The patent spiral.

• Author: Ford, Roger Allan
• Position: Flaws in patent screening

Examination--the process of reviewing a patent application and deciding whether to grant the requested patent--improves patent quality in two ways. It acts as a substantive screen, filtering out meritless applications and improving meritorious ones. It also acts as a costly screen, discouraging applicants from seeking low-value patents. Yet despite these dual roles, the patent system has a substantial quality problem: it is both too easy to get a patent (because examiners grant invalid patents that should be filtered out by a substantive screen) and too cheap to do so (because examiners grant low-value nuisance patents that should be filtered out by a costly screen).

This Article argues that these flaws in patent screening are both worse and better than has been recognized. The flaws are worse because they are not static, but dynamic, interacting to reinforce each other. This interaction leads to a vicious cycle of more and more patents that should never have been granted. When patents are too easily obtained, that undermines the costly screen, because even a plainly invalid patent has a nuisance value greater than its cost. And when patents are too cheaply obtained, that undermines the substantive screen, because there will be more patent applications, and the examination system cannot scale indefinitely without sacrificing accuracy. The result is a cycle of more and more applications, being screened less and less accurately, to give more and more low-quality patents. And although it is hard to test directly if the quality of patent examination is falling, there is evidence suggesting that this cycle is affecting the patent system.

At the same time, these flaws are not as bad as they seem because this cycle may be surprisingly easy to solve. The cycle gives policymakers substantial flexibility in designing patent reforms, because the effect of a reform on one piece of the cycle will propagate to the rest of the cycle. Reformers can concentrate on the easiest places to make reforms (like the litigation system) instead of trying to do the impossible (like eliminating examination errors). Such reforms would not only have local effects, but could help make the entire patent system work better.

INTRODUCTION I. Patent Law's Examination Model A. Examination as a Substantive Screen B. Examination as a Costly Screen II. Patent Examination's Vicious Cycle A. How a Flawed Substantive Screen Undermines the Costly Screen B. How a Flawed Costly Screen Undermines the Substantive Screen 1. Personnel Costs 2. Coordination Costs 3. Research Costs III. Testing the Vicious Cycle A. Testable Hypotheses B. Some Empirical Evidence 1. The Scale of the Patent-Examination System 2. The Quality of Patent Examination 3. The Behavior of Patent Litigants IV. Implications and Reforms A. Flexible Patent Reforms B. Fixing the Screens 1. Fixing the Substantive Screen 2. Fixing the Costly Screen C. Fixing the Cycle 1. Reducing the Effect of the Flawed Substantive Screen 2. Reducing the Effect of the Flawed Costly Screen CONCLUSION INTRODUCTION

Patent infringement is a strange legal claim. In most lawsuits, events follow a standard script: first the plaintiff's claim accrues, then the plaintiff files suit, and finally the plaintiff must prove each element of the claim. In a negligence case, for instance, only as the lawsuit proceeds does the plaintiff have to prove that the defendant owed a duty of care, that the defendant breached that duty, and that the breach caused damage.

In a patent case, this usual sequence is set aside. A key component of the claim--that the patentee invented something that is legally entitled to protection--is not proved at trial. (1) Instead, years or even decades before, a patent applicant persuades a patent examiner that she is entitled to a patent. (2) And the examiner's decision to grant a patent is entitled to significant deference at trial, even though there are many reasons to think examiners are not particularly good at deciding whether an applicant has really invented anything. (3) It is as if the existence of a duty of care were not decided in a lawsuit, but years before, when the plaintiff asserted that a duty existed in an ex parte filing with a bureaucrat, with the party owing the duty not necessarily knowing of the proceeding until years later.

Why patent law uses this examination model, and whether it should do so, are fundamental questions in the field. Scholars have advanced two principal explanations for patent law's use of examination. The first is that examiners function as a substantive screen. (4) This substantive screen performs several functions. It separates deserving and undeserving applications for patent rights, protecting patent quality by ensuring that patent rights are assigned to the people who actually invented things and strengthening incentives to invent and file for patents. (5) It also helps improve the patents that are granted, since examiners review applications to make sure inventors have properly disclosed their inventions. (6) And it helps to clarify and provide notice of rights from the start, so inventors can invest in developing their products and the public can avoid infringing others' rights.

The second explanation for patent law's use of examination does not depend on examiners performing a substantive service. Instead, it posits that simply by making it more expensive to obtain patent rights, examination serves as a costly screen, discouraging applicants from seeking low-value patents. (7) If it costs $30,000 to obtain a patent, then a rational actor will only apply for one if she expects to obtain at least $30,000 in benefits from having the patent. And since patent law theoretically allows a patent holder to capture privately much of the social value of an invention, at least for the duration of the patent term, (8) the low-private-value patents that get screened out are also likely to be low-social-value patents that we want to exclude.

Neither of these explanations for patent law's examination model is entirely persuasive. The substantive-screen theory only works if examination provides the claimed benefits--if examiners grant patents to the right applicants, and if those grants are reliably enforceable in court. Yet most patent scholars agree that patents have a substantial quality problem, so that many granted patents are invalid. (9) Moreover, courts often invalidate these patents when they are litigated--probably not as often as they should, (10) but often enough to create uncertainty for patent holders and the public. Indeed, there are reasons to think that patent examiners are simply incapable of systematically separating deserving and undeserving patent applications, or at least that it would be prohibitively expensive to do so. (11)

The costly-screen theory may provide a better approach, since it does not depend on a level of examination accuracy that might be impossible to achieve. The problem is that the theory does not explain much of the behavior we observe in the real world. The theory predicts that the cost of prosecuting a patent application will screen out the sort of low-value patents that make up the "patent thicket" (12) or are only asserted in nuisance lawsuits. (13) Yet stories of such patents are legion; indeed, many or even most patent cases are precisely the sort of nuisance lawsuits a costly screen might prevent. (14) So if patent examination acts as a costly screen, it is not an especially effective one. Moreover, if the main benefit of patent examination stems from the cost it imposes on applicants, then much of the work of patent lawyers and examiners is wasted; the same ends could be accomplished with far less busywork by moving to a registration system in which the fee to purchase a patent is $30,000. (15)

These flaws in the patent system--with patents being both too easy and too cheap to obtain--are well known. (16) And yet, this Article argues, things are worse than they seem. These flaws in the patent system are not static; instead, they interact and reinforce each other. This Article explores that interaction, which the legal literature has not previously recognized. This interaction creates what I call the patent spiral: a vicious cycle of worse and worse patent examination, leading to more and more low-quality patents, which in turn leads to worse and worse examination. In short, we should expect the patent system's flaws to get worse over time.

This effect has different causes in each half of the cycle. A flawed substantive screen weakens the costly screen because it results in more invalid patents: when it is too easy to obtain a patent, examiners will grant many invalid patents. These invalid patents are, however, usually worth more than the cost of obtaining them, thanks to the cost of patent litigation, the presumption of validity, and various other factors that lead parties to settle nuisance cases. If it costs $30,000 to obtain a patent, but even a plainly invalid patent has a nuisance value of $150,000, then the costly screen does not work. So the costly screen becomes less effective at discouraging patent applicants from applying for low-value patents.

And in turn, the flawed costly screen undermines the substantive screen--it makes the PTO worse at its job--because it results in more patent applications of all kinds. When it is too cheap to obtain a patent and the PTO gets applications even for patents of low social value, the substantive screen fails to do its job. The PTO, like any large bureaucracy, cannot scale indefinitely: as the number of patent applications increases, the cost of examination will increase, or the quality of examination will decline, or both. This is so because three types of costs increase with the number of applications and examiners. Personnel costs increase because hiring and search costs grow nonlinearly; the first 4000 patent examiners will be better at their jobs than the...