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strategy+business: Corporate Strategies and News Articles on Global Business, Management, Competition and Marketing
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.

Prolific and controversial inventor Jerome Lemelson is often cited as the cause for the business community’s drive to weaken patent regulations. Mr. Lemelson, who died in 1997, had nearly 600 patents to his name, for innovations involving automation, computers, VCRs, toys, and much more. His patent applications were long, detailed, and so full of ideas that some were eventually divided into as many as 20 distinct patents.

Some of Mr. Lemelson’s patents took decades to issue. But when they were finally granted, the inventor gained exclusive rights to such ubiquitous technologies as barcode scanners and automated machine vision systems. From 1989 to 1997, with “submarine patents” — so called because they emerged out of nowhere, long after companies had adopted the technologies — Mr. Lemelson sued Japanese, European, and American automakers and electronics companies, among others, for patent infringement, ultimately receiving an estimated $1.5 billion in settlements. In January 2004, a surprise ruling from a Las Vegas district court invalidated his barcode and machine vision patents.

But the damage had been done. In 1995, just as Mr. Lemelson’s litigation was at its peak, corporate lobbyists convinced Congress to change the life span of patents to 20 years from the date of application. Previously, it had been 17 years from date of issue. Under the new rules, if a patent took 10 years to be approved, only 10 years would remain on it. This effectively crippled the possibility of a submarine patent, but also broadly weakened patent protection.

A 1999 law restored some protections but added the requirement that most patent applications be published within 18 months of the filing date, eliminating the secrecy that had always been associated with these documents. This exposes inventors when they are most vulnerable, before their ideas have generated revenue or even been awarded a patent.

And a proposed bill, the Patent Reform Act of 2005, would diminish patent rules further. Under this legislation, patents go to those first to file, rather than first to invent; companies or individuals can avoid paying royalties to inventors by claiming that they previously used the idea; and any party, foreign or domestic, can stall a patent indefinitely by asking for a reexamination.

Most observers would agree that companies need a viable way to respond to unjustified sneak attacks on their use of technology, but diluting patent laws is not the solution. A more thoughtful answer would be to give the Patent Office the resources it needs to eliminate harmful delays, and to return to fixed patent terms of 17 years from the date of issue, without prior publication, with one key caveat: If a patent has not been issued after three or four years, and if the delay is caused by the inventor, it should be published promptly. That way, companies will not be blindsided by outliers playing the system.

Perhaps with an approach like this we can return to a time when patents lived up to Abraham Lincoln’s lofty praise: In naming the most significant achievements in world history, he cited the “the art of writing and printing, the discovery of America, and the introduction of patent laws.”

Author Profile:

Robert P. Siegel ([email protected]), an inventor and consultant on innovation and intellectual property, holds 43 patents and is currently working on a biography of Jerome Lemelson.




As Patent Laws Weaken, Innovation Suffers