It's Time for Patent Reform

Companies should focus on better ideas and work with Congress and the U.S. Patent & Trademark Office to fix the system

If you follow the headlines, you may already know that the U.S. Supreme Court will rule shortly in a case that's likely to have big implications for everyone affected by patents. At issue in the case is whether an idea is too obvious to be patented. This may seem esoteric, but intellectual-property issues are striking closer to home for many people and point to the need for patent reform.

For instance, Research In Motion's (RIMM) BlackBerry service was in jeopardy of being shuttered last year until a patent dispute was settled out of court. A case involving Apple (AAPL) iPods was similarly settled. And with a record-setting award in a patent case involving MP3 files, it's safe to say that intellectual property now has the attention of many.

These types of issues and crises are finally being addressed by the Supreme Court, Congress, the U.S. Patent & Trademark Office (USPTO)—even the private sector.


To be successful, we need to restore a balanced approach that doesn't over- or under-protect the rights of patent holders. For instance, we currently overprotect by allowing patents on business methodologies that have no technical underpinnings. We publish patent applications, but then limit feedback that can be provided to the USPTO by experts from the public. This feedback could be invaluable in identifying cases where a patent may not be warranted.

The threat of lavish patent infringement awards can have a chilling effect, too. For example, patent award damages are often ratcheted up if the courts find the infringer to have intentionally ignored existing patent protections. So the system actually rewards those who haven't checked to see whether a patent already exists.

Rules that lead companies to place blinders on their developers is a startling sign that patent law has lost touch with the concept of teaching the public about new inventions, which is, after all, the reason for granting patents.

Innovation Stifled

Then there's the matter of under-protecting patents. Even as the threat of penalty prompts some companies to rush the application process, some inventors may be slow to seek legal protection for ideas. That's because unlike other countries, the U.S. gives precedence to those who are first to invent, but not necessarily the first to file a patent application. That opens the door to disputes between a patent holder and a party that can argue it came up with the idea first—even if it hasn't yet applied for a patent.

Also, the sheer volume of patent filings makes it impossible for the USPTO to review patent applications in a timely fashion. All of this creates uncertainty, which is harmful to innovation and the economy.

And intellectual property is a big contributor to the economy: U.S. intellectual property is worth $5 trillion to $5.5 trillion, say economists Kevin Hassett and Robert Shapiro. That's more than the gross domestic product of any other country.

Congress Must Get Involved

Ned Davis Research found that 80% of the value of Standard & Poor's 500-stock index companies now comes from intangible value. And according to the U.S. Commerce Dept., American intellectual property comprises more than half of all U.S. exports, driving approximately 40% of the country's growth.

Given the stakes, it should be no surprise that the Supreme Court has accepted seven patent cases in the past two years—far more than in recent memory. The cases focus on issues involving shutting down suspected patent infringers, extending U.S. patent law overseas, and determining what kinds, and combinations, of ideas can be protected by patents.

But the courts merely interpret the legal equivalent of radiological charts; it is Congress that actually performs the surgery. And Congress does appear ready to operate, contemplating the most sweeping patent reforms in 50 years. Among other improvements, these reforms would require a systematic approach for assigning realistic values to infringed patents and provide a new way for parties to reassess a granted patent's validity without a lawsuit.

A Classic Arbitrage

While the USPTO is dependent on Congress to establish the patent laws, it has already started making internal improvements. This spring it is experimenting with a program that will enable expert volunteers, including those from IBM (IBM), to provide feedback to patent examiners on selected patent applications. Better and more efficient patent examination will improve patent quality by reducing the issuance of overbroad patents.

By bringing 21st-century knowhow to a 200-year-old institution, the USPTO is performing a classic arbitrage: pairing those who have expertise, motivation, and access to information with those who need it but lack the resources to generate it.

The private sector is beginning to voluntarily help in other ways, too. For example, when IBM, the top holder of U.S. patents, seeks patents for business methods, it aims to do so only for those methods underpinned by deep technical content. Pure business methods can be difficult to examine and tempt some to seek patents of questionable merit.

A Role for Small Biz

IBM also is encouraging other patent practitioners to follow its lead with a sort of voluntary, corporate Hippocratic Oath that would institutionalize innovation-friendly patenting behavior. For instance, if more companies focused on ideas of higher technical quality, were transparent about which patents they owned or were applying for, helped review public patent filings, and permitted others to comment on their own pending patents, the likelihood of legal controversy would be reduced.

Small businesses also can play a role. There is a sense that for them, especially, the system has become too complex and expensive. Some smaller businesses have fallen prone to patent pawn shops, which buy patents cheap, only to resell or license those patents at disproportionate profits. If we are going to have meaningful patent reform, we need to give small businesses a voice. An online brainstorming forum this spring for small businesses might be a step in the right direction.

Consensus must underpin action. For while the Supreme Court can adjudicate, Congress legislate, and the USPTO and private sector innovate, we won't have broad progress until all parties work with one another, with the right balance, moderation, and the greater good at heart.

The Good Business Issue

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