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Proposal: Fix Patents to Free the Economy

It is time to finally heed the advice of James Madison, who warned us 200 years ago to guard patents and copyright with “strictness against abuse.” Patents have an important purpose, but when they lead to monopolies and are abused, they become the worst of crony capitalism. Today, that abuse is omnipresent and has become a significant barrier to long-term economic growth. Not only are so-called “patent-trolling” companies filing numerous, vague patents in order to file future litigation against our society’s true innovators, but corporations are also taking similar measures to unfairly stave off competition. 

The Issue

Problem Defined

200 years ago, James Madison warned Americans to guard patents and copyright with “strictness against abuse.” His words couldn't ring truer than ever today. Patents have an important purpose, but when they lead to abusive corporate monopolies, they become the worst of crony capitalism. Patent abuse today is a rampant barrier to long-term economic growth. Corporations have always used patents to stave off competition. Now, so-called “patent-trolling” companies are filing numerous, vague patents in anticipation of filing bogus lawsuits.

The current patent environment promotes monopolies, disservices consumers, and impedes innovation, where it is supposed to do just the opposite.

***insert graphic of some absurd patents currently held (preferably by well-known corporations)

Background
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1.
Current Patent Standards Are Out of Control

This is not an argument against patents and copyright in the slightest. Most of the Founders thought they were beneficial—so beneficial, in fact, that they were included in the Constitution despite the known risk of their abuse. In certain situations, patents are certainly the most logical and fair solution to promote innovation and protect the rights of inventors. 

However, patents today are filed more than ever. These patent filers rarely demonstrate the original innovation that should merit exclusive patent rights. Up from the 268 patents granted in the first 10 years of our country’s independence, there were 324,000 patents granted in 2014. This trend shows no signs of flagging. The inundation of patent requests cuts off entire industries from competition. It also bogs down patent offices, leaving inventors in limbo for an average of 3-5 years as their patents are processed. 

2.
Patent Laxness is Economically Crippling

***insert Laffer Curve/Patent Curve with an explanatory caption (roughly 2 sentences)

In practice, patent policy is more dimensional than a 2D representation of weak to strong. There are many aspects of patent policy to be examined, but this curve is useful in considering changes to patent policy. What is clear is that modern patent policy maximizes innovation and growth at a different point on this curve than where we are today. Currently we are closer to the “infinite patent” (*have this delineated on the graph*) side than we are towards the optimal level of patent policy. Researchers estimated that mounting regulations have slowed economic growth by an average of 2% per year over the past fifty years (*this was the statistic in the Lincoln Labs document, can we find a more concrete, convincing statistic?*).

3.
An Uphill Battle for Upstanding Companies

In 1991, Bill Gates wrote an all-company memo: “I feel certain that some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.” This behavior is precisely what we have seen in many sectors of the economy. As Bill Gates explained, “A future startup with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors.”

Today, this is happening at the hands of nonpracticing entities that have large patent portfolios and sue small businesses for alleged infringement. Sometimes the infringement may be substantiated, but often the infringement is alleged but never proven. Often these non-practicing entities send a threatening letter asking for $50,000-$100,000 for a settlement.  When small businesses realize that the proposed settlement is less than the cost of defending themselves in court, they are often quick to pay up even when they are not infringing. 

So-called patent trolls were estimated to cost the economy $29 billion in 2011 alone in just direct legal costs—not even counting the diversion of resources, delays in new products, and loss of market share. Another estimate shows that, in aggregate, patent litigation destroys over $60 billion in firm wealth each year.

4.
Stories of Patent Abuse

Vlingo

  • Consider the story of Michael Phillips, chronicled in New York Times piece Patents Used as a Sword. In 2006, he co-founded a voice recognition company that developed the technology that was integrated into Siri. His company, Vlingo, was contacted by a much larger voice recognition company, Nuance. Nuance’s chief executive told Mr. Phillips, “I have patents that can prevent you from practicing in this market. They issued Phillips an ultimatum: he could sell his firm to Nuance or be sued for patent infringement. Phillips knew his technology was not infringing, as he had developed it with his own team out of a university laboratory, so Phillips refused to sell. 
  • Then Vlingo was hit with six lawsuits. Eventually, the jury ruled that there was no infringement, but winning the first lawsuit cost Phillips $3 million dollars and the financial damage was already done. After triumphing in this lawsuit, he was informed that he still had 5 more legal battles to fight, and was forced to shut down operations and sell his company. Phillips explains, “We were on the brink of changing the world before we got stuck in this legal muck.” Incredibly, Phillip’s story is a success story: he had the resources to fight through one trial, and he had clear evidence that he wasn’t infringing. Other entrepreneurs are not so lucky.
5.
The Solution

The underlying problem at the heart of patent abuse is low-quality patents and a system that encourages trolling behavior. The solution is to restore a system that abides by the Constitution’s directions to “promote the progress of the sciences and useful arts.” Patents can encourage innovation, but they are not the only way, or even the primary way, that innovation occurs in the economy. 

Go deeper
Expert Authors

N/A

Jack Jundanian
Student - Princeton University

The Solution

Proposed Recommendations
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1.
Increase patent quality requirements
  • Patents are required only to be for things that are novel, non-obvious, and useful. This standard may seem clear in principle, but in practice there has been an abject failure to abide by the Constitution’s mandate. This standard must be strengthened to increase patent quality. Increasing patent quality with a higher standard and higher consistency in implementation would drastically increase competition and increase—not decrease—research and development. Entire new sectors of the economy would become open to competition. Imagine the innovation and competition of internet startups happening across broad sectors of the economy.
  • Create new statutory language to specify that independent creation by others is evidence that the patented idea is not “non-obvious” to someone skilled in the art; if others are creating the same idea at the same time independently then this indicates the idea is obvious to someone of average skill in the art.
2.
Require that patent applications are accessible and provide teachable information
  • Patents should be an instruction guide for the world on how to build that invention—if they aren’t, then they must be rejected by the USPTO. 
  • **Make this quote a graphic of some sort**: 112 requires “patents have a written description of the invention... in such full, clear, concise and exact terms as to enable any person skilled in the art... to make and use the [invention].”
3.
Reduce or eliminate “business method patents” and “design patents.”
  • The free market means when someone tries a new business method, others can borrow, compete and improve upon that first business method. This is an essential fact about how the free market works. Entire business programs are devoted to studying the business models of various companies in different markets and applying those same strategies to new markets (see Harvard MBA case studies).
  • In a competitive marketplace, often the first entrant with a new business model loses because of poor execution, misreading their consumer base, or failing to invest in better technology. This is a feature, not a bug, of the free market. But if that first entrant can secure a business method patent, it can secure its “first mover advantage” and never be forced to execute well and compete in the marketplace. This is terrible for competition and innovation. What is the economic argument to sustain this cost to the economy?
4.
Create independent invention defense
  • In the absence of actual alleged copyright, a patent holder should not be able to sue an innovator. This is the law for copyright and trademark law already, where if someone creates something substantially similar to another, but can prove that they didn’t or couldn’t have copied, then they are not infringing or violating a trade secret. If Newton and Leibniz invented calculus simultaneously and independently, it’s certainly possible that two individuals invented the potato gun without knowledge of the other. Lawsuits should not arise from such coincidences.
5.
Make the loser pay
  • In the Founding Era, those who brought patent lawsuits and lost had to pay the costs of litigation; this is called loser pays. There is currently no system to deincentivize patent trolls from bringing about legally frivolous lawsuits. Recently, there has been more interest by the courts in loser pays, but legislation can make this clearer. Those who bring meritless claims should have to pay for the litigation—doing so will drain the swamp of patent trolls.
6.
Speed up USPTO approval and rejection processes.
  • Patents are one of the primary ways the federal government regulates the private sector. This regulation must be done as quickly and efficiently as possible. Currently, the response time for a patent application is three to five years. Due to a backlog, it can be over a year before the patent application is even looked at for the first time. 
  • The total time spent looking at a patent application is estimated at eighteen hours on average. The easiest way to get rid of a patent is to grant it, rather than to reject it. Thus, it shouldn’t be surprising that approximately 75% of patents are granted by the PTO.
Expected Results
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Budget
Budget Impact
Net Present Value

The Conversation

This proposal is now closed.

The US Treasury Secretary acknowledged the people’s desire to honor abolitionist leader Harriet Tubman. As of 2020, she will be the new face of the $20 bill, with the portrait of Andrew Jackson relocated to the back. Alexander Hamilton will remain untouched on the $10 bill, and we continue to honor his vision.

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The US Treasury Secretary acknowledged the people’s desire to honor abolitionist leader Harriet Tubman. As of 2020, she will be the new face of the $20 bill, with the portrait of Andrew Jackson relocated to the back. Alexander Hamilton will remain untouched on the $10 bill, and we continue to honor his vision.

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