Patent inflation.

• Author: Masur, Jonathan S.

ARTICLE CONTENTS INTRODUCTION I. PATENT PROBLEMS II. PATENT EXPANSION A. Error-Free PTO and Federal Circuit B. Error-Prone or Noisy PTO, Error-Free Federal Circuit C. Error-Free PTO, Error-Prone or Noisy Federal Circuit 1. Issued Patents 2. The Contours of Patent Law D. The Patent Office and Federal Circuit in Reality 1. The PTO 2. The Federal Circuit 3. The Parties' Interaction 4. Granted Patents and Expansionary Doctrine 5. Patent Inflation and Suits for Infringement E. A Strategic Federal Circuit F. Outside Actors and Patent Remedies III. THE PATENTING OF SOFTWARE AND BUSINESS METHODS A. Software Patents, Business Methods, and State Street Bank B. Bilski in the Courts C. The PTO's Response CONCLUSION INTRODUCTION

The shape of patent law is defined in large degree by the interaction between two institutions: the Court of Appeals for the Federal Circuit and the Patent and Trademark Office (PTO). Intervention from Congress or the Supreme Court comes rarely--Congress went nearly sixty years without significantly altering substantive patent law, (1) and until very recently the Supreme Court has generally been reluctant to weigh in on many of the most important patent questions. (2) In their absence, the Federal Circuit and the PTO have arrived at an institutional detente. The Federal Circuit dictates the rules of substantive patent law to the Patent Office via interpretations of the Patent Act. (3) The PTO then grants or denies patents according to those rules. (4)

Yet this structural accord has not well served the patent system or the private parties who rely on it. In recent years both the PTO and the Federal Circuit have received trenchant criticism for their handling (and mishandling) of patent applications and patent cases. Critics have leveled two particular charges: first, that the PTO grants too many invalid patents; (5) and second, that the Federal Circuit has steadily loosened the legal rules governing patentability, allowing applicants to obtain patents on an ever wider variety of inventions. (6) The first criticism is all the more remarkable in light of the second. Despite the fact that the Federal Circuit has noticeably expanded the boundaries of what may be patented over the past decades, the PTO continues to grant significant numbers of patents that are invalid under governing Federal Circuit law.

Scholars have attributed the patent system's joint dysfunctions--an excess of invalid patents and overly permissive rules of patentability--to a number of potential causes. These include funding shortfalls at the PTO; internal management problems at the PTO; a lack of expertise at the PTO or the Federal Circuit; capture by private interests; and, perhaps most importantly, a simple ideological preference for greater numbers of patents across a broader range of technologies. (7) Nonetheless, there remains sharp disagreement regarding the likely causes of these systemic problems and their proper solutions. Indeed, a variety of correctives have been proposed and implemented, to little avail. (8)

This Article intends to offer a different explanation for the problems plaguing the patent system. The permissive nature of the PTO and the inflationary tendencies of the Federal Circuit might instead be due to the contorted institutional relationship that exists between the two organizations. Because of the manner in which patent cases make their way from the PTO to the Federal Circuit, the PTO has a decided institutional interest in granting more patents than it should. And because of this same interaction, the Federal Circuit is engaged in an unwitting expansion of the patentability rules.

The key lies with the asymmetric nature of appeals from the PTO to the Federal Circuit. When the PTO denies a patent application, the aggrieved applicant may appeal to the Federal Circuit. (9) When the PTO grants a patent, however, there is no losing party to appeal--the victorious applicant merely walks away with its patent. (10) That patent is unlikely ever to see the inside of a courtroom, given how few infringement lawsuits are litigated. (11) Like most administrative agencies, the PTO wishes to avoid appeals and especially reversals. (12) In order for the Agency to accomplish this, it need only err on the side of granting excessive numbers of patents--even invalid patents--for which there is no appeal. This desire to avoid litigation is a source of the invalid patents now being issued by the PTO in vast numbers--the patent system's first problem.

The second problem, the ongoing expansion of the rules governing what types of inventions may be patented, stems from the PTO's proclivity to grant any plausible patent. Because of the PTO's efforts, the patent applications that the Agency denies will predominantly concern inventions that are unpatentable under current law. (13) When a disappointed patent applicant appeals such an application to the Federal Circuit, that court has two options. It can reject the patent under existing law, preserving the law as it stands, or it can grant the patent under a new, more expansive understanding of what is patentable. The circuit denies most of these applications. (14) But when the Federal Circuit eventually decides a case in favor of an applicant, it creates a new precedent that enlarges the scope of what may be patented. The process then repeats itself, with the PTO denying more boundary-pushing patent applications and the Federal Circuit being presented with further opportunities to expand the limits of patentability. The result is a natural inflationary pressure on the law, generated entirely by the types of cases that the PTO sends to the Federal Circuit.

These effects rely on only three innocuous factors. First, the PTO--through its administrators--pursues its own organizational interests. Second, the Federal Circuit is composed of heterogeneous judges who do not always agree on the proper content of patent law. This means that a patent applicant could draw a favorable Federal Circuit panel and be granted a patent that the median Federal Circuit judge would find invalid. And third, the PTO is asymmetric. Only an applicant whose patent has been rejected may appeal a PTO decision to the Federal Circuit. Using only these three institutional features of the patent system, this Article builds a model of the interaction between the PTO, Federal Circuit, and patent applicants, which predicts that improperly granted patents will expand the legal boundaries of patentability. (15)

This Article thus identifies a novel institutional source for the patent system's problems. The goal is not to demonstrate that the other possible causes of patent inflation--ideology, lack of expertise, and so forth--are incorrect. It is possible that some of these causes are at work alongside the institutional pressures described here. But it is crucial to note that even if all of these other potential causes were eliminated, the systemic problems of bad patents and expanding patent law would remain, driven by the institutional relationship between the PTO and Federal Circuit. Accordingly, this Article suggests a legal solution that would directly address these institutional issues at their source.

Finally, the interaction between the PTO and the Federal Circuit is uncommon but by no means unique. Nearly every type of civil litigation or administrative proceeding produces winning and losing parties, either of whom can appeal to the federal courts. This is of course true for standard civil trials, and it is true as well for essentially every federal administrative action, from promulgating major regulations (16) to individual funding (17) or permitting decisions. (18) Yet asymmetric systems of review exist in several important areas of federal benefits law (such as Social Security Disability benefits), (19) immigration law, (20) tax law, (21) and--most importantly--jury verdicts in criminal law. (22) Indeed, even systematically different rates of appeal by civil litigants--for instance, perhaps tort defendants appeal adverse judgments more frequently than tort plaintiffs--can give rise to meaningful (though more muted) asymmetries in appellate review. (23) It is worth noting, however, that most of these other areas of law involve only the adjudication of private rights against the government. A Social Security claimant (or a criminal defendant) acquires no rights against other private actors. By contrast, the PTO and the Federal Circuit are in the business of granting patents that may then be asserted against third parties who were never involved in the proceedings. Patent law thus offers applicants a nearly unique opportunity to capitalize on institutional asymmetries to the detriment of outside actors.

This Article proceeds in three parts. Part I briefly describes the complaints that scholars and stakeholders have registered against the Patent and Trademark Office, the Federal Circuit, and the patents (and patent law) that they have jointly produced. Part II explains and analyzes the interaction between the PTO and the Federal Circuit, beginning with a simple model and building toward a more nuanced description that incorporates the characteristics and motivations of the individuals in charge of those institutions. It also describes the roles of other actors within the patent system, offers an important testable prediction, and proposes a remedy to patent law's institutional maladies. Part III presents a case study of the relationship between the PTO and the Federal Circuit concerning the evolving rules that undergird the patentability of intangible processes, an evolution that culminated in the Supreme Court's recent decision in Bilski v. Kappos. (24) Part III shows how the forces described in Part II have effectively broadened the rules governing the patenting of software, business methods, and related inventions.

1. PATENT PROBLEMS

   There is by now a broad consensus that the United States patent...