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Make American Intellectual Property Great Again

Published in Richmond Times-Dispatch

Co-authored with Robert J. Koch, former head of the intellectual property practice group at Milbank, Tweed, Hadley & McCloy LLP in Washington, D.C. 

The Declaration of Independence on July 4, 1776, is celebrated and commemorated as what gave birth to the United States. But the nation’s ascendance from colonial poverty to global superpower in a little more than 200 years was not just the result of political ideas.

It was also helped by an appreciation of economics by the Founders, who enshrined in the Constitution a national patent system to protect and foster commercialization of invention — and the continuous development of new and better products and ways of doing things.

Having served us well for more than two centuries, America’s system of patents and intellectual property rights have been largely taken for granted. And so, not surprisingly, few today realize the consequences and extent to which the U.S. patent system has deteriorated over the last decade.

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The Great Recession of 2008 technically ended in June 2009, but normal recovery never got traction in the next eight years of Obama’s two terms.

Rearranging health care through Obamacare, reorganizing financial service regulations through Dodd-Frank, and the EPA’s war on fossil fuels — affecting some 38 percent of the economy — were thought to be the chief culprits hindering economic recovery.

But it turns out that during this time frame, Supreme Court rulings and congressional legislation that affected the U.S. patent system and the protection of intellectual property also contributed to diminished innovation, fewer jobs created, and lower economic growth.

Two factors were at the root of perceived problems of the U.S. patent system that had prompted responses by the judiciary and the legislature: 1) the high cost of patent litigation and 2) the proliferation of vague, overly broad, and otherwise bad patents that were exploited by “patent trolls.”

Patent trolls typically own large numbers of patents. Their business model revolves around monetizing portfolio patents through licensing fees from alleged infringers under threat of litigation.

In 2011 Congress sought to correct these problems by passing the America Invents Act (AIA), which sought to establish a faster and cheaper alternative to litigating patent disputes in courts by creating a new patent adjudication venue inside the U.S. Patent and Trademark Office (USPTO).

It turns out, however, that this only further jammed the system, adding another layer of costs and delays to holders, who still often sought dispute remedies in the district and federal circuit courts, which generally require costly proceedings.

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Within the same time frame there were two Supreme Court rulings on patents that negatively affected key growth areas of the U.S. economy — biotechnology and high tech.

The 2012 Mayo v. Prometheus decision specifically limited subject matter patent eligibility itself — negating patent protection in the U.S. for significant naturally occurring biotechnology inventions.

The 2015 Alice Corp v. CLS Bank International decision was equally sweeping — invalidating a range of business-method patents, which also undermined the concept of patent eligibility, that is, whether certain inventions can be patented at all.

These decisions were intended to help the targets of patent trolls by rendering the trolls’ patent claims invalid, thereby reducing the former’s need to license or face costly litigation.

But the rulings also put a chilling effect on others — the legitimate inventors, innovators, and R&D entities that have counted on patent protection for their own inventions since the Patent Act of 1790.

Companies big and small now ask the same question: Why invest in research and development or why license basic technology and/or improvements when the current weak patent regime brought on by Supreme Court rulings and AIA policies encourage free-riding and the infringement of patents?

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Meanwhile, China has strengthened its patent laws in recent years and is filling the vacuum of a declining U.S. patent environment.

China surpassed the U.S. in 2015, becoming the world’s top issuer of patents, granting 359,000 — some 20 percent more than the number granted in the U.S. that year.

China’s patent system provides favorable treatment of biotechnology inventions and business-method patents. Enforcement of patent rights in China is also significantly cheaper than in the U.S.

With nearly four times the U.S. population, China will soon have the largest economy in the world. The more important issue is whether China will also become the preferred destination for inventors, innovators, and R&D entities to license and seek enforcement of their patented technology.

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Patents provide a vital public interest in the long run, providing the foundational building blocks for technological progress by protecting returns on investment in R&D. Patents also provide critical safeguards that enable companies to compete, particularly important for start-ups and market entrants, who are disadvantaged by the economies of scale of larger and more established firms.

Venture capital start-ups have historically generated more than 70 percent of new jobs in the U.S. A 2015 study by the U.S. Patent and Trademark Office summarized the key role that patents play in driving economic growth, noting that: “Five years after approval of a first patent, startups show 36% more employment growth, 51% greater sales, more (and higher-quality) patents … and a much greater chance of an (initial public offering).”

As it now stands, the weak U.S. patent regime allows market incumbents to infringe others’ patents — particularly those of market entrants — with little risk. They know that legal costs are sufficiently high to discourage the often undercapitalized market entrants from defending their rights.

And if litigation does ensue, settlement costs in most cases are likely to be no higher than they would have been in a licensing fee arrangement.

The status quo — which favors incumbent companies and infringers at the expense of innovators and market entrants — is quite the opposite of a beneficial patent system envisioned in Article 1, Section 8 of the Constitution.

Change is obviously needed.

First, resolve through legislation the serious uncertainty surrounding what is and isn’t patentable. There is no inherent reason why a business method, biological method, or other application should not be patentable if it otherwise meets the “usefulness, novelty and non-obviousness” criteria of the longstanding patent statute.

Second, amend the reform started by the new review procedures of the AIA by giving the final word on claim scope and validity to the U.S. Patent and Trademark Office instead of the federal circuit courts. This would save time and cost by eliminating the option for a court rehearing on patent validity already established or upheld by the USPTO.

Third, reduce marginal and weak litigation threats by reinstating the presumption of patent validity and also by adopting a loser-pays-legal-fees approach to lawsuits brought by trolls and patent holders against alleged infringers.

In conclusion, a strong U.S. patent regime has a vital role to play in strengthening the economy, by leveling the playing field and helping market entrants and small companies compete and succeed.

Making intellectual property great again should be a high priority, along with tax and regulatory reform, in President Trump’s domestic policy initiatives to create jobs and accelerate economic growth.

Scott S. Powell

Senior Fellow, Center on Wealth, Poverty, and Morality
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.