AEI-Brookings Joint Center Policy Matters 06-09

Innovation and Its Discontents. Adam Jaffe and Josh Lerner. March 2006.

The problems of the U.S. patent system are under discussion today with an urgency not seen in decades. The Supreme Court will soon hear oral arguments in eBay v. MercExchange LLC, which promises to be its most far-reaching examination of patent law in many years. Today the court will also consider LabCorp v. Metabolite Laboratories -- the contested matter is whether a patent can be issued for the correlation between a disease and a naturally occurring substance in the human body. That is: Can you actually patent the laws of nature? And shockingly, Research in Motion has been forced to pay $612 million to prevent all of our BlackBerry handhelds from going dark, even though the U.S. Patent and Trademark Office (USPTO) has indicated that it is likely to find all of the patents behind this ransom demand invalid. Congressional subcommittees, with good reason, have recently held hearings asking fundamental questions about developments like these in the patent system.

The importance of this long-overdue focus on patents cannot be overemphasized. The past decade has seen periodic uproars over particular patents, such as Amazon's "one click" patent for online shopping. The troubling patents have been well publicized, but the wrong lessons have typically been drawn. Commentators have tended to focus on the incompetence of the USPTO in allowing "bad patents." Others have concluded that the patent system is not working with respect to a particular area of technology. Concerns about software awards led, for instance, Jeff Bezos of Amazon to propose a new patent type for software; others have suggested that biotechnology be excluded in various ways from the patent regime.

We believe, instead, that the problems with the patent system are systemic and fundamental, the result of two congressional changes to the patent system. At the time they were described as administrative and procedural rather than substantive; but taken together they have resulted in the most profound changes in U.S. patent policy and practice since 1836. One set of changes has made it easier to enforce patents, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents' validity; another set of changes has made patents much easier to get. The combination has created a perfect storm: a complex and intensifying combination of factors that increasingly makes the patent system a hindrance rather than a spur to innovation.

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Congress set us on this road in 1982 when it created a centralized appellate court for patent cases, the Court of Appeals for the Federal Circuit. Its decisions -- which advocates argued would simply ensure judicial consistency -- are largely responsible for the significant strengthening of the legal potency of patents. Then, a decade later, Congress turned the USPTO into a "profit center." The office has been pushed to return "excess" revenue to the U.S. Treasury. This shift led to pressures to grant more patents, difficulties in attracting and retaining skilled examiners, and a torrent of low-quality patent grants. These include such absurdities as patents on wristwatches (paw-watches?) for dogs, a method of swinging on a swing ("invented" by a five-year-old), and peanut butter and jelly sandwiches. But they also include the patents on broad ideas related to mobile email -- virtually devoid of any details of implementation -- that have imposed a $612 million tax on the maker and users of BlackBerries.

The combination of making patents easier to get and simultaneously more potent when enforced has led to an explosion in patent litigation. Holders of dubious patents -- be they established firms or "trolls" whose only business is patent enforcement -- routinely threaten firms that sell valuable products with shutdown based on alleged patent infringement. Even if the target firm believes that it does not infringe, or that the patents at the basis of the claim are invalid, the cost and risk of proving this in court may be too high. Innovators may choose simply to drop the allegedly offending product, or to settle and pay ransom rather than fight. This is not a problem confined to any single industry. Even in industries where patents have been traditionally rare, such as financial services, patent filings and litigation are exploding. Financial patents are being litigated at more than 10 times the rate of awards more generally.

It might be tempting to view patent law as just another area where litigation has spun out of control. But there is more at work here than a general increase in litigation; and its effects are particularly worrisome, because a faulty patent system can have profound impact on the overall process of innovation. The hugely successful BlackBerry may be able to bear an enormous "innovation tax" and still succeed, but other valuable but not-quite-blockbuster innovations may be driven from the market entirely.

The continued advancement of commercial technology is the basis for the long-term ability of our society to continuously improve our lives -- to promote health and longevity, protect and clean up the environment, and secure our safety against terrorism and other external threats. For all its deficiencies and periodic stumbles, our free-enterprise system has demonstrated a unique ability to generate new technology: Industrialized economies have increased their economic productivity more in the last two centuries than in all the millennia of previous human history. The basis for this advance is the pursuit of profit, which forces firms to innovate. But the profit-based incentive to innovate depends fundamentally on the institutions governing ownership of the fruits of innovation. Specifically, taking new ideas from the notebook to the market often requires huge investments in research and development. This is an inherently risky process, and risk is the enemy of investment.

The legal protection patents provide is supposed to mitigate the risks of these investments, but the flood of dubious patents that nonetheless have amplified legal force is increasing rather than mitigating the risks associated with investments in innovation. While we have not yet killed the geese that lay the golden eggs, we are increasingly hindering and distracting the people and firms that must breed, feed and care for the geese. If we continue on this course, it is inevitable that their output will decline.

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We believe that the incentives of the existing system induce all participants -- inventors, competitors and potential litigators -- to invest in abusing the system rather than innovating. Reform of the system must change these incentives by (1) changing the USPTO review process so that the determination of whether a patent application is really new is made with as much information as practical about what related technology is already out there; and (2) leveling the playing field between litigants so frivolous patent holders cannot intimidate true innovators into paying protection money.

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the USPTO. A review process with multiple levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review -- with barriers to invoking review increasing at higher levels, along with the review's thoroughness -- would naturally focus attention on the most potentially important applications. Most patents would never receive anything other than the most basic examinations. But for those applications that really mattered, parties would have an incentive and opportunities to bring information in their possession before the USPTO, and the USPTO would have more resources to help it make the right decision. (Changes in this direction are at the heart of the patent reform bill currently under consideration in the House Subcommittee on Courts, the Internet and Intellectual Property.)


If bad patents with important consequences were weeded out by the USPTO, the incentive to file frivolous applications in the first place would be reduced. This would break the current self-stoking cycle in which inventors are induced to make marginal applications by their likelihood of success, and the resulting flood of applications overwhelms the patent office and makes it harder to separate the wheat from the chaff.

Breaking the vicious cycle of bad examination and bad applications is the key to reform of the patent review process. But there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.


The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. Having decisions made by people who can't really understand the evidence increases the uncertainty surrounding the outcome. The combination of this uncertainty with the legal presumption of validity -- the rule that patents must be presumed legitimate unless proven otherwise -- is a big reason why accused infringers often settle rather than fight even when they think they are right.

The right to a jury of one's peers is a venerated concept in Anglo-American law. But there is ample scope for judges to use pretrial rulings and reports of special "masters" commissioned by the court to resolve more of the most technical issues that determine the outcome of patent litigation. While litigation will always be uncertain, it has to be structured so that complex technical issues are addressed in a way designed to elucidate rather than obscure.

The protection for true innovators created by a workable patent system is vital to technological change and economic growth. The problems in the existing patent system are structural, and the fundamental solutions need to be structural as well. As much as the USPTO needs to do a better job, it can only do so if the system is modified so that all parties have incentives to help with the job, and the courts provide a reliable backstop when mistakes are made.


Adam Jaffe is professor of economics and dean of arts and sciences at Brandeis University. Josh Lerner is Jacob Schiff Professor of Investment Banking at Harvard Business School. They are the authors of "Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It" (Princeton, 2004).

This article appeared in the Wall Street Journal on March 21, 2006.