither Jaffe, an economics professor at Brandeis University, nor Lerner, who teaches finance and entrepreneurial management at Harvard Business School, is a lawyer. As a result, there are small technical errors. As specialists in the economics of innovation, however, the authors provide a superb analysis of the trade-offs inherent in designing a system that protects innovators from those who would free-ride on their investments but leaves inventions accessible to those who would build upon earlier work. Their book would make excellent supplemental reading for students in a patent law or an innovation theory class. I can only hope that it will be studied by policymakers.

Despite the title's reference to "discontents," the book projects an image of pathology: according to the authors, thickets of strong but invalid patents are raising transaction costs and creating a drag on innovation. Their diagnosis is that these symptoms arise from the confluence of two congressional moves that began in the mid-1980s: establishing the Court of Appeals for the Federal Circuit to hear all federal patent appeals and underfunding the PTO. Their proposed cure lies in improving the efficacy with which patent validity is tested. This is a simple story, and keeping it simple may be the best strategy for a book aimed at a lay audience. It is also fairly accurate. There is, however, little to substantiate the assertion that bad calls by the PTO and the Federal Circuit constitute the only plagues on patenting. In fact, the problems go far deeper, raising questions about institutional competence to grapple with the changing face of science. Nonetheless, the reforms suggested have strong institutional implications. With some modification, they could go a long way toward healing the system.

1. SYMPTOMS

   No one can lay out a case more graphically than two empiricists. Their core thesis is that the patent system has undergone a fundamental change in the last twenty-five years and has done so across two dimensions. As their figures illustrate, in that period, the number of patents skyrocketed (p. 12), and the exclusionary power of these patents increased dramatically (pp. 105, 107).

   The rise in numbers is troublesome on its own: the authors suggest that as the volume of patents increases, it becomes more difficult to assemble the rights needed to pursue lines of research or manufacture products. Thickets of rights are especially problematic for new entrants (often the most vibrant competitors), who must search through existing patents to determine how free they are to operate. They cannot afford to pay for, or bear the risk of, protracted litigation, so they are inclined to improvident settlement. And because these firms lack patents of their own, they are unable to offer cross licenses to those who sue them. The payments they are forced to make divert resources from research activities (pp. 13-15).

   But as bad as the raw numbers are, the problem is aggravated by the increased power associated with these patents. The authors demonstrate that in the last two decades, the probability that a patent will be found valid and infringed has risen substantially. Furthermore, there is greater likelihood that permanent injunctions and substantial monetary damages will be awarded. With increasing confidence in the efficacy of patent litigation, new business strategies have emerged. Because patents are now more attractive than other ways of appropriating the benefits of inventiveness (such as relying on first-mover advantages), firms that might once have allowed their advances to fall into the public domain instead tie down new technologies with patents. Furthermore, the prospect of a rich award or settlement leads fawns to look for "Rembrandts in the Attic" to assert against their rivals. (13) Indeed, there are now "patent trolls"--firms whose only business is to hold up established companies and force them to pay hefty fees (see, e.g., pp. 56-64).

   The result is a vicious cycle. The better patents are at protecting investments in innovation, the more firms rely on patents; the more evident it is that patents are good sources of income, the more they are used as investment vehicles. As the thicket of rights grows, it becomes harder to maneuver without attracting litigation. Since the best defense is often a good offense, firms patent to the hilt, creating a base for even more suits. (14)

   So far, so good. There is no reason to doubt that these numbers are accurate and worrisome. However, at the crux of the book is the claim that improving examination will fix the system. For that to be true, the authors must demonstrate not only that there are many more patents, but also that these new patents are largely invalid. Unfortunately, it is difficult to evaluate that claim because Jaffe and Lerner never say what they mean by invalidity. Because subsequent arguments are mainly directed at the PTO and the Federal Circuit--especially their failure to adequately consider earlier materials ("prior art") when determining patentability--the concern is presumably with patents on advances that are not inventive as defined by statute or precedent.

   Understood this way, the authors' support is spotty. They furnish four types of evidence. First, there are the anecdotes: they dwell on the peanut butter and jelly sandwich patent (pp. 32-33), and also cite patents on Amazon's "one-click" checkout procedure (p. 75), a remote control that enables a T.V. to display adjustment instructions (p. 121), a garbage bag that looks like a jack-o'-lantern when filled (p. 122), and two methods for pricing expirationless options (pp. 145-46). These stories do make one wonder what is going on in the Patent Office. However, none of the patents described is likely to tax innovation heavily. Further, mistakes are sure to happen--indeed, the authors suggest (for reasons discussed below) that it would be foolish to expend resources on too much accuracy at the earliest stage of examination (pp. 174-75). But that means that the existence of some bad patents does not tell us whether the system as a whole is sick.

   The next two forms of evidence are comparative. The authors first consider data on validity and infringement before and after the 1980s, showing that findings of validity have increased substantially (pp. 98-107). This information is suggestive, but before concluding that the marketplace is now awash with bad patents, one needs to know whether the validity determinations in the earlier era were accurate. Perhaps courts were previously too quick to invalidate patents. And, in fact, there is reason to think that in the 1970s, the research community believed that patents were offering insufficient protection...