Patent Reform: Beware of Unintended Consequences

Rep. Howard Berman (D-Calif.), the new chairman of the House Subcommittee on Courts, the Internet and Intellectual Property, and Rep. Rick Boucher (D-Va.) are seeking wholesale reforms of the patent system they say is issuing "low quality" patents and encouraging infringement lawsuits.

According to witnesses at Thursday's hearing, she has good reason to worry.

In the early 1980's, the process for judicial appeal of patents and infringement claims was changed so that all appeals were heard by the Court of Appeals for the Federal Circuit (CAFC). A decade later, Congress changed the fee structure at the U.S. Patent and Trademark Office (PTO) to where the costs of operations are fees paid by patent applicants.

"It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836," Adam Jaffe, an economist at Brandeis University, told the committee.

According to Jaffe and other witnesses, CAFC has consistently interpreted patent law to make it easier to obtain and enforce a patent while making it more difficult for those accused of infringement to challenge the validity of the patents. The result has been a blizzard of litigation often resulting in huge financial settlements.

By comparison, the European Patent Office approves 72.5 percent of all applications and the Japan Patent Office grants patents to just 44.5 percent of applications.

Daniel Ravicher, executive director of the Public Patent Foundation, told the panel that in the current PTO funding system, examiners are given more credit and evaluated more favorably if they issue, rather than reject, patent applications.

"It is perverse that…if the PTO were to reject undeserving patent applications such that the number of issued patents decreased, it would suffer financially," Ravicher said, adding the PTO is "granting too many people too many patents."

Jaffe said CAFC and the new PTO fee structure "have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves to a grenade that firms lob indiscriminately at their competitors."

Berman and Boucher's patent reform legislation will focus on administrative reform at the USPTO, as well court reform, including when a court can grant injunctive relief.

"There should be absolutely no bias to either issue or reject a patent application," Ravicher said. "The PTO and the Examiner Corps should be free to make their best scientific and technological judgment about pending patent applications without any financial pressures or incentives."

Other reforms proposed Thursday included a post grant review of issued patents requiring all patent applications be published within 18 months of filing and allowing third parties to comment during the application process.

Should software be patented?

But perhaps the most startling suggestion came from Ravicher, who said software and business methods should not be patented.

"Software…which is nothing more than a set of instructions – an algorithm – to be performed by a computer in order to solve some mathematical problem, should not be patentable," he said.

Since the PTO began granting patents on software and business methods in the late 1980's, Ravicher said economists have determined the policy "has not increased investments in research and development," but "contributed to the significant increase in patent litigation."

That's one proposal that Berman and Boucher, who have strong backing from the tech community, are not likely to act on, although Boucher said he has concerns about business method patents.

Berman said he and Boucher would introduce the Patents Depend on Quality Act of 2006 (PDQ Act) in the coming weeks and promised more hearings on patent reform.

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