May 1, 2012

Patently Slow

The U.S. system favors the rich, threatens the little guy and takes forever.

Abraham Lincoln, the only president to ever receive a patent, said, “The patent system added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.” Still, a congressman from Illinois, Lincoln got Patent No. 6,469 in 1849 for a device for “buoying vessels over shoals,” a series of bellows that could be used if a boat was in danger of running aground.

Some 40 years later, Mark Twain, in a more cynical vein, wrote: “A country without a patent office and good patent laws was just a crab and couldn't travel anyway but sideways or backwards.”

Safe to say, more than 120 years after both men pondered the nature of patents, the hundreds of thousands of applicants awaiting approval or rejection from the U.S. Patent and Trademark Office (USPTO), would call it more a crab than fuel to the fire of genius.

Despite attempted reforms by the Obama administration, America's patent system hurts entrepreneurial activity at home, favors the rich and the big, and is making only marginal improvements at best, in a backlogged, bogged-down system. Though it is a major anchor of the innovation that is at the heart of the American economy, the U.S. patent system remains largely a mystery to politicians and the public alike.

The first sweeping reforms since 1952, the Leahy-Smith America Invents Act (AIA), signed into law Sept. 16, 2011, and effective March 2013, will entirely redefine the basis for patent awards in this country. The United States had been the last industrialized country to award patents to the “first to invent” rather than the first to file an application. AIA erases that distinction, giving the edge to those who file first, which frequently means those with the best lawyers, most money and familiarity with the system.

The AIA also aims to slash the wait from three years to one for applications from startups. It is supposed to limit the volume and cost of litigation, cut the current backlog, which sits at an estimated 621,800 pending applications this year, and enhance the ability of American inventors to protect their intellectual property abroad.

Critics point out that the process still takes far too long and is far too expensive, especially for individuals and small companies. The backlog of patent applications remains overwhelming. And a growing market in existing patents, traded by investors with little interest in ever turning them into anything productive, is raising the price of patents while contributing little to the innovation they were designed to encourage and protect. Meanwhile, the volume of litigation involving disputed patents threatens to overwhelm the effectiveness of the system.

“The U.S. is still the biggest market in the world, especially for the most valuable products. For that reason, we are still the pre-eminent patents system,” says R. Polk Wagner, professor of law at the University of Pennsylvania Law School. “If we don't do more, we will end up lagging, but there is no question we are still the leading patent system.”

After Canada changed its patent law to a first-to-file system in 1989, Wagner and his University of Pennsylvania Law School colleague, David Abrams, studied data from the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office and found a significant drop in the fraction of patents granted to small inventors. They said while “the net welfare impact that can be expected from a shift to first-to-file is unclear, our results do reveal that, contrary to conventional wisdom, the rule change is not free—it is likely to result in reduced patenting behavior by individual inventors.”

A 13-Step Program

The government's Patent and Trademark Office website describes the application process in 13 steps and acknowledges that it is complex. Estimating the cost for a patent is tricky, as so much depends on technology. The basic costs for a utility patent (the most common kind) can range from $95 to $395, whether you file on paper or electronically, along with an issue fee of approximately $870 for those that are successful. Total cost: as much as $1,265. After that, the maintenance fees for a small entity to keep a patent in effect, according to the USPTO, are “approximately” $565 due at 3.5 years, $1,425 due at 7.5 years and $2,365 due at 11.5 years. The USPTO says it does offer deep discounts on its fees—up to 50%—for individuals. But a lawyer is generally necessary to properly navigate the process and bureaucracy, and legal fees can quickly become daunting.

Fees are only the beginning. The applicant, after searching the USPTO database to determine that his or her invention hasn't already been patented, must then decide among three types of patents: a design patent (ornamental characteristics); a plant patent (new variety of asexually reproduced plant); or a utility patent (useful process, machine, article of manufacture, composition of matter). The applicant must decide whether to file globally, to secure international protection or to file only in the United States. She must then make a series of additional decisions on the appropriate strategy for filing, each of which requires legal advice, not to mention a tutorial in patent terminology. The applicant then waits for a decision. If the result is rejection, there is of course the option of a lengthy and expensive appeals process.

It took nearly a decade to work out the details of the AIA, which President Obama called a “much-needed reform [that] will speed up the patent process so that innovators and entrepreneurs can turn a new invention into a business as quickly as possible.” But as noted, it is no longer the first person that invents something who may get the initial patent under current law. Rather, it is now the first person with the legal and financial muscle to file an approvable application who has the upper hand. The new reforms, moreover, do not limit the damages that can be sought in a patent lawsuit, and do little to address the unique and often esoteric technical challenges of software patents. Litigation limits and a better system for sorting out real software innovations from the contrived were both sought after by reformers.

“Unfortunately, the changes we've made recently are going to . increase dominance of large-market players, which is to say, make it less competitive,” says F. Scott Kieff, a professor at the George Washington University School of Law and a Ray and Louise Knowles senior fellow at Stanford University's Hoover Institution. “But I do think changes in the patent system will have a large impact on the way and rate that those inventions come to market.”

The USPTO granted 247,713 new patents in 2011, a slight increase over the 244,341 doled out in 2010, and the most ever in one year. But global interest in U.S. patents is growing and many of America's top companies are losing ground. Cisco Systems, HP, Intel, Microsoft and Oracle were granted fewer patents last year than in 2010, as global competitors—especially Asian companies—moved to snap up patents in their historical areas of expertise. The Bloomberg Government Barometer indicates the number of applications awaiting review, projected at 621,800 this year, would be whittled to 329,500 by the end of 2015 under the agency's plan to use increased fee revenue to hire more examiners. Without the additional reviewers, the 2015 backlog would be 444,200, according to patent office projections.

Asian firms now comprise half of the top 50 U.S. patent-grant recipients while U.S. firms account for just 17, according to Mike Baycroft, chief executive at IFI CLAIMS Patent Services, a major producer of global patent databases. “Obviously the Asian countries . have a lot. South Korea is becoming a real player in the world in patent law,” Wagner, the University of Pennsylvania law professor, says. “They are all important competitors and growing.” IBM has been the largest holder of U.S. patents for 19 consecutive years, with a record 6,180 utility patents in 2011, up nearly 5% from 2010. But Samsung, based in Seoul, is quickly gaining traction, with 4,894 U.S. patents last year, up 8% from 2010.

The United States is the world's biggest market for goods and services, so all innovators want to patent here. “There is no question the U.S. is the pre-eminent system,” says Baycroft. “One of the benefits in the United States is a fairly unitary system; all products get the same rules. [The U.S. system] is a little more clear, a little easier to administer.” And, lest we forget, the United States is still the major market for consumer products and thus an all but obligatory patent source for any company with an innovative product to sell.

Those will most likely be big multinationals, and the cost of challenging alleged patent infringement means that larger companies are favored both in the application and patent litigation processes. “Since there are no 'patent police' to [protect] a patent against infringement, the cost to sue an infringer is substantially out of reach of most solo inventors and small companies,” says Donn Harms, owner and partner with the American Patent & Trademark Law Center. “So the small inventor these days must license their patent to a big company who can afford to defend it in court. To manufacture and sell the item and then pay legal fees to stop infringers is beyond the budget of most individuals and small firms.”

The average cost of patent infringement litigation through trial is in the range of $2 million, according to the American Intellectual Property Law Association. Nevertheless, PricewaterhouseCoopers, the consulting firm that tracks such information, reports that the annual number of patent actions filed has increased at an overall compound annual growth rate of 4.9% since 1991.

Patents as a New Asset Class

The increase in patent litigation and the cost of it are changing the place of patents in the innovation process—and not for the better. “We are definitely seeing more litigation in recent years. We are also seeing [that] the way we use patents has changed a lot,” Wagner says. “People are seeing patents as assets in themselves. Increasingly there are companies out there to create patents as an asset. Because of that, there is lot of upheaval in the market.” And that upheaval is being driven by so-called non-practicing entities or NPEs, companies set up primarily to buy and sell patents, with no capability to design, manufacture or distribute products with features protected by the patent. They buy patents, often with the main objective to litigate and extract settlements from companies with similar patents. Critics call them patent pirates or “trolls.”

The median award to NPEs of damages for patent infringement has doubled over the last five years, while dipping for practicing firms. NPEs have been successful 23% of the time overall, versus 33% for practicing entities, according to a report by PricewaterhouseCoopers, which maintains a database of patent damages awards from 1980 through 2010.

Hurry Up and Wait

Baycroft at IFI CLAIMS Patent Services says there are a variety of reasons it can take around three years to get a patent approved. “I could point to the volume of patent applications that are filed that have no value. I could point out the antiquated technology and arcane processes the patent offices use to process examinations. I could point at the patent lawyers who write some of the most impenetrable descriptions I have ever seen,” Baycroft says. “In the end, none of the parties in the process do much to make things easier.” Wagner says the median is somewhere between 30 and 36 months, and varies depending on the technology. “Some take six, seven, eight years,” says Wagner. “Any delay is certainly a problem, because you can't protect your invention. It's important to try and reduce the wait, and at the same time you need a patent office that scrutinizes.”

Kieff says three years has been the “rough average for a while.” At the same time, the so-called allowance rate, the chances of any given application getting approved, hovered around 65% throughout the 80s and 90s, with the latest estimates down to just under 50%.

“One big issue, according to the USPTO, is that the USPTO does not have the budget to hire all the examiners and [information technology] infrastructure it needs,” says Timothy J. Maier, principal and registered patent attorney with Maier & Maier, PLLC. The USPTO requested a $2.71 billion budget for 2012, a 16% increase from last year. The office says it needs more money to cut the number of pending applications, upgrade its information technology systems as well as hire more patent examiners. The office wants to hire approximately 1,500 new patent examiners in fiscal year 2013.

The latest Obama budget proposes more than $2.9 billion for the USPTO in 2013, and supports strengthened intellectual property enforcement domestically and overseas. It is not clear how this proposal will fare in an angry and gridlocked Congress. But it is clear that however flawed and sluggish, the USPTO remains the destination of choice for global inventors who seek to protect their innovations.

Natasha Gural is a New York-based multiple award-winning editor and writer with 19 years of experience as a journalist. She has worked at The Associated Press and Dow Jones, and is currently Editor-in-Chief of the BTM Institute and a columnist for Better Investing. Natasha has just finished her first novel, Hedgies.