The American Invents Act and Patent Reform: The Good, the Meh, and the Ugly

by Stephan Kinsella on October 14, 2011

Mises Academy Webinar: Stephan Kinsella addresses Obama's Patent Reform: Improvement or Continuing Calamity?It’s widely recognized that the American patent system is “broken” and needs to be “fixed.”1 And so various alleged “patent reform” measures have been bandied about for years now.

And so, after about six years of gestation and special-interest wrangling, the America Invents Act was signed into law on Sept. 16 by President Obama. Below I summarize my take on this law. (For elaboration, see the slides and audio I presented in Mises Academy Webinar a week after its signing, appended below; see also my Mises Daily article, Obama’s Patent Reform: Improvement or Continuing Calamity?)

1. Patent Law versus Private Property and the Free Market

Despite the received wisdom that patent rights are a type of property right, they are in fact simply state-granted monopoly privileges that allow patentees to use state force to squelch competition. See, e.g.:

Patent law should be repealed completely and immediately. That is the optimal, pro-property, pro-capitalist, libertarian solution.

2. What Real Patent Reform would Look Like

Real patent reform is repeal of the US patent law. Short of that, any legislative, executive, or judicial reform that significantly reduces the scope and impact–and thus cost–of patent law, is to be welcome. As I laid out in Radical Patent Reform Is Not on the Way and How to Improve Patent, Copyright, and Trademark Law, significant reform would include things like:

  • Reducing the Patent Term
  • Removing Patent Injunctions/Providing Compulsory Royalties
  • Adding a Royalty Cap/Safe Harbor
  • Reducing the Scope of Patentable Subject Matter
  • Providing for Prior-Use and Independent-Inventor Defenses

The reasons for these reforms, and others, are explained in the preceding linked articles.

So the question before us is: Does the AIA achieve any such significant reform?

3. The AIA: Good, Meh, and Ugly

In what was a surprise to me, one of the improvements I have advocated has been adopted: a version of the prior-user defense (discussed below). Other than this, the AIA does not significantly reduce the overall cost of the patent system. Almost all of the changes are minor, and some make a horrible system even worse. Let’s review them.

The Good

Prior Commercial User Defense. Under previous US patent law, if someone is using a device or process in secret, and someone else independently discovers or invents it later and then patents it, the second inventor can stop the earlier user from using their time-tested machines or processes. For example if a chemical company uses a given innovative nozzle or mixing technique to make a product more efficiently, and keeps this as a trade secret, then if a second company independently re-invents and patents this technique, they could stop the first user from using their own machine or process. In 1998 a narrow exception was added to give “prior users” of business methods a defense against those who later patent the same method. Subsequent caselaw weakened business method patents so that this defense was even more rarely needed (see the Bilski case in 2008). The AIA’s one significant improvement–probably the first real improvement to US patent law since 1790–was to adopt a fairly broad prior user right, one not restricted to business methods.

So now, for example, a patentee seeking to sue a competitor for patent infringement may fail if that competitor was already practicing the patented idea. This can weaken the ability to use patents for legal extortion, at least in some circumstances. This is good. A thin reed–but good. There are special-interest exceptions to this defense, and there is still no general independent inventor defense, but the expansion of this defense is nontrivial and good.

Other positive, albeit minor, changes to US patent law in the AIA, include:

  • It’s now somewhat easier to challenge “bad” patents and submit prior art to be considered by Patent and Trademark Office (PTO);
  • Joinder law has been revised to make it more difficult for patent trolls to join defendants for forum-shopping purposes (this is good, as patent trolls cost economy $80 billion a year2
  • Patent filing fees are slightly higher; some have whined about this and complained that it helps large corporations, but on balance, this is good, because it makes it more difficult to apply for patents–but bad in that it gives the PTO more revenue. Some have claimed this gives large companies an advantage over smaller ones, but on the other hand, small companies (those with less than 500 or fewer employees) already get a 50% fee reduction, and the AIA adds a new category for “micro-entities”–small entities with up to 4 patents or universities–who get a 75% fee reduction; and
  • Tax strategies and some financial methods are now declared unpatentable; this is an improvement, albeit arbitrary: this exception appears to be the result of special-interest lobbying by the banks against Claudio Ballard and his company Data Treasury who used patents to extract royalties from banks who “violated” its check image capture and storage technology (see Banksters versus Patent Monopolists).

The Meh

First-to-File Priority System. The big hub-bub about the AIA is that it changed the US patent system from a first-to-invent priority system to a first-to-file priority system (more like other countries’ patent systems).3 Patent lawyers and others complain about this, but in reality it makes little difference (and why they whine about patent reform in either direction is a mystery; any change only generates work for them–see Mike Masnick, New Patent Reform Law Already A Good Thing… For Patent Attorneys). First, of hundreds of thousands of patents filed annually, less than a hundred are contested in so-called “interference proceedings,” the previous method of settling who gets the patent between two independent inventors who both file similar patent applications. I.e., this problem is rare, and fairly irrelevant. Second, and most importantly, the victim of patent aggression does not care whether he are being sued or extorted or put out of business by a patentee who is the first inventor or the first filer. What difference does this make to him?

And a third point about the debate over what is better, a first to file, or first to invent, patent priority system. But note that in cases where this question even arises there is nearly simultaneous, independent invention of the same thing by different people. As I and others have suggested, not only should there be a broad independent inventor defense (that is, even when the accused infringer is not a “prior user,” but a later, but independent, inventor),4 but the fact of independent invention should mean the invention is obvious and thus unpatentable.5

Boring Miscellany. Other changes that I rate as “meh” include repeal of the residency requirement for Federal Circuit judges, giving the USPTO authority to establish satellite offices, and the creation of a USPTO ombudsman. Who cares? There is also complaining about PTO “fee diversion,” but this is completely confused complaints, as I noted in Patent Fee Diversion and Patent Reform Whining.

The Ugly

  • The AIA adds a new category for “micro-entities”–small entities with up to 4 patents or universities–who get a 75% fee reduction. This is bad, as it lower the burden to acquire patents;
  • The best mode defense has been virtually eliminated. Previously the law required that a patent application (a) include a detailed written description; (b) the written description had to enable someone skilled in the art to make the described invention; and (c) the description had to disclose the “best mode” so that the patentee can’t get a broad patent claim that covers, by its language, the best mode known to the inventor but that is withheld from the written description. The latter requirement is part of the “patent bargain” that grants a temporary monopoly privilege “in exchange” for revealing to the public information that would otherwise be kept as a trade secret. This is a bizarre dilution of the “bargain” and makes it easier to get a monopoly while keeping key aspects of the monopolized idea secret, in effect letting patentees having their cake while eating it. It removes one possible defense that can be used against patentees who game the system or flout the best-mode disclosure requirements. Bad.
  • The PTO can now prioritize examination of inventions of national importance or for a high fee. This is bad for two reasons: first, it will result in some patents issuing sooner than otherwise (and with a longer term, since the term is 20 years from the filing date); second, it will result in extra funds for the PTO (the state).
  • The penalties for “false marking” have been drastically reduced. This is another inexplicable change. Previously it was considered an antitrust issue and “patent abuse” to falsely mark a product as patented or patent pending and private lawsuits could be brought against those engaged in false marking. Some have even unfairly besmirched these plaintiffs as “false marking trolls,” in an analogy to patent trolls, even though it is the party using a false patent claim to squelch competition who is in the wrong. If you don’t want an unfair marking suit, you simply don’t go around threatening people with patents. You don’t have to mark your products with “Patented” even if it is–failure to mark simply made it harder to recover past damages before the infringer was put on actual notice. Now it’s harder for private parties to file such suits. It’s bad enough that patenting something can be used to scare off competition; now it’s easier to do this by falsely claiming there is a patent on the product.
  • Further, now it’s easier to use “virtual marking” by putting a web address on a product, to satisfy the marking requirements, making it easier to qualify for a greater damages award in patent infringement. Anything that makes it easier to extract more resources from targes of patent aggression is bad.
  • The patent law permits companies to apply for an extension of their patent term when a patented pharmaceutical was delayed from reaching the market due to FDA regulatory delays. The AIA includes a provision “clarifying” how much time pharmaceutical companies have to apply for patent extensions that can provide extra years of protection from generic competition. This is a case of favoritism/special interest legislation, which critics have labeled “The Dog Ate My Homework Act.” The critics say this provision is really a special fix for one drug manufacturer, the Medicines Company, and its powerful law firm, WilmerHale. The company and its law firm, with hundreds of millions of dollars in drug sales at stake, lobbied Congress heavily for several years to get the patent laws changed. … The provision would guarantee that the Medicines Company got the extra patent protection, and it would relieve WilmerHale, which was hired to file the application, of a possible malpractice payment to its client.”6

Bottom Line

The AIA makes only minor changes, and does little to diminish the escalating cost of patents. The only significant improvement is prior commercial user defense, and it makes some things worse. The AIA does nothing to stop:

  • ~17 year patent terms;7
  • Patent injunctions;
  • Grants of state monopoly privileges, which are used to suppress competition;
  • money wasted on defensive patenting;
  • The Evil of Patenting Food and Seeds;
  • Gene patents;
  • Smartphone and other patent wars; and
  • Oligopolies and big-business favoring rules.

Under the post-AIA system, stupid patents will continue to be granted (Obama Signs Patent ‘Reform’ Bill — ‘Crustless Sandwich’ Still Patented, David Kravets, Wired).

The complaints that the AIA helps big corporations at the expense of the small guy are misguided. Neither large corporations nor independent inventors should be able to obtain state-granted anti-competitive patent monopoly privileges.

Appendix

The audio of the webinar is available at: Kinsella Webinar: Obama’s Patent Reform (mp3), and streaming below; and the slides used are provided below as well.

 

[Previous post: My Webinar on the America Invents Act; Mises cross-post]
[Mises]

  1. See Chorus Of Mainstream Press Saying The Patent System Is Broken Gets Louder; Bill Gates’ 1991 Comments on Patents ; Even The OECD Is Noting How Dreadful Patent Quality Is Negatively Impacting Innovation. []
  2. See Patent Trolls Cost The Economy Half A Trillion Dollars since 1990. []
  3. See Ayn Rand Finally Right about the First-to-File US Patent System. []
  4. Prior User Rights and Patent Reform. []
  5. See Mike Masnick, The Economist Notices That The Patent System Is Hindering Innovation And Needs To Be Fixed. []
  6. See also Patent Bill Viewed as Bailout for a Law Firm, Andrew Pollack, NY Times. []
  7. see Optimal Patent and Copyright Term Length []
Share

Facebook comments:

Previous post:

Next post: