Are Patent Problems Stifling U.S. Innovation?

The U.S. Patent & Trademark Office is drowning in applications while its budget shrinks. Stanford Law professor Mark Lemley suggests some fixes

Chief executives from 28 large corporations, including Google (GOOG), Cisco (CSCO), Research in Motion (RIMM), and Intel (INTC), sent President Barack Obama a letter on Mar. 25, urging him to support the Patent Reform Act of 2009. The problem, they say: Litigation costs and patent infringement damages are stifling innovation.

The proponents say the measure would help patent holders by giving them a stronger defense against lawsuits from others who claim to have made the same invention, fights that can cost upwards of $10 million. The biggest change: Patents would go to the first to file an application, rather than the first to invent, which is often hard to determine. The bill would also curb forum shopping, in which plaintiffs look around the U.S. for judges they believe are sympathetic to their side.

But litigation isn't the only problem. The U.S. Patent & Trademark Office is drowning in applications. If new filings were to stop today, it would take the agency's 9,500 employees two years to clear the backlog. Moreover, the Patent Office may soon run short of money. The office is entirely funded by patent application fees—it expects to take in $2 billion in 2009—and those applications are projected to drop 2% to 10% this year as companies deal with the slumping economy.

Mark A. Lemley, a professor at Stanford Law School and specialist in intellectual property, has been sounding the alarm on these issues for years. He's co-author, with Dan L. Burk, of an upcoming book, The Patent Crisis and How the Courts Can Solve It. Lemley spoke to BusinessWeek's Damian Joseph. An edited version of their conversation follows:

What's wrong with the U.S. patent system?

I think there are a couple of problems. The Patent Office gets 450,000 applications a year, and there's a backlog of 1 million applications—700,000 of them are just sitting in a stack. The examiners don't have time to review them. It's sort of turned patenting to a mass-production business, and I think there are concerns that quality has declined. A lot of patents shouldn't have been issued.

Also it is impossible to finally ever reject a patent. Someone can go back unlimited times and get a do-over. If the patent office denies your application, you can keep coming back and back until they approve. Examiners turn over pretty quickly so if a new examiner reviews the resubmitted application, or he's not paying attention, it can slip through.

Why should businesses care if there are issues with the patent system?

They spend a lot of money just paying lawyers and dealing with copyright infringement claims. To take a patent case to trial can cost $5 million to $10 million. Even worse is the time and distraction. Some number of employees are dealing with lawsuits, depositions, and collecting materials. Then at the end of the day, there's the risk that even a weak case could still go to jury and you never know what the jury will do. The jury could award huge damages. Companies end up settling cases and paying out money to avoid that.

Is there an effect on the overall economy?

I think it has an affect on the overall economy, but concentrated in different industries. The problems are most severe in information technology. Money being diverted from research and design is most problematic.

What can be done to solve the problem?

I think there are a couple of basic approaches—by fixing forum-shopping and fixing the way we calculate infringement damages. We are, though, beginning to see an approach in courts and Congress to deal with litigation abuse problems. We recently fixed the problem of getting injunctions, where cases involving small components of an item can shut down the production of the larger product. (For yet another solution, check out this BusinessWeek article on peer-to-patent crowdsourcing.)

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