Small Business

America’s Patent Crisis

How a new law encouraging more efficient patent processing could further stifle innovation.

Chrysler Jefferson North Assembly Plant with Chrysler Group.
Detroit, home of Chrysler assembly plant, will host one of several new U.S. Patent and Trademark field offices.

Photograph by Bill Pugliano/Getty Images.

The U.S. Patent and Trademark Office this week announced the opening of its first set of field offices, coming soon to Silicon Valley, Detroit, Denver, and Dallas. This move was mandated by the America Invents Act of 2011, the most important recent effort to overhaul the country’s badly broken patent system. Unfortunately, both the new offices and the larger legislative framework reflect a fundamental misunderstanding of what’s gone wrong with patents. The underlying assumption is that our major patent problem is that applications are processed too slowly. In fact, the problem is that we’re granting far too many patents, tying up vast swathes of industry in litigation and negotiation rather than innovation.

Counting up patent applications creates a convenient quantitative measure of invention, but patents and innovation are really not the same thing. It is less and less the case that more patents mean more innovation.

A patent is a government-created monopoly. The government creation of monopolies used to be a common and necessary practice. The administrative capacity of 18th-century governments was sharply limited, and states had difficulty raising revenue. One way to address this was through the direct sale of monopoly rights to businessmen of various kinds. Another was to substitute monopoly rights for fiscal appropriations. Today, a government that wants to build a bridge would normally spend some money to build a bridge. A couple of hundred years ago it was more common to charter a private corporation to build a bridge with private money and incentivize investment by sheltering it from competition.

A patent, similarly, is a monopoly for inventors—a way of financially rewarding people for inventing things without directly appropriating the funds. But while deliberate monopoly creation has gone extinct in most realms (though it may be making a comeback in transportation infrastructure), patents play a larger role in economic life than ever before.

Most famously, they’ve led to an incredible logjam of smartphone patent litigation (not to mention a thousand infographics attempting to chart the mess). Patent strategy has also come to figure larger and larger in business decisions. Last year, Google spent more than $12 billion to acquire Motorola’s failing mobile phone business largely for the patents. That was on the heels of a consortium of tech companies paying $4.5 billion for bankrupt Canadian networking equipment manufacturer Nortel’s patents. Right now Research in Motion, the maker of the BlackBerry, is almost certainly facing doom as a device-maker, but the firm should retain some value as a patent owner.

Enter last year’s America Invents Act, which takes as its premise the theory that patents are in crisis because the PTO isn’t good enough at processing applications. As patents have become more central to the economy, applications have surged, creating a huge backlog. An April 2010 report from the Commerce Department, which houses the PTO, claimed that this “backlog (currently at 750,000 applications) could ultimately cost the U.S. economy billions of dollars annually in ‘foregone innovation.’ ” The America Invents Act launches a multipronged attack on this backlog, including the hiring of new patent examiners and the launching of field offices to house them.

If you accept the underlying diagnosis of the problem, it’s a smart solution. Throwing more bodies at the issue helps, but it’s also important to get the right people. And the field-office model recognizes that location matters for personnel recruitment. Having a physical location in Texas helps you recruit people who are knowledgeable about the energy industry. The same goes for Silicon Valley and digital technology or Detroit and manufacturing. The firms in the computer business tend to cluster together between San Francisco and San Jose.

The problem is that the underlying diagnosis is wrong. All else being equal, it would be nice for the government to do its paperwork faster, but there’s little reason to believe the United States is underpatented. Patents work more or less as intended in the pharmaceutical industry, where inventing a new drug and shepherding it through the approval process is extremely expensive. Granting monopolies to drug inventors is very costly to consumers, and arguably we should think of a different system, but the lure of windfall monopoly profits really does induce capital to flow into research and development.

But in the thriving digital sector, patents don’t work at all, and more patents are likely to cause more litigation rather than more innovation. A product like the iPhone that was world-changing and awesome five years ago seems boring today, leaving people to wonder what’s next. In this space, where the capital costs of innovating are relatively low, invention is driven by competition not monopolies. Practical engineers working in high-tech understand that the patent war is bad for innovation, but disturbingly the big corporate players in the industry are reconciling to it—costing American consumers billions and stifling startups. The government hands out patents so freely that there’s no way to make anything without violating every other big player’s patents. That’s fine for established firms that have had time to assemble (or buy) vast patent arsenals. But it’s a disaster for new entrants, who know that any successful new product they make will be taxed by a storm of litigation once it becomes popular. The real risk of “foregone innovation” is that resources will be shunted away from making great products into hiring lawyers and away from investing in promising new firms into investing in old ones with legacy patent arsenals.

In almost no sector of the economy do politicians talk about their desire to promote more monopolies and less competition, but that’s exactly what the recent round of patent reform is all about. America doesn’t need more offices to house more examiners to process more applications more quickly. It needs more thinking about how to roll back harmful monopolization without doing too much damage to the sectors where the system works.