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Patching up the Patent System

Prepared by: Lee Hudson Teslik
March 26, 2007

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A battle pitting business-world behemoths against one another is brewing in Congress as legislators consider an overhaul of U.S. patent law. The reforms, which seek to dampen a recent surge in patent legislation and to clarify ambiguities (Bloomberg) in Internet-technology law, have for years been trumpeted by tech-industry lobbyists. They are strongly opposed by pharmaceutical and biotech companies, which fear stricter regulations will make it harder to protect claims on new chemical compounds. With Democrats controlling Congress, the reforms are far more likely to pass—the legislation’s drug-industry opponents have overwhelmingly backed Republicans over the past five years. Now a $1.52 billion February 2007 verdict against Microsoft (MarketWatch) has brought the debate to a head, and analysts predict Congress could press for reforms in the near future.

The core issue in the patent debate is how to balance the positive effect patents have on technological innovation and the negative effect they have on competition and the diffusion of new technologies. Efforts to strike this balance have been complicated, however, as the U.S. Patent and Trademark Office has become backlogged (CNN) with far more patent applications than its staff can manage. The negative impact of this pileup is twofold: First, some industry analysts say patents of dubious merit, or patents filed solely to stir up a lawsuit, are often granted (Wired). Second, the authority of patents is undermined more generally and the incentive to innovate is weakened. An erosion of patent protections has broad economic ramifications—a 2005 study (PDF) by a lobby group called USA for Innovation values U.S. intellectual property at $5.5 trillion, or roughly 40 percent of gross domestic product.

With these concerns already in the air, the Microsoft case was a wakeup call for tech titans. In the past, tech firms had shied away from attacking each other on intellectual property rights, with a tacit understanding that prosecuting minor patent violations meant a kind of mutually assured destruction. But when Lucent-Alcatel went after Microsoft for using certain patented MP3 products—and won—observers worried that without swift action to limit damages in similar suits, the legislative floodgates might swing open (ZDNet UK).

So what is to be done? If a new bill is passed, experts say reforms would likely include limitations on the damages that can be paid on infringement suits and clauses to make it easier for targets of litigation to challenge frivolous patents. These revisions would be in line with the recommendations of a November 2006 CFR Special Report. The report cautions against a system that encourages “extraction of payments from legitimate competitors,” and also looks more broadly at U.S. efforts to encourage patent protections overseas.

Simultaneously, the U.S. patent office is seeking to expand (WashPost) its thinly stretched operations and aims to hire 1,200 new filings examiners each of the next five years. These reforms aren’t without their critics. A recent Wall Street Journal op-ed argues that in its quest to stamp out “patent trolls”—people who buy up scores of patents in the hope of winning a lucrative lawsuit if one is violated—the government runs the risk of stifling innovation by making patents harder to come by for inventors. Still, there is broad agreement that the system needs reform; the question is where to strike the balance.

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