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 / Winter 2005 / Issue 41(originally published by Booz & Company)


As Patent Laws Weaken, Innovation Suffers

Corporations and inventors everywhere require strong patent laws like those America’s founders originally designed.

Imagine if the only penalty for shoplifting was that you would have to pay for what you took. Implausible as it sounds, that is essentially the consequence faced by those found guilty of patent infringement. Under the current system, if someone (or some company) appropriates a patented idea, the punishment is generally nothing more than the payment of “reasonable royalties.”

In other words, patent infringers are seldom forced to pay out more than they would have if they had licensed the idea from the inventor in the first place. This slap on the wrist is not just some idle quirk in the law. It’s part of a disturbing decrease in the strength of intellectual property rules that may be stoking a growing innovation crisis in the U.S.

Patents were designed to serve as a temporary protective shell around technological seedlings, letting them enter the marketplace shielded for at least a few years from deep-pocketed, established competitors. In recent years, a long-standing legal battle has intensified, threatening to permanently undermine this original intent.

On one side of the legal battle is a new breed of contingency litigators, who file patent infringement suits for inventors who could not otherwise afford an attorney. These so-called patent trolls have recently won visible judgments against some big-name companies. In 2003, Microsoft was ordered to pay $560 million to Eolas Technologies Inc. and the University of California for infringing their patent involving functions in Web browsers. (The case was overturned on appeal and will be retried.) And in March 2005, Research in Motion Ltd., which makes the BlackBerry, agreed to pay a little-known inventor $450 million in a conflict over patents involving wireless e-mail.

On the other side, a number of large corporations — in the automotive, electronics, aerospace, and computer industries, among others — have reacted to these suits by lobbying for weaker patent laws. These big companies, which were often unaware that there were any potential patent claims against them until they came up in court, argue that the inventors take advantage of legal rules to extort big paydays with sometimes frivolous claims on technologies that businesses have used for years. The cure: less stringent protection for inventors.

But by taking this position, U.S. corporations may be hurting themselves in the long run. As former Microsoft Chief Technology Officer Nathan Myhrvold put it: “Small changes in patent law can, as an unintended consequence, have catastrophic effects.”

For years, the U.S. patent system perfectly balanced the interests of the inventor with those of established companies and was considered among the best in the world, responsible for decades of innovation. Between 1929 and 1982, more than two-thirds of the productivity gains in the U.S. were the result of advances in science and technology, according to George Washington University economist Edward Dennison. Now, with global competition at a fever pitch, companies may have picked the wrong time to tamper with these rules and thereby discourage inventors from inventing. The implications affect not just the future of American patent law, but also innovation around the world. Corporations and independent inventors everywhere in a global economy, all with important ideas to protect, require consistently strong patent laws of the sort that America’s founders originally designed.

There are already signs that watered-down patent rules are discouraging American invention. Annual U.S. patent growth slowed to about 1 percent in 2002 and 2003, after increasing an average of 4 percent in each of the prior three years, according to U.S. Patent Office data. Moreover, in 2004, U.S. patent output declined by nearly 5 percent, with 75 percent of this drop-off attributable to American inventors.

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