U.S. Patent System Needs Improvement Despite ‘Record High’ Grant Rate, Brookings Says

While the PTO is not “fundamentally broken,” it isn’t “functioning as efficaciously as possible” in that lack of rigor has caused the office to lean “too heavily in favor of intellectual property protection,” Brookings said. Problems with the U.S. patent system in general include “a decline in the quality of patents being issued, the granting of excessively broad claims over questionable subject matter, granting patent protection to ‘nature,’ to functions, or otherwise inappropriate subject matter, difficulty entering markets with many patents, and abuse of the legal system to extract rewards for infringement without contributing to innovation,” Brookings said. Funding and staffing issues at PTO resulted in longer wait times for the office to grant a patent application -- an average of 1.9 years in the late 1970s grew to an average of 3.2 years between 2007 and 2011, Brookings said. Jonathan Rothwell, the report’s lead author, told us patent examiners he spoke with did not specifically mention the need for increased staffing at PTO, but they gave him the impression that they needed more time to effectively examine a patent given the increasing complexity of applications.

The patent system “pendulum may be swinging in the other direction” as the government implements the America Invents Act (AIA), Brookings said. The AIA directs PTO to implement measures to increase patent examination quality and make it more difficult to abuse patent litigation. PTO said it has increased its patent examination staff from 6,780 in fiscal year 2011 to 7,935 in fiscal year 2012. PTO is also working to increase examiners’ technical expertise and has begun opening satellite offices, with its first one opening in Detroit last July; offices are also planned for Dallas, Denver and Silicon Valley. Internal reforms and AIA implementation measures helped PTO reduce its patent backlog to 608,283 applications at the end of fiscal year 2012, from more than 750,000 at the beginning of 2009, then-PTO Director David Kappos said in November in the office’s annual performance report (http://xrl.us/bod6n4). Kappos retired as PTO director at the end of January.

Those measures are a “positive step,” Rothwell said, particularly the implementation of the regional examination offices. Those offices will make it easier for PTO to recruit people with expertise in localized technology clusters, such as the high volume of IT industry experts in Silicon Valley, he said. Additional steps would also improve the patent system, including limiting the ability to patent software functions, Rothwell said. “Based on Supreme Court rulings in the ‘50s and ‘60s ... functionality is not supposed to be a subject matter that can be patented,” he said. “When that applies to software, it would say that certain software codes, written in a certain way, can be patented. But you shouldn’t be able to patent a function that could be achieved through other means."

Non-producing entities (NPEs), also referred to as patent-assertion entities (PAEs), are also taxing the U.S. patent system by abusing the litigation process -- and that “needs to be resolved,” Brookings said. “Since NPEs are not producers, their revenue comes solely (or mostly) from the licensing and litigation of intellectual property, which gives them a strong incentive to issue legal challenges, while avoiding reputational repercussions from consumers. Not surprisingly, a raft of academic and journalistic accounts is increasingly suggesting that non-producers (along with spurious or hyper-strategic) patent suits are perverting the patenting system.” The federal government has taken notice of the issue, Brookings said. The FTC and Department of Justice held a joint workshop on the impact of PAEs in December (CD Dec 11/12 p11). PTO is considering changing the rules on reporting real-party-of-interest (RPI) information to better reflect the identity of a patent’s current owner throughout the patent lifecycle (CD Jan 14 p8). The FTC and DOJ are planning to support PTO in its efforts to improve disclosure of RPI information, FTC Chairman Jon Leibowitz said Friday during a conference call with reporters. “The disclosure of this information will make markets function more effectively and more transparently,” he said.

Legislators are also considering remedies to the problem, though Brookings said a proposal by Rep. Peter DeFazio, D-Ore., is lacking. “A complete prohibition of NPEs’ ability to bring up patent litigation disputes would go too far,” Brookings said. “Throughout U.S. history, patents have been monetized, providing an important spark to innovation. In so far as small businesses cannot afford a legal defense staff to monitor possible value-diminishing infringements, NPEs can serve a useful function by increasing the value of inventions and minimizing infringement risk. Yet, parties that bring frivolous law suits against companies for the sole purpose of extracting money should be punished."

Brookings suggested an alternative. “NPEs should be prohibited from initiating litigation or legal threats of any kind related to a patent claim until their claim has first been assessed and approved as valid by a patent authority, such as the Patent Trial and Review Board. An expert judge could be charged with assessing the merits of the infringement claim, on a preliminary and ex-parte only basis (meaning between the owner and the judge), and whether or not the owner can proceed with legal action (without taking a view as to whether or not the owner should win redress)."

The Brookings proposal would “add a layer of scrutiny,” Rothwell said. “It would filter out the illegitimate claims of NPEs. If they knew that their claim was being scrutinized by a judge and the [PTO], they have a strong incentive make sure it’s a good and compelling claim. If they know it’s a fairly weak patent, they're not going to want to subject it to that extra scrutiny."

Critics and proponents of the U.S. patent system will like the Brookings report, said Colleen Chien, an intellectual property scholar at the Fenwick & West law firm and professor at the Santa Clara University School of Law. “It alleges that while our innovation system is fundamentally working, there are serious problems that need attention including those that pertain to tech patents and patent assertion entities.”