Poisoning the next apple? The America Invents Act and individual inventors.

• Author: Abrams, David S.

INTRODUCTION I. FIRST-TO-INVENT VERSUS FIRST-TO-FILE: A PRIMER A. First-to-Invent: U.S. and Canadian Approaches B. First-to-File: U.S. and Canadian Approaches C. The Policy of Patent Priority Rules II. RESEARCH DESIGN A. The Canadian Law Change B. Prior Literature on Priority Rules C. Data Used in This Study III. ANALYSIS AND RESULTS A. The Rate of Patenting in the United States and Canada B. The Effect of First-to-File: Individual Versus Corporate Inventors C. Patent Quality Changes D. Addressing Potential Concerns and Robustness Tests 1. The contemporaneous patent term change 2. The introduction of maintenance fees 3. Deferred examination E. Interpretation and Analysis of Our Results 1. Possible mechanisms 2. Welfare implications CONCLUSION INTRODUCTION

The garage inventor is an American icon. The image of the solitary genius tinkering away in order to perfect her idea captures our imagination, and the long line of world-changing inventors and their companies--from Thomas Edison (in Menlo Park, N.J. and West Orange, N.J.) (1) to Bill Hewlett and David Packard (in Palo Alto) (2) to Steve Wozniak and Steve Jobs (in Los Altos) (3)--only confirms this uniquely American vision of innovation. The patent system works hand in hand with this sense of the small inventor by providing those who have little more than good ideas much-needed clout in the commercial marketplace. Indeed, without the protection of inventions by the patent system, the world might never have known General Electric, Hewlett-Packard, or Apple. (4)

On September 16, 2011, President Barack Obama signed into law the Leahy-Smith America Invents Act (AIA or the Act), (5) almost certainly the most sweeping set of changes to the U.S. patent system in almost sixty years. (6) The most important provision of the Act, and the subject of this Article, is the change in the rules used to establish priority between competing inventors. (7)

Until March 16, 2013, the United States used a first-to-invent (FTI) priority rule. (8) This means that when there was a dispute as to patent priority, the party that had the inventive idea first was entitled to the patent. This could be established by using lab notebooks, emails, and other documentation of the date of invention. By contrast, a first-to-file (FTF) rule relies on the date (and possibly time) when a patent application was filed with the U.S. Patent Office for the priority determination. As we explain further below, the AIA implements a modified version of the traditional FTF rule, wherein in most cases the first inventor to publish his invention will be given the rights (as long as he follows the publication with a timely application to the U.S. Patent Office). (9) But in broad strokes, the Act implements a shift in American patent law from FTI to FTF; the United States is the last country to make this change in its patent system. (10)

Although the FTF system has advantages--it is simpler and less costly to administer, and it encourages earlier patent applications (11)--it may have a darker side for small inventors. (12) Since they are likely to be slower in turning an invention into a patent application than larger corporations, they will be less likely to win a patent race. Under the FTI rule, this was not especially relevant, because the date of invention determined patent priority and the scope of prior art. But under FTF, a successful patentee must not only invent, but also win the race to draft and submit a patent application that satisfies the requirements of the patent law. Companies with significant research and development (R&D) operations are more likely to have patent attorneys on staff with experience working with the company's inventors. This can substantially cut down the time necessary to transform an invention into an application. Small inventors are much more likely to be resource constrained, and much less likely to have staff attorneys or existing relationships with outside counsel--placing the small inventor at a potential disadvantage in a FTF regime.

What impact will this major patent reform have? Although there were years of debate prior to the passage of the AIA, there has been virtually no empirical work completed to date. (13) In this Article we aim to correct that deficiency and predict that the AIA will have a negative impact on small inventors. We do so by examining the effect of a very similar law change in Canada, the last major country preceding the United States to change to first-to-file, (14) which it did with the Canadian Patent Act reforms that took effect in 1989. (15) By examining data on over one million patents in both Canada and the United States, and by using sophisticated econometric methodology, we are able to estimate the effects of the Canadian law change. (16) Like the AIA, the Canadian Patent Act made several other changes to patent law besides the priority rule, and we therefore go to some pains to establish that the results we find are due to the priority rule change.

We find that the Canadian change to FTF generally harmed individual inventors. One simple measure of its impact is a drop in the share of patents granted to individuals after the law change. However, we note that this drop could be due to general long-term trends (like an increase in R&D funding among larger entities) rather than the priority rule change itself. Thus we use a difference-in-difference technique, (17) which allows us to address any overall trends by using U.S. patenting behavior as a control group. Patenting in the United States generally follows similar patterns to those in Canada, but the United States did not change its patent law around 1989. (18) Thus, comparing the difference between the differences in individual grant rate in the United States and Canada will isolate the net effect of the Canadian law change. We find that there is a substantial decline in patents granted to individuals due to the change in priority rule: about a fourteen-percent drop. (19)

Our findings do not augur well for small inventors in the United States. While the AIA differs in important ways from the Canadian law, there are enough similarities that we should see parallel effects. (20) In addition to harming small inventors, some have suggested that the AIA may also encourage lower-quality patent applications. One of the purposes of the patent document is to disclose information about the invention to the public: this is what a patentee provides in exchange for the exclusive right to make, use, and sell her invention. (21) In preliminary work, we explore this potential effect of FTF in the Canadian context by performing a basic linguistic analysis of patents before and after the law change. We use word count, sophistication of words, and similar measures as proxies for how much information a patent conveys. We find no evidence of a substantial impact of the law change on patent quality.

The America Invents Act changes the United States to the first-to-file system, but fortunately there are provisions in the Act that call for studies such as this to help inform its implementation. (22) In the rest of this Article, we detail why we expect the Act to be harmful to small inventors in its current form. In addition, we empirically estimate, for the first time, the effect of the priority rule on patenting behavior and patent quality.

The balance of the Article follows in three Parts. In Part I, we detail the policy questions surrounding the FTI versus FTF systems, as well as discuss the changes implemented by the America Invents Act and the Canadian Patent Act in greater detail. Part II introduces our datasets, obtained from the U.S. Patent and Trademark Office (USPTO) and the Canadian Intellectual Property Office (CIPO). In Part III we detail our empirical strategy and present the main results. Part III also explores some possible shortcomings of our analysis, and seeks to address the main objections to our results. We end with a brief Conclusion with discussion of the possible policy implications and suggestions for further research.

1. FIRST-TO-INVENT VERSUS FIRST-TO-FILE: A PRIMER

   Patent priority is a relatively straightforward concept, determining the question of who, among contemporaneous inventors of a particular subject matter, is awarded the patent to that subject matter. In a perfect world, patent systems would not require such rules: inventors would work on distinct inventions, and receive patents on them once (or if) they had reached the substantive thresholds for patentability. Unfortunately, it is common for inventors to work on overlapping or even the same inventions, often at nearly the same time--information is simply not available to prevent such occurrences. (23) It is under these circumstances in which the priority rules step in, allocating the patent rights to single inventors (or inventive entities, in the case of joint inventorship). Note that regardless of how the rules allocate the patent grants, these circumstances are costly for both inventors and society. (24) Thus, the system of allocating priority matters--significantly. (25)

   To date, modern patent systems have used one of two systems for allocating priority to patent rights. The first, known as the first-to-invent system, attempts to grant the rights to the inventor who can prove the earliest date of invention. (26) What this means is that the decisionmaking body, whether the Patent Office or the courts, must weigh various kinds of evidence relating to the inventive process and its timing. The second, and dominant, approach has been the first-to-file system, wherein the first inventor to file his application in the relevant jurisdiction is awarded the patent. (27) As compared to the first-to-invent approach, the evidentiary inquiry required for awarding priority under first-to-file is substantially reduced--indeed, almost nonexistent.

   Both of these approaches are modified first-in-time systems. One might...