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A New, Comprehensive Patent System

I. Structure

The patent system is driven by incentives. Inventors desire to secure rights in their ingenuity to maximize the value between research effort input and profitable output. The U.S. Patent Office (PTO) must balance the recognition of innovation while scrutinizing the extent of claims so as not to limit competition and social utility. In the litigation context, patentees seek to broadly construe and solidify the scope of their rights while infringers seek to scrutinize the extent of the patent. All of these competing actors and forces participate in an economic “game” that is defined by the legal foundations of both patent award and litigation. [1]

The incentives faced by the actors in this game centrally evolve from the terms of the right at issue. Particularly, the evaluation on all sides turns broadly on the breadth and length of the protection at issue. In patent prosecution, the broad incentive is fairly simple: only inventions that have positive expected value over 20 years that is greater than obtainment costs will be pursued by inventors. The PTO recognizes the market effect of patents and scrutinizes claims during the obtainment phase to a level it deigns appropriate with the prospective right to be granted. In this sense, the incentive system acts with feedback because the obtainment costs are dependent on the extent of the final terms of the patent and the desire to seek a patent is based on the final terms and the obtainment cost. [2] More complex models have taken into account the flow of costs and revenues in different industries and inventions, changes in the term structure of interest rates and other variables.[3] However, at their core, these complexities derive from the length and the breadth of the rights granted.

Once rights are granted, litigation incentives are based on the terms too. Recognizing potential profits of an invention over a certain period of time, potential infringers implicitly weigh the costs of litigation based on the breadth of rights recognized by court decisions against the gains to be had by becoming a producer of a good (or less directly, by not performing exhaustive, and costly, patent searches before producing an item). Similarly, the patent holder defends her patent to the extent that she expects value over the term of the patent. In this sense, the incentives all trace from the basic terms that evolve from securing exclusive rights to inventors for a limited time. [4]

II. History and Issues

Over time, innovation has evolved. In the past, inventions were less diverse and of limited value because the economy was less technical. Further, transaction costs of evaluating patent claims were arguably higher in the past because communication of information was less efficient. It thus was sensible to give a certain fixed time of protection for patents as a means of economizing the patent system.[5]

However, an historic choice for economy reflects only a specific balance of forces that is subject to inefficiency as the underlying conditions change. As industries and inventions have grown more sophisticated, the failure to recognize different terms of inventions mean that more inventions will not have access to adequate protection and there will be underinvestment in development.

Further, as more industries apply for more diverse patents, the costs of evaluating all patents centrally by the PTO will lead to increased costs in obtaining patents and further exclusion of inventions from the patent system. In this age, where the global economy is based on innovation and research, a patent system that is justified based on an historical balance imposes needless costs and limits the welfare of society.

As an example, evolving, fast-paced industries like software complain that patent terms overburden innovation by supplying too much protection or are too costly to obtain in a marketplace where obsolescence is measured in months.[6] Many companies will not seek protection because the average costs of obtaining patents (in both time and money) make patents inefficient. The current system leads to underinvestment in research and less products. Further, some companies with more resources will have patents awarded that are too broad and preclude future development leading to societal losses as well. Conversely, capital and “sunk cost” intensive industries, like pharmaceuticals, claim that the limited time of patents precludes development of more drugs that could aid “less profitable” maladies (e.g. vaccines) that may require more years of protection to be viable.

III. A New System and Guidelines

This paper proposes an inventor bid system of variable time patent right grants coupled with correlated, multiple breadths of rights. A variable time patent system is not new,[7] but the difference in this proposal, is keyed off the recognition that the inventor is in the best position to make a judgment about the expected value of her invention and the terms of right needed to recognize positive utility ex ante. The second key to this system would be a change in the patent office structure for the granting of rights that is consistent with the length and breadth of the rights sought. The third key is a doctrine of judicial evaluation based on scrutiny correlated with the extent of the right sought. In implementing such a system, the legal framework would present avenues for different choices that maximize efficiency because patentees would get to choose the length and breadth of rights based on their superior information about their claim.

First, users would seek the time they feel their invention needs to be profitable. This would allow for capital intensive companies to seek patents for more rights and for fast-moving industries to submit applications for fewer rights. However, given a fixed cost of obtainment, all patentees would generally petition for the maximum terms so as to increase the expected value of their invention. Thus, the system must have variable costs of obtainment linear and flexible to the commensurate rights granted in order to induce different inventors to seek appropriate rights.

One option is to decentralize the PTO’s role and procedures in adjudicating all patent claims. Other industries provide an example of efficient private adjudication for time-sensitive rights.[8] Additionally, the use of expertise in determining certain matters is not unparalleled in law either.[9] The role this paper envisions is the PTO acting as an overseer that distributes patent applications to private groups or contractors organized by industry and/or by terms of right sought. The PTO could then evaluate trends from a policy level and adjust procedures and scrutiny to maximize total utility from the rights. For example, 6 month rights in software would have a binding adjudication within 3 weeks after submission. But, 20 year rights in chemical processes will be subjected to a 1 year evaluation of claims. More specific economic and social studies could set bins and feasible review times and scrutiny doctrines for each right.[10]

Alternatively, the PTO could maintain its current monopoly over granting rights through its own inspectors as well and merely parse applications by the time sought and establish internal procedures and tracks. However, the system must have variable length of examination correlated with the scope of rights granted rather than a relatively static average of 18 months as it stands now, in order to encourage diverse applications from inventors.

As part of the dynamic rights evaluation system, the PTO and Congress could utilize the extensive law and economic studies [11] about the appropriate breadth of rights and standards of judicial and prosecution review for the multiple lengths of patent rights granted. Such a system could grade the doctrine of equivalents, degree of similarity to prior art, presumption of irreparable harm and other doctrines in order to match the scope of rights with the scrutiny of review. Ideally, a system of private arbitration could evolve that would allow more certainty and expediency in back-end litigation that would feedback to enabling more diversity of patent terms and granting of rights.

IV. Conclusion

The current fixed patent is a function of historical balancing of social utility and economy in processing claims. This balance fails to provide adequate incentives for the growing number of industries and creates a more costly prosecution and litigation system. By utilizing the advances of our innovative society, a new legal framework can enable further growth by reducing costs of securing rights and allowing for more dynamic industry equilibriums. The system must recognize the superior information held by inventors ex ante and allow them to choose their path to defined bundles of rights. In doing this, the patent system will build on the technological sophistication it helped create to bestow value-maximizing grants of rights into the future.


[1] See generally, The Patent-Antitrust Intersection: An Appraisal, 97 HARV. L. REV. 1813 (1984)
[2] For examples of this type of discussion, Rewards Versus Intellectual Property Rights, http://www.papers.ssrn.com/paper.taf?abstract_id=226404 (2000)
[3] Partnoy, Frank, Finance and Patent Length, http://papers.ssrn.com/abstract=285144
[4] Paraphrase of Art. I Section 8, Clause 8 of the U.S. Constitution.
[5] DONALD CHISUM, CHISUM ON PATENTS (1999).
[6] See, Jeff Bezos, An Open Letter from Jeff Bezos on the Subject of Patents,
http://www.amazon.com/exec/obidos/patents.html/104-5354614-3959959 (2000)
[7] e.g., C. Michael White, Why a Seventeen Year Patent, 38 J. Pat. Off. Soc’y
[8] ICANN arbitration procedures, www.icann.org
[9] See Special Masters (Federal Rules of Civil Procedure 53)
[10] e.g., Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent
Scope, 90 COL. L. REV. 839 (1990).
[11]e.g. Donald G. McFetridge & Mohammad Rafiquzzaman, 8 THE SCOPE AND DURATION OF THE PATENT RIGHT AND THE NATURE OF RESEARCH RIVALRY, RESEARCH IN LAW AND ECONOMICS 91 (1986)

Posted by at April 8, 2007 10:19 AM in Commentary Posts