Why Patent Demand?

I have spent my entire legal career working within the patent system. My first experience as a patent litigator taught me the incredible power that a single patent can impose on the market, and the huge expense of patent litigation. Now, as in-house IP counsel at a large software company, I see the enormous risk that all companies face from patent litigation just by being in business. Large corporations are filing huge numbers of patent applications so that, if they are sued by a competitor (or another company that actually makes a product), they will likely have a patent within their portfolio to file their own lawsuit (sort of like mutually assured destruction).

Because patent infringement lawsuits cost so much to defend ($4 million), just the filing or threat of filing a lawsuit is a very powerful weapon. I have heard IBM patent professionals publicly declare that the size and scope of IBM’s patent portfolio allows them to enter any business it chooses without fear of patent infringement suits. So, when IBM decides that it would like to enter a market, the player who created the market in the first place can’t use its patent portfolio against IBM without fear of a retaliatory strike from IBM in an area that may be completely unrelated to the technology that created the market. Thus, a real inventor’s market advantage from its patent portfolio is limited by the huge patent portfolios developed by huge companies.

IBM files more than ten patent applications each and every day of the year…..

Supply and Demand Reviewed

I like to examine markets using economic principles. In a market for commodities, the Law of Demand generally states that if all other things are equal, the price of a good has an inverse relationship with the quantity of the goods demanded. In other words, the higher the price, the lower the quantity of the goods demanded. This relationship is depicted graphically by a Demand Curve, with price on the y-axis and the quantity demanded on the x-axis as follows:

Of course, there is an equally powerful Law of Supply in most markets, which reflects that the supply of a good is directly related to its price graphically reflected in a Supply Curve. The interaction between the Demand Curve and the Supply Curve in a perfectly competitive market yields a price and quantity demanded that will efficiently allocate resources.

The Patent Application Market

What does this have to do with the patent system? Well, consider that a patent application is a “good” within its market system. The Law of Demand would require that as the price of a patent application increases, the number of patent applications demanded by the market would decrease. The Law of Supply would predict that as the price of a patent application rises, so does the quantity supplied. However, in the market for patent applications, the US Government is, in effect, a monopolist that controls both the price of patent applications and the quantity of patent applications supplied.

In a normal market controlled by a monopolist, economic theory would predict that the monopolist would set a price and supply goods that would maximize its profit. In the market for patent applications, the US Government follows a policy that the price of a patent application should not keep an inventor from accessing the patent system. Large corporations have determined that it is in their interest to file as many patent applications as possible because of the potential value of a single patent application. The interaction of the government policy and the corporate determination have lead to the 400,000+ annual patent applications and the chaos created within the USPTO simply trying to deal with the incredible volume of applications – to say nothing of providing a quality examination process.

Hire, Train, Repeat, Repeat.....

In its 2006 Annual Report (Report), the USPTO congratulated itself for exceeding its hiring target by over 200 new examiners for a total of 1,218 new examiners. That is, more than one third of the total examining corps are new examiners, which would lead to a three year average examination career. The Report predicts that the USPTO will hire 1,200 more new examiners in 2007…. Of course, for the first eight months of a new examiner’s career they are training in classroom groups prior to being new examiners actually examining cases for two years prior to moving on.

So, the United States has one of its most important resources being evaluated by recent college graduates with three years of experience. I believe that the examining corp is trying its best to do its job, but the numbers are overwhelming. How do we fix this problem? 1. reduce the number of patent applications and 2. increase the pay for the examination corp to improve retention of talent. Raising the patent fees to $50,000 would cut the number of patent applications filed by 2/3 and increase the revenue to the patent office from $1.6 billion currently to $5 billion ($50,000 * 100,000 (est) applications per year).

Two Interview Stories

One of my former and much esteemed colleagues, Ken Adamo of Jones Day, told me of a trip to the USPTO for an examiner interview. According to Ken, the examiner was a true expert of the subject matter, to the extent that when Ken would make an argument about a novel aspect of the invention, the examiner would leave the room for a few minutes only to return with an applicable reference deflating the argument. I can’t remember whether Ken was ultimately successful (knowing him, he probably was), but the point is that this is the type of individual that we all would like to have protecting the free market from impingement by improvidently granted patents.

Having been involved in numerous examiner interviews over the years, I was recently struck by a comment from an inventor about an interview: “I expected to discuss my case with someone like Thomas Jefferson . . . not a recent college graduate, who did not even read my application entirely.” Of course, I made some excuse regarding the enormous time pressure the examiners are under (which is true). The unyielding pressure of 400,000 plus patent applications has made Ken’s examiner at the USPTO extinct.

Opening Salvo

The US patent system was intended to help promote the useful arts by providing inventors of new technologies the time-limited right to exclude others from the market in exchange for disclosure of their inventions. Thus, it was thought, inventors would be fairly compensated for their contributions and society would benefit because the early disclosure of invention would encourage more rapid evolution of technology.

The current US patent system is in crisis. In my opinion, this crisis is the result of the sheer volume of patent applications that companies file to protect themselves from the threat of patent litigation and to extract as much revenue from the resulting patents as possible. As a result of the volume of patent filings, the USPTO has been overwhelmed and seems to vacillate between the policy of granting patents quickly without the necessary rigorous review and the policy of creating as many obstacles to obtaining patents as possible (the current trend). The USPTO is not primarily responsible for the problems in the US patent system, but rather the volume of patent applications has created an environment wherein no human process can adequately decide whether any single patent application should be entitled to a patent. In other words, the USPTO has been given an impossible task with no rational solution.

Here is the data:

Wow! Over the past 5 years, 1.8 million patent applications were filed in the US. It is no wonder that the USPTO has a 1 million case backlog, and it takes an Examiner nearly 3 years on average to read and reply to one of my cases in the software art. But, even scarier, is to look at a plot of the data over time:

In your mind, just visualize the extension of that line through 2010 (don’t worry, I’ll provide a model that will give accurate forecasts later). Half a million patent applications per year by 2010 is a great possibility. The patent system is collapsing under this weight of patent applications and granted patents and none of the proposed “patent reforms” wending their way through Congress address this fundamental problem.

So, how can we possibly fix this problem? Each year, we hear of some new patent reform, but the reform tends to focus on treating a symptom of the problem (litigation) rather than the actual problem (application volume). Similarly, courts have begun to provide limits on elements of the litigation process. The main problem that I have with these solutions is that they de-value all patents regardless of whether the patent should have been granted by the USPTO or not.

I like to solve problems using market-based solutions if possible. There are too many patent applications, in other words we have a classic over-supply problem. How do you fix an over-supply of goods in a government-controlled market? Raise the price for large entities. Currently, filing a patent application costs $1000 for a large entity, peanuts for any large corporation when you consider the potential benefit of a single patent. Of course, this ignores the attorney fees to prepare the application. My hypothesis is that the $1000 application fee does not provide any disincentive for filing marginal patent applications. A corporation will always file the marginal patent application and the application fee is not even a consideration in the decision process.

PROPOSED SOLUTION

I would raise patent application fees to $50,000 for large entities (no change for small entities, individuals and universities for now). I would make this fee apply to all applications currently being examined by the USPTO. My guess (to be validated later) is that this will dispose of the current backlog of applications and leave the USPTO with about 100,000 applications to examine per year.

Patent Demand is a forum to discuss the proposed solution, its benefits and drawbacks in an effort to improve the US patent system. I hope that you will contribute to the discussion.