Innovation Will Lead Recovery if Patent System Allows

By Gene Quinn
March 29, 2009

I was reading the March 30, 2009, edition of Fortune magazine today and there is an article titled After the Panic, Innovation, written by Glenn Hutchins, a co-chief executive of the technology investment firm Silver Lake.  His brief article chronicles how we managed to get into this economic crisis and concludes that, as always, scientific advances and entrepreneurship will lead us out of the economic haze and could well lead to several decades of prosperity.  Hutchins is, of course, completely correct.  It will be innovation and entrepreneurs who lead us out of these dark financial days if and only if the United States Patent and Trademark Office becomes willing to play their part in the recovery.  If the USPTO does not alter course and issue patents in a technologically and economically relevant time frame no amount of scientific advances, innovation and entrepreneurial spirit will solve our economic problems. 

The nasty little secret that so many seem to want to ignore is that innovation requires funding.  Without funding the best ideas that could lead to inventions of tomorrow that will spur economic growth, give birth to new industries and employ millions will simply not come to fruition.  Simply stated: Without issued patents there will be few, if any, investors willing to provide the capital necessary to commercialize and grow new businesses.  So instead of spending hundreds of billions of dollars to artificially prop up the economy, our leaders need spend a fraction of that sum, just a few billion dollars, on a overhaul of the Patent Office.  If there is no stomach for a few billion dollars then why not simply change the philosophy and direct the Patent Office to start issuing patents.  Issuing patents should be fairly cheap and easy to accomplish, even for the US Patent Office. Creating monetizable assets free of charge, at least from the government perspective, is a common sense approach to stimulus, but sadly for the USPTO it would be a revolutionary concept.

The Hutchins article in Fortune explains:

The answer resides where it always has — in innovation and entrepreneurship.  The way out of the doom and gloom of the ’70s — a period much like today’s — was a wave of technology innovation that spurred a generation of company formation, job creation, productivity gains, wealth accumulation, and GDP growth.  Today’s opportunities are just as big if not bigger.  For instance, we stand on the cusp of perhaps one of the mightiest technology trends of our lifetime in the field of wireless broadband mobility, with opportunities in a host of related industries.  Innovation is also rampant in green technologies, biotechnology and stem-cell research, nanotechnology, VoIP, virtualization, cloud computing, collaboration, software as a service, and social networking.  The economic and social benefits that will flow from this tsunami of innovation stand to propel another quarter-century of prosperity.

I would agree with Hutchins but for one thing — the US patent system is horribly dysfunctional and will stand in the way instead of acting to assist economic development.

Let us not forget that the recession of the 1970s did not end until well after Ronald Reagan was elected President.  According to the Joint Economic Committee’s report in 2000, it wasn’t until December 1982 that the period of economic growth and expansion first started.  The report explained:

In 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run. He proposed, and Congress passed, sharp cuts in marginal tax rates. The cuts increased incentives to work and stimulated growth. These were funda-mental policy changes that provided the foundation for the Great Expansion that began in December 1982.

The Reagan economic policies, including the dramatic reduction in tax rates, is widely accepted as fundamentally important to the largest era of peacetime economic boom in American history.  One thing lost from our understanding of what lead to such tremendous economic prosperity is the fact that patents became relevant thanks to the formation of the United States Court of Appeals for the Federal Circuit.  Recall that in an effort to promote greater uniformity in patent law, Congress established the Federal Circuit in 1982, making it the only US court of appeals defined exclusively by its jurisdiction rather than geographical boundaries. 

If you look at the number of utility patent applications filed in the United States dating back to 1963, it becomes clear that the tremendous growth in the number of patent applications filed did not start until about 1982-1983. 

The number of applications continued upward through the recession of the early 1990’s, continued upward despite the bursting of the dot-com bubble, and continued upward despite the terrorist attack on 9/11/01.  The fact that patent applications have continued to increase since the formation of the Federal Circuit is not a coincidence.  Patents were virtually worthless prior to the formation of the Federal Circuit because the outcome of a patent litigation was completely dependent upon what Circuit the litigation was brought in.  The Federal Circuit created uniformed and predictable patent laws, which lead to patents being quite valuable.  Investors understood this and provided capital for the formation of new companies and new industries regardless of the economic realities of the moment.  Unfortunately, this is all changing.  Patent application filings are down in calendar year 2009 by as much as 5% when compared to calendar year 2008, and that does not bode well for future economic growth.

There are many reasons why patent application filings are down, but assuming it is all due to the recession we are in now is not only naive, but is dangerously incorrect.  The facts are clear.  During economic trouble over the last 25 years patent application filings have grown, so there must be something else to explain this alarming drop in the number of patent applications.  Sadly, there is more than one explanation, but the short answer is that the US patent system has become so dysfunctional that we will not be able to look to innovation and entrepreneurship to lead us out of this economic debacle unless we quickly get our act together and form a national innovation strategy.

The Patent Office is now allowing only 42% of patent applications to mature into an issued patent, which is at least 25% lower than the historical average allowance rate.  Examiners are encouraged to “reject, reject, reject right now,”  Add this reject now philosophy to the ridiculous length of time applications remain pending at the Patent Office, and some are simply making the choice to keep innovation as a trade secret rather than lay it out for everyone to see and still not get a patent in a technologically relevant time frame, if ever. 

On top of Patent Office dysfunction, the Federal Circuit has seemingly outlived its usefulness.  Once upon a time we had a uniformed series of patent laws thanks to the Federal Circuit, but now the outcome of an appeal depends completely upon what three judges are on the panel hearing the case.  There is no uniformity, precedent is not obeyed, the Federal Circuit ignores the Patent Office definition of the duty of candor owed by applicants and inequitable conduct fears are crushing the patent system.  While I am not a fan of recent Patent Office initiatives, it is really the Federal Circuit who is to blame for the failure of the Patent Office.  The Federal Circuit forces patent attorneys and agents to game the system and bury the Patent Office with anything remotely relevant or risk any patent being declared unenforceable.  This nonsense is unsustainable and has crushed the Patent Office because they simply cannot look to or rely upon help from applicants because if the applicant says or does anything to assist the Patent Examiner in understanding the prior art and the invention it will be used against the patent owner during licensing and litigation and make the patent obtained worth less, if not completely worthless.

It is hard to argue with those making the choice to forego patent protection, although it is short-sighted.  If you file an application now it will be at least a couple years before a patent will issue, and in that time frame we will have to get our patent act together, or we are going to be in for a terrible economic downturn that will easily rival the Great Depression.  This is the undeniable truth because we have always relied upon American innovation to get out of tough economic times, and unless investors see assets worth betting on there will be much less funding for start-up companies that would otherwise be the next wave of job creators in the US.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 8 Comments comments.

  1. Dan March 29, 2009 10:37 pm

    You state:
    “Patents were virtually worthless prior to the formation of the Federal Circuit” (circa 1982).
    And you also state:
    “The Patent Office is now allowing only 42% of patent applications to mature into an issued patent, which is at least 25% lower than the historical average allowance rate.”
    It seems that you are saying that a historical allowance rate of 77% created worthless patents, or conversely, that having a 42% allowance rate creates worthless patents.
    The point is, it seems allowance rates have anything to do with the worthyness of patents. Applicants are capable of submitting patent applications for inventions that already exist.
    If the system is to be fixed, and patents to be credible, we should move away from even measuring the allowability rate.
    Instead we should find a way to measure what useful, new, and unobvious matter is trying to be protected through patents, and how the USPTO might be failing, if at all, to provide inventors with patents protections in a timely matter for said measured useful, new, and unobvious matter.

  2. Scott B. Garrison March 30, 2009 8:52 am

    Hey Gene;

    Great post. I couldn’t agree more with the premise re: innovation, CAFC pros and cons, PTO dysfunction.

    I agree that the number of patent applications filed went up each year due to the creation and existence of the CAFC. However, in addition, I believe it important to note that the CAFC was a pro-patent entity unlike it’s predecessors and the individual circuits. The effect on the patent world was “Build it and they will come”. In addition in 1995 with State Street we added business methods which although noble and legitimate led to an abuse in patent grants. Couple all of this to ED Texas and NPEs, fraud and the duty of disclosure, as well as a number of other factors and it makes the patent world a very lucrative area of law for the successful litigant, the attorneys, etc. It is not surprising that the chart would show the growth that it does.

    Of course everything I say is also a gross oversimplification, but I cannot help but wonder if the drop in filings is not a result of the strong push back on business methods culminating to date in Bilski, the move against grants as you note…I think the list can go on.

    The problem I see is that the pendulum swingeth too far. That however is not a new problem of human nature. In the end, I too agree that change is needed. If the appropriate change is made which enables the continued protection and monetization of one’s innovations, and that is coupled to a clear and reasonable patent environment, then we will recover and grow this economy once again.

    Scott B Garrison

  3. Gene Quinn March 30, 2009 9:52 am

    Scott-

    Thanks for the comment. I agree that it is not surprising that the chart shows growth in the number of applications. I think there are a lot of things that lead to that. You ask a good question about Bilski and whether that could account for fewer applications. I am sure that it accounts for at least some of the reduction in applications, at least with respect to those applications that were completely related to mental processes or business methods without any technical point of novelty.

    -Gene

  4. Gene Quinn March 30, 2009 9:56 am

    Dan-

    A low allowance rate does not create worthless patents, although it does mean that many innovations are not being protected. The reason patents were worth much less prior to the Federal Circuit was because they were invalidated left and right by the various regional Circuits, so protecting innovations with patents was seen as not the best use of resources. Once the Federal Circuit started to bring uniformity to patent law patents became worth more because owners knew they had a right that could be enforced, and more importantly knew what the target was with respect to defining an invention and claiming an invention so that the patent claims would be valid and the right strong.

    -Gene

  5. 6 March 31, 2009 2:57 pm

    ‘no amount of scientific advances, innovation and entrepreneurial spirit will solve our economic problems. ”

    I disagree, an amount of scientific advances which are patentable could very well solve our economic problems.

  6. Gene Quinn March 31, 2009 4:24 pm

    6-

    Wow! Are you really that malevolent? Choosing a string of words and quoting them for the exact opposite point that was clearly intended. You must be a TV news reporter. Do you work for MSNBC?

    What I said was: “If the USPTO does not alter course and issue patents in a technologically and economically relevant time frame no amount of scientific advances, innovation and entrepreneurial spirit will solve our economic problems.”

    Indeed, advances that are patentable would solve the economic crisis, but if and only if the Patent Office actually issues patents, which they are not doing. With entire Art Groups not issuing any patents and an allowance rate of 42%, the US Patent Office has become the place where innovation goes to die… a true patent denial authority. And if you are being honest, you know that is completely true.

    -Gene

  7. Jimmy May 10, 2009 4:23 pm

    Although I agree with the main point of your article, I have to disagree with some of your analysis and arguments. First, you said patents application didn’t really take off until about 1983. Second, you said the allowance rate of patents has been dropping and that’s a bad thing. I offer one situation where this may not be true and why applications jumped in 1983.

    Enter the gene patent.

    Discovering a gene and patenting it was a slow process before 1983, the year Kary Mullis invented Polymerase Chain Reaction (PCR). PCR shortened the process of isolating a gene from weeks and months to a mere 2 hours. Needless to say, the process was sped up and companies raced to file patents for various genes leading to a surge in patent applications starting in 1983 up till these few years.

    The problem was companies, biotech firms, and universities would all file for patents for fragments of genes, sometimes before they even knew what the gene really did. In the early 2000s, too many patents were issued and doctors around the world voiced that if this continues, new research would be slowed or halted because of the large amount, and relatively expensive royalty fees for each gene. THE PATENTING OF GENES IS ACTUALLY SLOWING INNOVATION. Already labs everywhere has given up on research either because of lack of funding or because they’re afraid of being sued for accidentally using a patented gene in their search for a cure. More about the controversy regarding this topic can be easily found through Google or any other search engine.

    By about 2005, figures in the government began taking action to reduce the number of gene patents allowed. That transferred over to the USPTO reducing the allowance rate.

    Again, I don’t mean to say your article is wrong, it’s just there are things like gene patents out there that could use a reduction in allowance rate in order to spur innovation.

  8. Gene Quinn May 10, 2009 9:18 pm

    Jimmy-

    I have heard from others suggestions that the early 1980s saw increased applications for more than just the Federal Circuit, and I think that is a fair point. There were a couple big Supreme Court cases which went in favor of the patent owner. That together with a new Federal Circuit bringing unity to the law was an important step forward.

    I will have to follow up with others who know more about patenting of genes in order to address whether that is slowing innovation. The only way that it could be slowing innovation is if what is being patented is a discovery rather than an invention, which may be what is happening. There were some high profile Federal Circuit cases in the early part of this decade that made it harder to get such patents. This has contributed to the lower allowance rate, but the thing that has really contributed is the “second pair of eyes” requirement. It first started off as only in business methods and then went into all technology areas, where in order for a patent to issue it would have to be allowed by 2 examiners. This lead to some senior examiners feeling like they had lost signatory authority, which they had. Low morale, double checking and a second set of quality review from OPQA caused examiners to fear making an error and it was perceived to be easier to reject than to allow and possibly make an error. So what you say may be a small part, but it is not the overwhelming part of why allowance went so low.

    -Gene