What’s the Best Way to Fix the Patent System’s Problems?

Eli Dourado argues that software patents tend to have a negative effect on innovation (as James Bessen and Michael Meurer have argued previously in Cato’s Regulation)[1] and should be eliminated. John F. Duffy agrees that many software patents should not have been granted, citing Amazon’s 1-click patent an example. But he emphasizes that the reason 1-click is a low quality patent is “not that it’s on software but [because] . . . it’s trivial; it’s obvious.” Rather than eliminating types of patents, like software and business methods, Duffy argues that courts and the PTO should focus on correctly applying the requirement that patented inventions be nonobvious.

One way to understand Dourado’s and Duffy’s differing solutions is to see their discussion as revisiting the longstanding debate over whether “rules” or “standards” make for better law.

Generally, this debate involves asking whether in particular circumstances it is better to create rules (“No driving over fifty miles per hour”) or standards (“Drive at a safe speed”) to govern some action.

Rules are more challenging to articulate well in advance, and usually they are over- or under-inclusive of what behavior the rule writer wants to reach. For example, the factors that affect safe driving speed are too numerous to take into account in a finite rule — weather, road conditions, temperature, and traffic patterns are just a few variables that interact with each other in complicated ways. So the strict application of any rule concerning driving speed will either exclude some safe driving conditions, include some unsafe ones, or both. Rules are nonetheless attractive because they are, compared to standards, easier to apply ex post and to anticipate ex ante.

In contrast, standards hold the promise, at least in theory, of always reaching the right result. If drivers must only pay fines for driving at an “unsafe” speed, then no one driving quickly down an empty road on a clear day will get penalized, and no one would get away with driving forty-five miles per hour, weaving in and out of traffic, in pouring, icy rain. But the downside of standards is that they are comparatively costly to apply, and those costs multiply when several parties must apply them. A police officer must assess what a safe speed is; if the driver disagrees he must go to a judge to argue and provide evidence about the weather, traffic conditions, road conditions, and so forth, in order for the judge to have the information necessary to apply the standard correctly.

Which are better: rules are standards? The answer changes based on the situation — how significant are the harms of an over- or underinclusive rule? Which way does one want to err in a given case? How high are the costs of applying the standard compared to the benefits of getting the ideal result?

Dourado’s solution involves the creation and application of a rule: no patents on software. While a rigorous definition of “software patents” would have to be chosen and articulated, in theory the application of the rule could be fairly straightforward. Duffy’s preference for eliminating obvious patents instead is a preference for a standard — many elements and documents have to be considered when evaluating each patent application to decide whether or not it is an obvious invention.

Framing this discussion as a choice between rules and standards helps explain why Dourado’s solution may not just be viable, but preferable. Some software inventions are nonobvious, easy to copy, and costly to develop — in other words, they are good candidates for deserving a patent. But perhaps software patents, as a whole, hurt innovation and innovative companies more than they help, by fostering trolling and inviting the patenting of many obvious programs. A clear, but admittedly imperfect, rule — no software patents — could be preferable over trying to apply, case by case, the standards for patentability, particularly because of the incentives and institutional structure of the Federal Circuit and Patent & Trademark Office.

In other words, the benefits of “good” software and business method patents may be outweighed by the costs associated with trying to weed out the “bad” ones: costs such as challenging low-quality patents’ validity in an adjudicative setting and choosing how to respond to demand letters sent by non-practicing entities with a portfolio of low-quality patents.[2] The law sometimes makes rough cuts when the cost of precision is too high, and perhaps software patents are an area where such a rough rule is optimal — not because all software patents are necessarily bad, but because software patents are so strongly correlated with other activities or qualities that we want to eliminate from the patent system.

Whatever the ideal solution is, the perfect need not be the enemy of the good. A variety of solutions would help improve the patent system, because the system has many problems which interact with and compound each other. Many software patents are merely mathematical formulas or abstract ideas and should not be considered patentable subject matter because they remove too much “raw” material from the public domain.[3] Other patents are granted because the standards for “nonobviousness” are, in practice, too forgiving. The strict liability of our patent system allows parties who contribute nothing to the “progress of science and the useful arts” to extract payments from productive companies and inventors who happen to have independently created something already patented.[4] And finally, the patent bar has a vested interest in a strong patent system, and its influence puts pressure on that system to evolve in a way that may not be in the public’s good. Each of these phenomena interacts with the others.

As a result, the patent troll who has acquired an obvious software patent that was never practiced or licensed, and who exacts unjustified settlements from small companies who may not have even infringed, is a phenomenon that exists and proliferates because of all of these imperfections in the system working in tandem. And so, it is not surprising that all of these problems would be mitigated by a proposal designed to reach just one.

Which brings us back to Dourado’s initial observation: the optimal contours of property are neither immutable nor knowable a priori, and so we necessarily need good property-defining institutions to choose what they are. The notion that patents are or aren’t property doesn’t help us decide the contours of patent rights — how long patents should last, what exactly can be patented, how and when patents can be enforced, and what institutions are best situated to decide the answers to these questions in practice. And these questions are difficult. Even Ayn Rand sidestepped suggesting a length for intellectual property terms, stating that if intellectual property “were held in perpetuity . . . it would lead, not to the earned reward of achievement, but to the unearned support of parasitism.”[5]

Perhaps even less intuitively, the question of whether patents are property also does not tell us whether the contours of property must be roughly or precisely defined. In fact, the contours of real property rights usually are rough — as Henry Smith observes, “The architecture of property emerges from the process of solving the problem of how to serve use interests in a roughly cost-effective way.”[6]

The patent system would be greatly improved if the PTO and courts could draw the line between obvious and non-obvious inventions correctly and at low enough cost to applicants, litigants, and society as a whole. But this is challenging precisely because of public choice theory. Applying standards — where the correctness of individual assessments of particular patent applications and suits is what constitutes the law working well — is harder for the public to see and criticize, and provides more of an opportunity for smaller groups to influence the patent system at the expense of the public interest. Eliminating the institutional structures that favor these groups is the next step to improving both the patent system and the innovation economy.



[1] James Bessen and Michael J. Meurer, Of Patents and Property, 31 Regulation Mag. 18 (Winter 2008-2009), available at http://object.cato.org/sites/cato.org/files/serials/files/regulation/200….

[2] Even if one has not infringed any patents, receiving a demand letter can be highly burdensome for a small company. In 2005, the average cost of an opinion letter assessing the validity of a patent and whether an accused party infringed was about $24,000. Am. Intell. Prop. Law Ass’n, Report of the Economic Survey 102 (2005). Getting a patent invalidated in court costs on average $650,000. Id. at 108.

[3] See generally, Ben Klemens, Math You Can’t Use (2006).

[4] Notably, “trolling” is not a new historical phenomenon. For example, in the late 1800s, farmers were frequently sued by parties called “patent sharks” over their use of basic farming tools that were covered by design patents. See Colleen V. Chien, Reforming Software Patents, 50 Houston L. Rev. 325, 325 (2012), available at http://ssrn.com/abstract=2125515.

[5] Ayn Rand, Patents and Copyrights, in Capitalism: The Unknown Ideal 127 (1967).

[6] Henry Smith, Property as the Law of Things, 125 Harv. L. Rev. 1691, 1703 (2012).

Also from This Issue

Lead Essay

  • The True Story of How the Patent Bar Captured a Court and Shrank the Intellectual Commons by Eli Dourado

    Public choice economics warns of regulatory capture - a scenario in which the regulated actors use lobbying to get favorable rules and regulators. When an industry writes its own rules, the rest of us may suffer, and Eli Dourado argues that that’s exactly what has happened in U.S. patent policy. Here, he tells the story of the Court of Appeals for the Federal Circuit, which for the last three decades has had exclusive appellate jurisdiction over patents. The Federal Circuit has tightened the law again and again, in what Dourado identifies as a classic case of regulatory capture.

Response Essays

  • Facts and Fables: A Long-Run Perspective on the Patent System by B. Zorina Khan

    B. Zorina Khan challenges Eli Dourado’s story of regulatory capture: The substantial growth of patent issuance in recent years is due overwhelmingly to an influx of foreign inventors, not to a flawed U.S. patent system. That system is neither broken nor even very different from its historical norms. Throughout our history, it has served us well, even if outsiders sometimes find it hard to understand. We should therefore resist any sweeping changes to it.

  • In Favor of “Good Property-Defining Institutions” … and Opposed to Bad “Reforms” by John F. Duffy

    John F. Duffy likens software patents to medical patents. At one time, medical patents were considered unethical, but nowadays, they are considered an important tool for spurring innovation in a field that otherwise might not get much of it. Software patents are very similar, he argues, and they should not be abolished. Yet some reforms in the patent system make sense to him, including ending the complete centralization of patent cases in the Federal Circuit. Duffy takes issue with several of the empirical studies that lead essayist Eli Dourado uses to make the case for software patent abolition - these, he contents, do not show that total abolition would yield good outcomes. He suggests some reforms that this evidence may support instead.

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