Is the U.S. Patent System Promoting Innovation? - Chicago-Kent

By: D. Deitch

Innovation is understood to be a foundational pillar to a thriving economy. Historically, the United States has incentivized innovation for its believed increase in prosperity as well as social welfare.[1] The United States patent system, in its broadest sense, was simply an extension to the long-established history of property rights. Although, what made the patent system so exciting is that, unlike real property, there is not a finite limit to the amount of property that can be distributed. Equally important to both real property rights and intellectual property rights (like patents) is having well-defined rights to ensure security and protection. Without a widespread belief that an inventor’s work will be properly protected, participation in the patent system will steeply decline.

The patent system incentivizes innovation through rewarding invention and protecting that of the invention, however, just because the patent system incentivizes innovation doesn’t necessarily mean it promotes it.[2] A modern look into the patent system, with respect to what aspects spur and deter innovation, as well as patents inevitable intersection with competition and policy help to understand if our current system truly promotes innovation in America.

Competition’s Relationship to Patents

The patent system is inherently linked to competition. Patents created a competitive environment of innovation, with innovators expecting to be able to profit off the ownership rights their patents conferred.[3] Every day people made long-term commitments to their inventions in large part due to the perceived idea that they would receive higher returns on their inventive activity.[4] This notion remained true through the 20^th century and continues to thrive well beyond the technological boom.

Not shockingly, people are still driven by return on investment. In recent years, economists such as Scotchmer (1999), and Gallini (2002) have found that patents continue to promote ex ante innovation, meaning that patents influence people to invent because of the expectation of profiting on their invention.[5] A competition to win a patent right can lead to a race to innovate and the more competitors the system has in “the race” the greater the variation in thought process leading to a higher likelihood of breakthrough.[6] One of the many examples of this comes from the pharmaceutical industry. Tagamet, an ulcer treating drug was patented, which forced other pharmaceutical R&D efforts to design around the Tagamet patent.[7] In designing around the innovation from Tagamet, the development of another successful product, Zantac, would not have been possible.[8] This is just one of many isolated examples of how competition can stimulate innovation. Another way in which competition and patents coexist is how they are mutually affected by federal policy.

Policy has had a major impact on the current state of innovation in the United States. §101 of the Patent Act states “Whoever invents or discovers any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof, may obtain a patent.”[9] Despite this language being tremendously broad, courts universally held that some inventions are off-limits like abstract intellectual concepts, mental steps, and business methods.[10] However, recent changes in the last 30 years have substantially altered the patent ecosystem.

Altering the Scope of Patentable Subject Matter

As mentioned, some of the long-held areas of “off-limits” patenting have been challenged in recent years.[11] In the 1980s, two different Supreme Court decisions held that both man-made living organisms and computer software constitute as patentable subject matter. Additionally, in 1999, Federal Circuit Court ruled that business methods can be patented.[12] These significant decisions opened up an argument that is still ongoing as to whether the allowance of such patents accelerate or obstruct innovation.[13] Patenting software and business methods was a dangerous door to open because of America’s history in avoiding ownership of such abstract ideas. Since innovation in many fields builds incrementally off preceding work, competitive concerns have been raised with the thought that allowing these patents will increase the potential for patent thickets and royalty stacking which undoubtedly deter innovation.[14]

As the boundaries continue to get stretched, policy makers must assess the system and decide if granting patents on previously dismissed subject matter promotes progress or hinders competition and innovation. If the scope of patentable subject matter continues to widen, the transition for patent and competition policy will only get more tumultuous.[15] An idea that was previously held as open to free competition that is now allowed to be patented by an individual or group, creates a difficult task for policy makers.[16] How should the existing patent doctrines apply to the newly patentable subjects? This is one of many questions that has been tangled with but is far from answered.

It is unclear to what extent expanding the scope of patentable subject matter impacts innovation, but it is evident that a recognizable relationship exists. The “obvious” component of the legal standard for a patent continues to weaken which is allowing people to gain ownership over ideas that are not significant technological advances.[17] It is imperative that the statutory application be held to a high standard or we will see the participation in patents diminish.[18] The participation alone in the patent system promotes innovation regardless of what the legitimate returns are.[19] However, the trend in policy has given the common inventor a weaker belief that their labor will be compensated for.

Achieving the Balance

The balance our patent system is in constant search of is between encouraging innovation and avoiding monopolies.[20] The economic effectiveness of all forms of property is dependent in large part to the supporting institutions.[21] So what things, from a policy standpoint, should be considered to help achieve this balance?

As previously mentioned, tightening the legal standards that are used in evaluating whether a patent is “obvious” would promote open market efficiency.[22] Additionally, the Patent and Trademark Office (PTO) has long recommended expanding its “second-pair of eyes” review.[23] This form of review allows the PTO to identify issues that should be given further attention by the examiners.[24] The PTO first utilized this method in an attempt to improve the quality of business method patents.[25] Understanding that examining business method patents needed a far different approach than the traditional patents the examiners were accustomed to evaluating, the PTO implemented this new style of review to boost the patent quality.[26] There have been suggestions to expand this stylistic review to patents that pose substantial economic impact.[27]

Emerging technologies have given examiners trouble in providing consistent and efficient examination and eventual issuance or denial of such patents. Many feel that implementing the expansion of the second pair of eyes approach will help strike the balance between public interest in intellectual property and individual customer’s interest in their patent or trademark.[28] Innovation is directly impacted because just as the PTO should issue valid patents to encourage invention, disclosure and commercial development, they also must protect the public against the issuance of invalid patents.[29] Innovation is hampered when unnecessary costs and market power are distributed via invalid patent issuance.[30]

Conclusion

The patent system plays a significant role in innovation and when the system is operating in harmony with competition, innovation thrives. However, the implementation of questionable patents can prevent innovation by deterring competition. The essential balance between encouraging innovation and preventing monopolies needs to remain steady in order for the system to flourish. Based on recent momentum, measures may need to be taken in order to balance the scale once again.

[1] James Bessen & Michael J. Meurer, Do Patents Perform Like Property in academy of management perspectives: Vol. 22, no. 3, (Aug. 2008) https://www.jstor.org/stable/27747459?read-now=1&seq=1#page_scan_tab_contents

[2] David Kline, Do Patents Really Promote Innovation, micholsonip hot topics blog (April 24, 2017) https://michelsonip.com/wp-content/uploads/2017/04/4-A-Hot-Topic-Do-Patents-Really-Promote-Innovation.pdf

[3] Id.

[4] Id.

[5] Suzanne Scotchmer, On the Optimality of the Patent Renewal System, the RAND journal of economics, vol. 30, no. 2, 181 (1999) https://www.jstor.org/stable/2556076; and Nancy, T. Gallini, The Economics of Patents: Lessons from Recent U.S. Patent Reform, Journal of Economic Perspectives, vol. 16, no. 2, 131 (Spring 2002) https://www.aeaweb.org/articles?id=10.1257/0895330027292

[6] United States Federal Trade Commission, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, 10, (October 2003) https://books.google.com/books?hl=en&lr=&id=4EXaUQRxsf0C&oi=fnd&pg=PA1&dq=Do+Patents+promote+innovation&ots=lCxwT8xdme&sig=h2y3KnNQu_ErV84Rvb0N3x7NNmk#v=onepage&q=race&f=false

[7] Id. at page 21.

[8] Id.

[9] 35 U.S.C. § 101.

[10] Supra note 6 at page 38

[11] Id.

[12] Id at page 14

[13] Id.

[14] See Bessen, supra note 1.

[15] Supra note 6.

[16] Id.

[17] See Bessen, supra note 1.

[18] Id.