Understanding patent-quality mechanisms.

• Author: Wagner, R. Polk

INTRODUCTION I. PATENT QUALITY: A READER'S GUIDE A. What Is Patent Quality? B. Should We Care About Patent Quality? 1. Uncertainty 2. Type I and Type II Errors 3. The Cure Is Worse Than the Disease 4. Litigation and Strategic Behavior 5. The Public Believes that There Is a Patent Problem 6. Feedback Effects II. PATENT-QUALITY MECHANISMS: WHAT CAUSES LOW PATENT QUALITY? A. Deferring Clarity B. Administrative Incentives C. Feedback Effects: The Prisoner's Dilemma of Patent Quality D. Cognitive Biases and Patent Quality E. Nontraditional Uses for Patents III. THE DURABILITY OF LOW PATENT QUALITY: WHY MOST REFORMS WILL FAIL A. Administrative Changes 1. Increasing Examiner Headcount 2. Improving Search Tools 3. Institutionalizing Patent Quality 4. Broadening Public Access to Prosecution 5. Postgrant Review B. Reforming the Prosecution Process C. Going in the Other Direction: Patent Registration D. The Weaknesses of These Approaches IV. AN INCENTIVES-BASED APPROACH TO ADDRESSING PATENT QUALITY A. Encouraging Early Clarity B. Addressing Feedback (Portfolio) Effects C. Addressing Administrative Incentives D. Penalizing Bad Patents CONCLUSION INTRODUCTION

The cry to "improve patent quality" is heard anywhere patent lawyers gather and is a centerpiece of many of the political and academic establishments' major reform agendas. (1) Indeed, although the modern patent system is entangled in policy disputes across a huge range of issues, the need to improve patent quality is essentially undisputed. (2) This is, in a significant sense, unsurprising. Basic structural facts flag the issue quite clearly: as the amount of patenting activity has grown rapidly worldwide, the administrative apparatus of the patent system has been strained to its limits, raising urgent concerns about the viability of its basic mission of evaluating patentability. (3) At the same time, the substantial costs of inappropriately granting large numbers of patents--uncertainty, additional litigation, and perversion of the incentives generated by patents themselves--are reasonably well understood. (4) Despite the near-universal agreement surrounding the question of patent quality, relatively little attention has been paid to the mechanisms that support (and undermine) it. Improving patent quality is generally viewed as an administrative concern--a question of funding levels, regulatory process, bureaucratic reform, and so on. While there have been many interesting and innovative proposals for enhancing patent quality by reforming (even radically) the patent-prosecution process, less work has been done to identify the underlying mechanisms of patent quality. (6)

What has largely been lost in this drumbeat for improved patent quality is that the modern patent system affirmatively encourages low patent quality (7)--the incentives at work are such that we cannot reasonably expect anything other than very large numbers of low-quality patents. For this reason, virtually all of the proposed reforms directed to patent quality are doomed to fail; until we change the incentives (and change them quite significantly), the patent-quality problem will continue to grow. (8)

In this Article, I suggest that only by understanding the mechanisms of patent quality--the incentive structure that not only discourages "good" patent behavior but also encourages "bad" patent behavior-will we make any real progress in improving the situation. Low patent quality, I argue, is not simply the problem of the U.S. Patent and Trademark Office (USPTO) and its counterparts worldwide, and no patent office can "fix" patent quality alone. Indeed, given the number of annual filings, it is hard to imagine any scenario in which enough resources could be directed toward this effort to have a meaningful impact. Instead, a serious effort to improve patent quality will need to address the reasons why patentees increasingly adopt a high-volume, low-quality patenting strategy, why litigation has become virtually the only reliable tool for determining a patent's scope and validity, and why memes such as "patent trolls" and "patent thickets" have become embedded in current legal-policy discourse.

A patent system that yields high-quality patents is an attainable goal. But administrative reforms--although they might well help--will not alone get us there. Until patentees have strong, unequivocal incentives to seek patents that clearly meet the standards of patentability, that are explained in the context of the prior art, and that draw clear and unambiguous lines around their subject matter, we will not succeed. The tools are there--we just need to understand which ones to use.

1. PATENT QUALITY: A READER'S GUIDE

   A. What Is Patent Quality?

   At the outset, it is important to be precise about what I mean by "patent quality" in this context. Patent quality is the capacity of a granted patent to meet (or exceed) the statutory standards of patentability--most importantly, to be novel, nonobvious, and clearly and sufficiently described. (9) Thus, a "low quality" patent is one granted for an invention that does not meet these standards. And, although it should be clear, I want to make plain that there is a definite distinction between the quality of a patent (as I use the term here), and its value. Although there may at times be a relationship between value and quality in patenting--in an ideal world, the correlation would be rather strong--at other times these characteristics will be independent. A patent's value depends on factors well beyond those of concern to the patent law--the size of the relevant market, the relationship between the patent's scope and a marketable good or service, and many others. Some of these factors will suggest the quality of the patent, such as the nature of the advance over the prior art, but others have little or nothing to do with patent quality as defined above.

   B. Should We Care About Patent Quality?

   Another threshold question is whether there is a problem with patent quality worthy of further consideration. That is, an argument might be put forth that although higher patent quality is better than lower patent quality, there is no particular reason to believe that the current state of affairs is dramatically suboptimal. A stronger form of this argument would posit a tradeoff between patent quality and costs, and suggest that perhaps "high" patent quality is an inefficient goal: it is better, perhaps, to allow market forces (in the form of litigation and licensing) to sort the wheat from the chaff in terms of quality in the same way that patent value is cleared. (10)

   I have significant sympathy for this line of argument. Reaching a state of affairs where every granted patent meets or exceeds the standards of patentability seems both implausible and likely a misallocation of resources. The patent-prosecution process is fraught with serious information problems of the sort that a robust marketplace might be able to resolve at least as well as an over-taxed administrative agency. (11) However, the case for better patent quality still carries the day, for the several reasons that follow.

   1. Uncertainty

      Particularly compelling is the recognition that a patent system characterized by low patent quality sows substantial uncertainty at all levels of the patent system: uncertainty about the validity of granted patents, uncertainty about the scope of granted patents, uncertainty about whether a particular invention is patentable, and uncertainty about whether a valid patent will be fully enforced.

      Uncertainty obviously makes business decisions based on patents (whether by patentees, prospective licensees, investors, etc.) much more difficult and costly. To be sure, I recognize that uncertainty exists in virtually every human activity, and that robust markets can function well despite that uncertainty. But it is important to remember that patent laws are an intervention into the free operation of the market--a well-justified intervention, in my view, but an intervention nonetheless. (12) Accordingly, the basis of the patent system is that the propertization of certain ideas ("patentable" ones, of course) will stimulate behaviors that will enable the market to better support innovation. (13) The strongest case for the patent system, then, is where it best performs the function of enabling the market for innovation. And it cannot do so particularly well when the basic component of the implementation mechanism--property rights in (patentable) ideas--are so imbued with uncertainty. (14) Again, uncertainty is both unavoidable and unlikely to be crushing (at least at moderate levels) in this context. But I am convinced that the current patent system has too much uncertainty, and that low patent quality bears substantial responsibility for it. It is the patent reformer's version of the Hippocratic Oath: first, consider uncertainty.

   2. Type I and Type II Errors (15)

      By definition, a low-quality patent system is characterized by a large number of errors in the patent-granting process. Paradigmatically, we think of these errors as being inappropriate grants--that is, patents granted that do not meet the standards of patentability. But errors in the patent-granting process also involve inappropriate denials--those where patentable inventions are turned away. These errors may well be as costly to society as inappropriate grants, for they may undermine the incentives for important innovations to be fully commercialized or have demoralizing effects on future research efforts. (16)

   3. The Cure Is Worse than the Disease

      Another reason to be concerned about patent quality is that many of the current responses to low-quality patents may have unintended pernicious effects across the patent system. For example, in eBay Inc. v. MercExchange, L.L.C., the Supreme Court's widely reported rejection of the Federal Circuit's longstanding presumption in favor of injunctive relief for patent infringement was...