How to overhaul shambolic U.S. patent system

In the fall of 2011, U.S. President Barack Obama signed a sweeping package of patent reforms into law. He promised they would improve patent quality, reduce excessive litigation, encourage innovation and create jobs. Last week, the president unveiled another round of sweeping patent reforms. He promised they would improve patent quality, reduce excessive litigation, encourage innovation and … you get the idea.

Obviously, the president’s first attempt didn’t work. His latest legislative proposals and executive orders won’t either. Although they move in the right direction, they fall short of the drastic overhaul that the shambolic U.S. patent system needs.

Too many low-quality patents are being approved. Applications have increased fivefold in 30 years, meaning overworked examiners sometimes spend only a few hours to determine if an invention is novel and nonobvious. Worse, too many companies have stopped inventing in favor of litigating over patents.

Patents are supposed to encourage innovation by giving inventors a 20-year monopoly for commercialization. Today, the opposite is the case: Patents are stifling innovation.

The problem goes beyond the main targets of Obama’s new proposals: “patent assertion entities,” better known as patent trolls, whose business model consists of holding many low-quality patents and suing infringers, real or otherwise. The trolls threatened to sue more than 100,000 companies last year, the White House says. Some seem like little more than extortion rackets. They prey on smaller businesses by claiming, for example, that a jewelry boutique is violating a patent every time it scans a document. One study concludes that defendants paid $29 billion in 2011 to trolls, four times what they paid in 2005.

Big technology companies play this game, too. They spend large sums that could go toward research and development on lawyers and lawsuits. Witness how Apple Inc. and Samsung Electronics Co., which uses Google Inc.’s Android operating system, have tied each other in knots with dozens of lawsuits filed on four continents over smartphone technology.

That brings up another problem: the increasingly pivotal role of the U.S. International Trade Commission. On June 4, the ITC ruled against Apple in a dispute with Samsung, which claims that Apple infringed a patent for data transmission protocols between mobile phones. After a 60-day review, Apple may be barred from importing some older iPhone and iPad models into the U.S.

Judging whether a product violates a patent is hardly the ITC’s expertise, and it can’t award financial damages. Yet it is the litigants’ favorite venue, because the standard of proof is lower than in U.S. courts and because the ITC can impose an import ban. The mere threat of such a ban often induces settlements.

The result of all this is an arms race, in which the goal is to amass patents to use against rivals. A federal judge in Miami, presiding over a dispute between Google and Apple, called the parties “obstreperous and cantankerous” for being more interested in litigation as a business strategy than in settling differences.

Among his dozen proposals, Obama would make patent enforcers divulge the real party behind any patent, which could stymie the trolls, whose main weapon is anonymity. He would provide legal protections for users of common products, and he would make public the letters that trolls send to demand royalties. Obama would also tighten the ITC’s rules for import bans and the patent office’s standards for software patents to make sure they aren’t overly broad.

These are all perfectly fine, piecemeal changes. But the quickest path to a more efficient system is to modernize the patent office itself. And that means ― crazy as it may sound ― hiring more patent examiners and giving them less to do.

Congress should switch the burden of proof so that applicants instead of examiners must search so-called prior art to see if a patent has already been awarded. The patent office should also consider whether software patents should be awarded at all (they already receive copyright protection).

To reduce frivolous litigation, Obama would make it easier for judges to decide that the losers cover court costs. A better course: Require losers to pay.

As we’ve written, the utility model that Germany and other countries use is worth consideration. Owners would have exclusive rights to produce, use and market inventions, with crucial differences: Protection is cheaper to obtain, and the term is shorter (usually seven to 10 years). The registration process is faster because the government doesn’t examine inventions to see if they are new, useful and nonobvious. But anyone can challenge, for a fee, whether an invention meets those standards ― with the losing party paying legal costs. The utility model is weaker than the U.S. patent model, yet it offers small companies a fast, low-cost way to protect inventions.

For the big players, we offer this suggestion: Presidents have the authority to override ITC import bans. They rarely do. But now that the ITC is about to ban some smartphone imports, which would limit consumer choice, Obama should step in. That would send a clear signal that the patent wars must end. It’s time for disarmament.

(Bloomberg)