Second Pair of Eyes Fails Innovation in the US

Monday I wrote about how the United States Patent Office is holding innovation hostage, and is treating applicants unfairly, at least insofar as some applicants seem to have their cases advance quickly and other applicants seem to wait for many years without any action whatsoever. I have gone on record saying that I believe the Patent Office is taking important steps, but the mountain that must be climbed might as well be as high and inhospitable as Mount Everest. When companies and individuals cannot obtain patents, despite the law being stacked to encourage innovation , the issuance of patents and even presumes that an inventor is entitled to a patent, this causes innovation to come to a halt because funding is effectively cut off and deals are put on hold. It seems self evident that when examiners take cases out of order they prevent other applications from percolating to the top of the pile.  Indeed, there seems to be little rhyme or reason with respect to the order some patent examiners take up patent applications, and this is problem one to be addressed moving forward if we are going to be able to do anything about the acute lack of innovation within the US Economy.

Americans have always been innovative, and it is extremely odd that this innovation has dried up over the last few years. President Ronald Reagan always joked about how he got worried when he heard someone say they were from the government and were there to help. That is why Reagan lead a movement to get government off the backs of individuals and businesses. There are many now who want burdensome federal regulations to address the collapse of Wall Street and the Housing sector, but none of them are looking at themselves as a part of the problem, which is at best hypocritical and at worst insane. While so many learned economists and political pundits want to blame Alan Greenspan for this mess because he kept interest rates low, the undeniable truth is that he warned Congress time and time again about the impending doom looming as a result of irresponsible lending practices and the threat posed by Fannie and Freddie. The fact that he was ignored by the likes of Barney Frank does not mean Greenspan was wrong, it actually means Barney Frank was wrong, at least if we are going to at all be honest about what really happened as a matter of historical fact.

But Alan Greenspan also proclaimed in a speech he gave in 2000: “We appear to be in the midst of a period of rapid innovation that is bringing with it substantial and lasting benefits to our economy.” What happened? Of course many will simply claim Greenspan was an idiot, which is admittedly far easier than actually trying to figure out the truth, and far more politically expedient. The reality, of course, is that Greenspan was not wrong, he managed our monetary policy through many years of unprecedented growth, and merely dismissing him as the problem, naive or as one who lacks intelligence is foolish. Greenspan did not have the authority to stop lending to people who could never hope to repay what they were borrowing; it was Congress forcing that to happen. Likewise, Alan Greenspan could not have envisioned that President Bush would nominate two PTO Directors who knew little or nothing about patent law, the economy and innovation.

Business Week observed in a recent article:

If an innovation boom were truly happening, it would likely push up stock prices for companies in such leading-edge sectors as pharmaceuticals and information technology.

Instead, the stock index that tracks the pharmaceutical, biotech, and life science companies in the Standard & Poor’s 500 dropped 32% from the end of 1998 to the end of 2007, after adjusting for inflation. The information technology index fell 29%.

So why is innovation failing or simply not occurring in the US? It seems clear to me that it is because the Patent Office spent much of the last 5 years simply not granting patents, or delaying making a decision on the well over 1 million patent applications that are pending.

Originally, when business method patents started to get bad press, the Patent Office initiated what they called “second pair of eyes” review. What this meant was that any business method patent, or any patent for an invention classified in class 705 whether a true business method or not, could only be granted if approved by two separate examiners. This caused extraordinary delays, and managed to keep the allowance rate for such commercially relevant technologies at extraordinarily low levels, as low as 20% from what I have heard.  Apparently, believing the second pair of eyes review was so successful, it was expanded throughout the Patent Office in 2005. I have anecdotally been told this was because the allowance rate was believed to be too high, and had to be forced downward.  I don’t know whether that is true, but a forcing down of the allowance rate is exactly what happened with the Office wide implementation of second pair of eyes.

But why should the Patent Office want to artificially deflate the allowance rate? After all, patent applicants are presumed to be entitled to an invention unless a patent examiner can articulate a justifiable reason for denial. In fact, the second pair of eyes review created a situation whereby one patent examiner with decision-making authority would be overruled by another patent examiner. I understand that the PTO wanted to increase quality, and a double review probably did increase quality, but at what cost?  I also have to wonder whether such a process is even legitimate under administrative procedure laws and the Patent Act. A two tiered allowance review seems to be inconsistent with the clear thrust of the Patent Act, although I cannot think of a section that it directly contravenes.

When second pair of eyes review became standard at the Patent Office the number of patents issued plummetted and the backlog grew at alarming rates. As it turns out, when the Patent Office forces more and unnecessary work it uses up valuable resources, which leads to lengthy waits for those still in the que.  So the Patent Office created its own problem, which has turned into a nightmare for them, inventors and the US economy. No single development is more to blame for the failure of US innovation than the second pair of eyes review.  While the motivations were likely laudable, it is now time to once and for all acknowledge what really caused this problem to get out of control.

Without assets individuals and companies cannot attract investors, and without capital from investors innovation cannot become a commercial reality. When innovation does not become a commercial reality that affects the bottom line of individuals and companies, which in turn affects the bottom line of GDP. It also prevents the hiring of employees and the growth of industries, which in turn means a smaller tax base and less revenues to governments.  Unfortunately, low allowance rates, increasing average pendency and stories about those who cannot get a patent for 5 or 10 years all contribute to a lethargy that sucks the energy out of innovators.  Why bother?  The truth is innovators still need to bother, and there are early signs that patents are flowing again and in some cases exceptionally quickly, but who can really take issue with those who have just given up?  The system needs to encourage, not discourage, and Congress needs to provide more resources to the Patent Office to help them dig out from the mess created.

What we are seeing at the Patent Office presently is an institution that is attempting to strike a balance and find remedies for problems of the past.  I doubt it is coincidence that forward thinking initiates seem to have started upon the departure of Jon Dudas.  It is really quite remarkable what a group of dedicated career employees can accomplish without misguided leadership of a political appointee who knows little or nothing about patents.  I have been critical of the Patent Office for a while, and was very critical of John Doll.  It was suggested by someone in comments to some of my articles that I give him time, and I dismissed that out of hand.  I should have listened to that comment.  While I don’t agree with everything going on, like deferred examination initiatives (I will soon explain my reasoning and offer an alternative, far easier solution) it is hard to argue against the developing positive change seems that seem to be brewing.  I just hope whoever is the next PTO Director doesn’t get in the way, and I also hope second pair of eyes meets a timely demise!