Improving patent quality improves innovation
June marks the return of Patent Quality Week, a coordinated effort highlighting the importance of quality when deciding whether to issue a patent. Dating back to the founding of the nation, patents have been viewed as a powerful tool for promoting progress and innovation. By allowing inventors a period of exclusivity to recoup their costs and enjoy the rewards of their work, patents create an incentive to invest in the future. This is especially true in sectors reliant on the advancement of science, such as pharmaceuticals and technology.
Yet in practice, patent policy has not always satisfied this goal. Critics of patent policy point to examples where patents become tools to protect monopoly profits rather than promote innovation. In the pharmaceutical sector, “patent thickets” and “product hopping” are used to extend monopoly protection and deter the entrance of cheaper generic alternatives once a patent expires. While these strategies enhance the corporate bottom line, they substantially raise costs for patients and do little to promote innovation.
One study by I-Mak found that among the top grossing drugs in the United States, there were an average 125 patents filed per drug, with drugmakers seeking an average of 38 years of additional protection from lower cost generic alternatives. Such patent thickets reduce patient access to critical drugs by maintaining unnecessarily high prices. Similarly, product hopping is used to extend monopoly prices beyond the 20-year length of a patent. A pharmaceutical company will reformulate one of its popular drugs and then push doctors and patients to switch to the new version, whose patent extends the collection of high monopoly prices.
Likewise, business method patents became notorious as the internet emerged and standard business practices transitioned to the digital world. In many cases, these patents were not novel or innovative; they were used to patent known and standard business routines and then force others to pay a fee should they do the same thing. For example, today’s ubiquitous online shopping cart was once patented, and a company acquired the patent in order to sue popular online shopping sites such as Amazon, Nordstrom, Macy’s and others to force them to pay a royalty fee whenever their customers checked out. While this patent was eventually struck down as being too obvious to warrant patent protection, business method patents continued to proliferate, imposing real costs on consumers and businesses while hampering invention and innovation.
In both the pharmaceutical and tech sectors, tactics emerged that focused on exploiting the government-enforced monopoly provided by a patent to extract profits rather than boost innovation, and the impact of such bad patent policies reverberate throughout the economy. Low quality patents facilitate this abuse and make it difficult for true inventors and innovators who must navigate through a formidable web of patents as they seek to bring new products to market.
This is not a trivial problem. In 2020 the Patent Office received over 646,244 patent applications, of which 388,900 were granted. This number is large and has grown substantially over time—the number of patents granted between 2000 and 2020 grew by more than 120 percent. This surge in patents stresses the patent system and affects the quality of patents that are issued. In fact, one study found that patent examiners spend an average of only 19 hours on a patent—a shockingly trivial amount of time that can lead to bad quality or invalid patents being granted. As the study concludes: “Our analysis finds that as examiners are given less time to review applications upon certain types of promotions, the less prior art they cite, the less likely they are to make time-consuming obviousness rejections, and the more likely they are to grant patents. Moreover, our evidence suggests that these marginally issued patents are of weaker-than-average value.”
Ideally, a patent should be valid, which means it should be new, novel and non-obvious. Satisfying these requirements suggests an invention is innovative and will promote scientific progress and economic welfare. Invalid and poorly defined patents fail to meet these standards and can generate problems should they enter the system. Poor-quality patents can become weaponized against true innovators by professional patent assertion entities who generate profits not through innovation but through accumulating large inventories of patents that can be used to sue others who are actually trying to innovate. These patent portfolios are so large and the patents so nebulous that real inventive activity can inadvertently generate infringement litigation and licensing demands. When this happens, it becomes important to distinguish between patents and innovation. More specifically, large numbers of low quality or invalid patents suggest that simply counting patents does not provide a useful measure of innovation.
Recently the U.S. Patent and Trademark Office (USPTO) released a study finding that intellectual property intensive industries contribute a significant amount to GDP (41 percent). While this is an important contribution, and patents undoubtedly play a role in this contribution, the report is careful not to attribute such growth specifically to intellectual property such as patents. In fact, there is little to demonstrate whether patents are optimally granted, over-granted or under-granted. It is therefore difficult to identify a causative link between current patent policies and economic output. Perhaps there are defensive patents that are not innovative but are required to avoid litigation. Or maybe eliminating patents that are invalid but impede invention by others would generate even more economic output.
Similarly, counting patents or patent citations provides a poor measure of a nation’s innovation, in part because that ignores the quality of the patents granted—as well as the fact that significant amounts of innovation occur outside of the patent system. The surge in patents since the 1970s should suggest substantial increases in innovation and productivity, but, in fact, this era of increased patenting coincides with what economist Tyler Cowen calls the “great stagnation,” a time of low growth in productivity. Research by Jeffrey Funk raises similar concerns: “US productivity growth has not increased along with patent applications and awards, suggesting that patents are not a good measure of innovation.”
Improving patent quality starts with ensuring the USPTO provides examiners the time and resources to review patent applications properly. It also requires efficient procedures for weeding out invalid patents that have made their way into the system. Congress created that mechanism when it created the inter partes review (IPR) process in the America Invents Act. Unfortunately, since its passage there have been efforts to limit its use and the previous director of the USPTO implemented several administrative changes that limited the scope and access to IPR proceedings.
Yet the USPTO is now under new leadership, with the recent confirmation of Kathi Vidal as its new director. Given the importance of patent quality, it would be useful to revisit some of the recent changes that make it difficult to remove invalid patents that clutter the current system. Identifying and eliminating these patents will improve the overall quality of the patent system and allow true inventors to innovate, boost productivity and foster economic growth.