Finding Balance in Patent Protection

sep balanceCongress is back at work and two pieces of pending legislation stand to alter the 200-year old U.S. patent system, the Innovation Act (H.R. 9) and the Patent Act (S. 1137). Lawmakers have to walk a fine line but a little common sense should help.

Innovation can be measured by different factors, including R&D intensity, productivity, and high-tech density.  A recurrent factor used in measures on innovation has also been patent activity.  There are several relationships worth noting between patents and the entrepreneurial economy.  For example, patents have been shown to increase firm productivity and a firm's market value.  Further, except in the case of software, patent applications held by young firms correlate with higher valuations by investors.  

Despite the clear impact of patent policy to the entrepreneurial economy, smart patent policy is hard to achieve. An innovative economy depends on policymakers striking a careful balance to achieve a patent protection system that is neither too strong nor too weak to incentivize productive inventive activity.

It is widely known that the current system in the United States discourages researching existing patents due to excessive fear of litigation. This deters innovating upon pioneering inventions. Moreover, many entities hold patents that are not practiced, but rather are owned just in case of potential infringement — often referred to as the “patent troll” problem. This practice is wasteful for society as it prevents patents from being put to their most efficient use especially when much economic value is being achieved through disruptive innovation and so many startups pivot their innovations in to entirely unexpected applications. 

The excessive protections granted by contemporary patent law block firm entry and stifle competition. The results are misallocated resources and growth-reducing roadblocks to innovation and its diffusion, recently wrote Brink Lindsey, vice president for research at the Cato Institute in the white paper “Low-Hanging Fruit Guarded by Dragons: Reforming Regressive Regulation to Boost U.S. Economic Growth”.

The Startup Legal Garage at the University of California Hastings has been collecting data, via surveyed venture capitalists and their portfolio companies, on the barriers facing early-stage tech companies, and has found that “when companies spend money trying to protect their intellectual property position, they are not expanding; and when companies spend time thinking about patent demands, they are not inventing.” 

In June 2013, the White House set forth a series of executive actions and legislative recommendations designed to protect innovators from frivolous litigation and ensure high-quality patents. A year later, the Obama Administration issued new executive actions and renewed its call on Congress to finish the job by passing common-sense patent reform legislation.

Congress attempts to address issues

In February, Rep. Bob Goodlatte (R-Virginia) introduced the Innovation Act to the U.S. House of Representative. It proposes changing regulations concerning patent infringement lawsuits, particularly new pleading, discovery, fee-shifting, and ownership disclosure rules. The legislation would require a lot more information from patent owners alleging patent infringement in court pleadings, such as details on how specifically patents are being infringed upon.

This bill has been facing fierce opposition from critics who argue the proposals go too far, favoring larger, well-established entities at the expense of independent inventors and start-up entrepreneurs. A member of Congress argued in an op-ed that the bill devalues all patents and makes them more costly to defend, creating unfair advantages to the “rich, patent-infringing mega companies.”

Alternative legislation was therefore proposed in the Senate a few months later. The Patent Act is considered by many universities as a more measured approach than the Innovation Act in addressing abusive litigation practices of patent trolls. 

But the Senate’s bill has also been facing criticism, particularly around its language related to “customer stay” which, many fear, would leave foreign manufacturers outside the jurisdiction of the U.S. courts free to illegally use patented technologies without any compensating recourse for patent holders. 

A framework for evaluating impact

As Congress continues debating how to protect U.S. Innovation, a recent edition of the Kauffman Policy Digest will come handy. It offers a practical framework for evaluating patent policy and concrete advice on how policymakers can strike the right balance in patent protection. This approach includes three principles:

  • Encouraging follow-on innovation by protecting those inventors who genuinely attempt to avoid existing patents and punish inventors who willfully ignore previous patents.
  • Reducing the prevalence of ambiguous or broad patents, which increase the likelihood of accidental but costly infringement.
  • Dramatically increasing maintenance fees to discourage patents that are held but not practiced.

Policymakers might find keeping those guidelines in mind as they debate the current patent bills in an effort to find a practical solution to protecting yesterday’s inventors without stalling tomorrow’s risk takers.

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