Invention is a Process, or Why the Electronics and Pharmaceutical Industries are at Loggerheads over Patents By Jay Dratler, Jr. Goodyear Professor of Intellectual Property University of Akron School of Law



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Invention is a Process, or Why the Electronics and Pharmaceutical Industries are at Loggerheads over Patents
By

Jay Dratler, Jr.

Goodyear Professor of Intellectual Property

University of Akron School of Law

Asked what were the two most important innovative industries at the dawn of the twenty-first century, most observers would have named the electronics industry (including software) and the pharmaceutical industry (including biotechnology). Yet we now have an interesting and unprecedented phenomenon. For the first time in American history, our two most promising growth industries disagree about patents.


The pharmaceutical industry loves them.1 This is not surprising, for its entire economic modus operandi is based upon them.2 It so loves patents and so relies on them that it is highly suspicious of any change in the current system—even one so seemingly innocuous as extended post-grant review.3
In contrast, the electronics-software industry is as leery of patents as the pharmaceutical industry is enamored of them. The difference first revealed itself in the FTC’s 2003 study of patents and innovation.4 Electronics-industry witnesses described the use of patent “thickets” not as tools for encouraging and financing innovation, but as tools of economic extortion and barriers to progress.5 The thousands of patents in a typical industry portfolio, they said, were useful primarily in the aggregate, and then mainly in defensive mode, as tools of cross licensing or bargaining chips in infringement actions.6 This difference crystallized with the Blackberry7 and eBay 8cases, in which the industry suddenly realized that broadly claimed patents on such things as software and business methods, used by so-called patent “trolls,”9 might substantially impede innovation in the industry, rather than promote it.10
The very metaphor of “thicket” is indicative. It suggests a barrier to progress, not a path to it. Since thickets require a multiplicity of patents, the metaphor also suggests that more patents are not necessarily better, as commentators and this author have argued for some time.11
But most of all, this first clear public dispute over patent law among industry participants suggests there is substance to repeated academic and scholarly warnings that our patent system is in trouble. Ivory-tower academics and purists like myself are no longer the only ones complaining. Instead, the very folks whose sweat and massive investment drives the electronics and software industries are doing so. That fact alone should cause Congress and other policy makers to pay attention.
This article reasons that a single difference in legal regulation accounts for most of the divergent viewpoints among these industries over patent law and the proper direction of patent reform. It argues that the difference reveals a fundamental conceptual flaw in our patent system generally and, by extension, patent systems in industrial nations worldwide. It then suggests ways to fix that flaw.
The analysis proceeds in four steps. Part I explains how the FDA’s requirement that pharmaceuticals prove their safety and effectiveness before being allowed into the marketplace complements and completes the patent system for that industry. Part II explains why that requirement matters economically: innovation and invention are processes, not events, and an economic system without some similar requirement for a workable, completed invention is economically irrational. Part III analyzes the specific features of our patent system that make it economically irrational for that reason, focusing on the doctrine of constructive reduction to practice and the patenting of abstract conceptions, which the highly abstract notion of the “nonobviousness” of an inventive conception aids and abets. Part IV suggests specific changes in statutory language to eliminate the economically irrational effect of these features and to make our patent system work as effectively for all industries as it seems to do for pharmaceuticals. The article concludes with a plea for plenary reform of our patent system led by economists, not lawyers.

I. The Big Difference: Focusing on Substantial, not Nominal, Invention

Let us begin by accepting, for the sake of analysis, the fundamental precept of most patent-system critics. They argue that too many “bad” patents issue on things that are not really inventions, or at least not inventions of the type that justify the state-granted monopoly of patent protection.12 If their critique is valid, what are the economic consequences?



The present-day electronics industry exemplifies the consequences. Most informed observers of this industry, let alone insiders, can identify off the tops of their heads the real inventions that have driven this industry forward, or at least most of them. The key inventions include such things as the vacuum tube, the cathode-ray tube (CRT or TV screen), the transistor, the integrated circuit, the electronic calculator, the digital computer, the laser, laser diodes, and the liquid crystal display (LCD, the technology used in laptop computer screens).
Some of these advances, such as the vacuum tube, discrete transistor, and CRT, were transitional technologies. They are now obsolete or becoming so. Yet they represented necessary and indeed vital transitions. It is hard to see how the television and computer industries would look today, or whether they would exist at all, without the decades of development that occurred during the vacuum-tube/CRT era. Take away but one of these fundamental advances, even the transitional ones, and the dots leading to our current technological infrastructure would disappear or no longer connect. No one questions that these fundamental advances required and deserved patent protection.
There is also a second level of important innovations in the electronics industry, perhaps less well known to those outside the field. It includes such things as complementary metal oxide (CMOS) transistors, non-incremental improvements in integrated-circuit process technology (such as the transition from visible light to X-rays to permit integrated-circuit masks with finer features), the transformation of gas and solid state lasers into the laser diodes that serves as lighted visual displays in everything from laptop computers to DVD players, and so on. While the industry might have progressed to its present stage without these secondary inventions, they support such a multitude of products of such commercial value that they seem to merit patent protection also.
An obvious problem, then, is the numbers. Inventions in these first two categories—pioneering and substantial—number in the dozens. Perhaps if fully enumerated, with the benefit of the doubt given to marginal cases, they might number in the hundreds. Yet electronics-industry players report tens of thousands of patents—as many as 90,000 for a single product.13 Does anyone really believe that there have been that many industry-propelling innovations within the last twenty years—the current lifetime of patents14? Does anyone really believe that a patent portfolio containing tens of thousands of patents, nearly all of which necessarily represent minor and incremental improvements,15 serves any valid economic function?
As discussed in more detail below,16 the economic function of patents is to attract risk capital to the entire inventive process—the long journey from the “Eureka” inspiration to a real product or service for consumers. Those who make the decisions to invest risk capital are people, not digital computers. They don’t normally have the capacity to keep thousands of things in their mind at once. Instead, they focus on the important ones.
Furthermore, when people make investment decisions, they often act individually or in small groups, as in a board of directors. Anyone who has ever attended a board meeting can only laugh at the notion that individual patents in a portfolio of thousands make any difference in decisions at all. A single pioneering patent on something like the laser, however, can focus the mind and occupy hours of intense board discussion. It can outweigh an entire portfolio.
So how does the electronics industry use its vast portfolios of patents? Just as warplanes use chaff. As the industry itself reports, firms use their gigantic portfolios not to attract investment or build industries. Instead, they use them defensively, in cross-licensing and counterclaims in infringement suits, in order to prevent others’ similar gigantic portfolios from impeding their own industrial development.17 Insofar as innovation is concerned, the whole exercise is a charade in which only the patent lawyers win. And the Patent and Trademark Office keeps getting larger and further behind.18
From an economic perspective, patent chaff hardly promotes innovation. Each patent in the huge portfolio costs money to prepare and prosecute. It takes inventors’ time away from technical innovation. Indeed, with the present differential between engineers’ and lawyers’ salaries,19 patenting a minor, incremental innovation may consume more resources than making the innovation in the first place.
To put these comments in perspective, consider a typical minor patented invention in the electronics industry: a socket that connects a computer chip to a printed-circuit board. Since the socket is not much use without something to plug into it, the chip (or at least its mechanical design) necessarily must come first, as it did in Pfaff’s case.20 Once the chip or its mechanical design exists, it takes virtually no risk and little ingenuity to create the socket. One need merely measure the chip or other device to be plugged into the socket (or get an accurate drawing of its dimensions from its manufacturer) and design female receptacles to fit the device’s male pins. The other side of the socket (the male pins that fit into holes that robots drill in the printed circuit board) may involve some design discretion, since its configuration is not determined by what plugs into the socket. But industry standards or general engineering best practices (such as making the pins as far apart as possible to avoid heat buildup or the risk of short circuits made by automated soldering machines) largely determine the configuration. Perform these routine and pedestrian tasks with basic competence, and voila! You have a patent.21
There are two problems with this “invention”—one typical of the sort of “inventive” chaff that routinely receives patents in the electronics and software industries. First, from a legal standpoint, it is difficult to distinguish the “ingenuity” or “inventiveness” involved in this process from that involved in changing the materials for a doorknob, an “advance” that the Supreme Court rejected as unpatentable over 150 years ago in the seminal case of Hotchkiss v. Greenwood.22 Only the Federal Circuit’s “suggestion” test, which effectively reads the nonobviousness criterion out of patent law,23 could allow such pedestrian mechanical work to be considered a patentable invention.
Second and more important, from an economic standpoint there is no reason whatsoever to grant a patent on such an “invention” and good reason not to do so. The Supreme Court correctly enunciated the basic economic criterion for patent protection in 1966: a patent should be granted only if the invention would not be made or disclosed but for the economic incentive of patent protection.24 Does anyone seriously think that Pfaff or anyone else would stop making sockets for computer devices if each socket were not separately patentable? Since making these sorts of sockets requires little ingenuity and no assumption of risk (beyond that inherent in any manufacturing business), there is no economic reason whatsoever to grant a patent.
Furthermore, patenting these pedestrian “advances” is likely to increase their cost of development significantly. With modern computer-aided design and drawing tools, it is not unreasonable to assume that a competent engineer, give a drawing of (or digitized specifications for) the device to fit in the socket, could complete the job of designing Pfaff’s socket in less than a day. On the other hand, a competent patent lawyer—working at twice the salary25—likely would take a least the equivalent of two full days to do a patent search in a crowded field, communicate with the “inventor,” analyze patentability, draft patent claims, review them with the inventor, file the patent, argue with the examiner, and amend the claims in response the examiner’s objections. In the end, therefore, it is likely that the cost of patenting Pfaff’s “invention” would be several times the cost of developing it.
To say that such a ratio of patenting expense to development expense makes no economic sense would be an understatement.26 Yet if competitors have their own portfolios of patents, the need for a “defensive” patent portfolio has its own inexorable competitive logic. Thus the logic of patent law, as currently practiced in the fields of electronics and software, fills the coffers of patent lawyers while draining the industry of money and innovative vitality.
It might be easy to blame industry participants for selfishness and short-sightedness in accumulating gigantic portfolios of patent chaff. In the long run, all participants would be better off if everyone agreed to abjure patenting chaff, wouldn’t they? But there are inherent strategic problems. Firm A can gain a temporary advantage over Firm B by patenting chaff if Firm B does not, so any such agreement not to patent chaff would be unstable. Furthermore, it is sometimes hard to predict ex ante whether a particular invention is chaff or possibly a second-rank invention worthy of particular investment. By making it possible for firms to patent trivia, the current patent system encourages a race to the bottom, a “land rush” in which the firm that accumulates the most patent chaff can gain a competitive advantage in the courtroom, if not in the marketplace. Our patent system has thus created perverse incentives for the electronics and software industries, from which it cannot escape without reform.
As if these trends were not bad enough, the year 1998 saw an order-of-magnitude increase in perverse economics incentives, as the Federal Circuit’s decision in State Street27 opened the floodgates to software and business-method patents—essentially patents on abstractions.28 As the result of that decision and its progeny, an industry player can get a patent on an abstract strategy for, or a block diagram of, a business, such as lending for instant tax refunds,29 pooled hub-and-spoke investment vehicles,30 or one-click Internet shopping.31
These are patents on abstractions, not the results of experiment, testing, or other laboratory work. They require virtually no risk and little investment because they are easy, pedestrian or trivial to create. Indeed, under the doctrine of constructive reduction to practice, they do not even require investment in the computer programming or business activities needed to bring them into reality.32 They require no equipment, no laboratory, no labor and little ingenuity. All they require is some abstract knowledge of the industry, an ability to speculate where it might go next, and enough cash to pay a good patent lawyer. Anyone can make these “inventions,” without creating anything of value for the marketplace, and then can use them to hold up those who actually do the work.
The abstract “inventions” in the celebrated Blackberry and eBay cases appear to have been of this kind. And they are just the beginning.
Claim 1 of the chief patent at issue in Blackberry is essentially a verbal description of a block diagram, or set of block diagrams, of a wireless electronic-mail system.33 It is too long to reproduce here, but a list of its functional elements reveals its abstract and general nature: “a RF information transmission network,” one or more gateway switches, one or more destination processors, one or more RF receivers, and one or more interface switch(es) connecting the gateway switch(es) to the network. There is not so much as a hint in this claim of any particular circuit, technique, procedure or programming to make the system work. Claim 1 of the patent as issue in eBay is similar in its breadth, abstractness and lack of detail.34 Since both claims are designed to cover all the bases, both admit of multiple different block diagrams to realize the aims of their “inventions.” Thus, what both claims recite is a set of related block diagrams of systems, without the slightest detail (other than alternatives for sequencing certain elements) as to how to make the system work.
From a purely abstract and formal perspective of black-letter patent law, there is nothing wrong with these results. Black-letter patent law permits an inventor to claim more broadly than her preferred embodiment or (if she has made or done anything real at all) the physical embodiment by which she has reduced the invention to practice.35 But this venerable principle of black-letter patent law departs from common sense, let alone economic rationality, when applied to inventions (like software and business methods) that are themselves abstractions. It completely leaves the realm of reason when combined with the doctrine of constructive reduction to practice.
Business-method patents are essentially patents on block diagrams or flow charts for businesses. So are software patents of the State Street type. But these “inventions”—if such they are—are quite different in nature and scope from the mechanical and chemical inventions that gave rise to the rule that claims can be broader than preferred or practiced embodiments.36 It is one thing to say that a chemist who through laborious and costly experiment discovers a new, useful and nonobvious chemical compound or combination can claim all homologues or other straightforward chemical variants thereof, although he has not tested all of them, lest his patent be circumvented by an infringer’s routine experimentation in discovering variants not specifically claimed.37 But it is quite another thing for an “inventor” to claim a set of variant flow charts for a business or computer program in the abstract, especially when that inventor has invested nothing but the time to write the patent and has created nothing real, but instead relies on the doctrine of constructive reduction to practice and the law’s current susceptibility to patenting abstractions. In that case, the “invention” rests on the notion that someone of ordinary skill in the art later, sometime, could actually produce a working system based on the block diagram, and, if so, the “inventor” controls not only the system that the “inventor” actually made or that that hypothetical person of ordinary skill could produce, but all conceivable variants of the block diagram or flow chart thereof.
That sort of claim is not a claim to an invention in any economic sense, but speculation on the future development of an industry or an industry segment. Even when the “inventor” has made a rudimentary but abandoned and commercially infeasible working model, as apparently the inventor in Blackberry did,38 it makes no economic sense to say that a firm that later invests hundred of millions of dollars in its own unique and different system, as Research in Motion (creator of the Blackberry) did, must pay a king’s ransom or shut down because its system follows the same block diagram or flow chart. To rule otherwise is to promote speculation in abstractions, not the investment in real work that builds industries.
Such is the state in which the electronics industry finds itself today. Large firms have at great expense accumulated huge portfolios of patent chaff, to be used defensively, if at all. This practice puts small firms (which, due to their limited lifetimes or limited funds, have no such portfolios) a disadvantage, reducing incentives to invest in them, the most innovative part of our national economy. Every firm, large or small, is vulnerable to suits by inventors of abstractions—essentially block diagrams or flow charts—who have never set foot in a laboratory and maybe never will, or who have produced abortive and abandoned working models of something and later seek to collect ransom from those who build a real industry on commercially viable embodiments of the same block diagram or flow chart.
So how does the pharmaceutical industry differ? The answer appears in a single acronym: FDA. Unlike the electronics industry, the pharmaceutical industry is subject to a legal-regulatory regime exogenous to the patent system. The Food, Drug and Cosmetic Act requires approval by the FDA before any drug product can be marketed or sold.39 Furthermore, that approval requires a demonstration, in accordance with strict scientific and medical criteria, that the product is safe and effective, i.e., that it works for its intended purpose.40 In other words, the FDA’s regime requires not just an abstraction, but a real invention that works, as shown by comprehensive scientific and technical evidence.
In the field of pharmaceuticals, the exogenous requirement for FDA premarketing approval has helped make the patent system economically rational and saved it from itself. Mostly by coincidence, it has addressed and ameliorated both the basic problems of the electronics industry: (1) too many patents on chaff and (2) patents on easy abstractions that impede real innovation. It has not, however, eliminated them entirely. The pharmaceutical industry may find itself reluctantly dragged along in the electronics and software industries’ footsteps, though at a slower pace and by a different path.
The FDA approval requirement ameliorated the chaff problem almost by coincidence. The reason is cost. The approval process, which requires both laboratory and lengthy clinical trials,41 is extremely costly. Current estimates of total cost, including the cost of false starts, approximate $1 billion for a single new drug.42 With so much investment needed, and with so much money at stake, the pharmaceutical industry has, until recently, concentrated its patenting effort on real innovation, i.e., on the subject and results of FDA-required testing. Furthermore, that strategy has succeeded both legally and economically. When a brand new drug undergoes such rigorous and costly testing and succeeds, a patent on it often enjoys universal respect, as any pioneering patent should.43
The effect of the FDA approval requirement on patenting abstractions is similar. Although the FDA’s exogenous legal regime by no means precludes patents on abstractions, it considerably devalues them. Under the FDA regime, a patent on an abstraction cannot produce revenue unless and until the abstraction is made into a product and the product is tested and found safe and effective. Furthermore, the processes of making and testing that product are so enormously expensive, and the prospect of making any money so dependent on successful testing that, apparently, few in the pharmaceutical industry (until recently) have conceived the idea of patenting early-stage abstractions in order to extract ransom from later innovators. With the risk and cost of making the abstraction real so high, no rational business person would agree to undertake the technological risk of making the abstraction real in the face of the need to pay such ransom.
One can imagine a hypothetical bargaining session between the patentee of a pharmaceutical abstraction and a firm prepared to invest the huge sums needed to synthesize the corresponding drug and take it through laboratory and clinical testing to FDA approval. That firm’s executives might say to the patentee,
“Let’s see, now. You’ve spent $100,000 of scientist, lawyer and computer time predicting that Chemical X will cure cancer and applying for a patent. We’ll spend $ 1 billion learning to synthesize Chemical X, and taking it through FDA approval. We’ll spend another $1 billion developing commercial production facilities that meet the FDA’s rigorous requirements for purity, consistency, and freedom from contamination. Your projected investment is 1/20,000 of ours, so we’d be happy to agree to pay you a royalty of 0.005% of our profit, if any, after deducting our expenses.”

Until recently, most reasonable people in the pharmaceutical industry have apparently run that scenario in their heads and decided to forego patenting abstractions.



Yet there is, of course, a timing problem here. What if the pharmaceutical firm has already invested its $ 2 billion, before finding out that the “inventor” has patented Chemical X in the abstract? Then the negotiations might go quite differently. Under current law, the “inventor” might have the right to enjoin the firm’s use of its production facility,44 thereby devaluing its sunk investment to zero. In theory, a rational firm then might then give the “inventor” as much as a 99% royalty, so as to realize at least some return on its massive investment. This is the problem of bilateral monopoly, discussed more fully below.45
So far, this nightmare scenario does not appear to have actually occurred in the pharmaceutical industry. We have yet to see a case in which the patentee of an abstraction, an early-stage separate piece of the puzzle, or an abortive and abandoned invention (as in Blackberry46) held up the real innovator for a near-billion-dollar ransom.
But the times they are a-changing. In both respects—chaff and abstractions—the patent “land rush” in the pharmaceutical field may be catching up with that in electronics and software.
Take chaff first. Already the pharmaceutical industry has discovered so-called “formulation” patents—variations on a pioneering drug in crystal structure, inert ingredients, encapsulation, or delivery method that, when patented, can extend a proprietary drug’s lifetime as an exclusive product and keep monopoly rents flowing to the producer.47 Some of these formulation patents may have merit because they have real medical benefit and involve real risk in production, testing or use. But most are nothing more than transparent ploys to exploit the Federal Circuit’s lax standards for nonobviousness and extend the lifetime of expiring pharmaceutical patents at the expense of generics manufacturers, competitors, and the public.48
Other emerging possibilities for early-stage patenting in the pharmaceutical and biotechnology industries are likely to have much greater clinical and commercial significance. One such possibility results from the fact—increasingly evident in genetic studies and medicine—that disease pathways and susceptibility to disease often derive from cooperation or “synergy” among multiple genes and other biochemical mechanisms, rather than the function of a single gene or a single mutation or other aberration in it.49 As a result, a successful drug or treatment method may require combining knowledge of how widely differing genes work, the proteins they express, the biological processes they mediate, the effects of their common variants and mutations, and additional environmental effects. Actually alleviating human suffering therefore may require putting together numerous pieces of a complex puzzle—as many as dozens or hundreds.50 To the extent that the discoverer of each piece of the puzzle enjoys independent patent protection, putting the pieces together will involve enormous transaction costs, while the already difficult problem of bilateral monopoly will morph into an insuperable problem of multilateral monopoly with dozens or hundreds of “sides.”
So-called “personalized medicine” presents similar problems. Just as genetic mutations can cause disease, so can normal genetic variation among individuals increase a person’s susceptibility or resistance to disease.51 And just as genes often work in concert to influence a particular clinical picture, so do “normal” genetic variations, i.e., variations among different ethnic groups or common variations within a population generally. Since the genetic code is quite long, the possibilities for meaningful but common variations in a single “letter” in the genetic code (so-called “single nucleotide polymorphisms,” or SNPs), let alone multiple “letters” are astronomical.52 If each one enjoys a patent, we will eventually need supercomputers to keep track of all the patent claims, and transaction costs will become literally astronomical.53 More important, the problem of multilateral monopoly will make transactions a matter of strategic bluff and bluster, rather than clinical, social or commercial significance, and funding will shift massively from medical researchers to lawyers and license negotiators.54
Considerations like these are reasons why I have called repeatedly (and do so again below) for true patent reform led by economists, not lawyers or law professors. That latter, as such, are not trained in quantitative analysis.55 Generally speaking, they make lists, sometimes accompanied by speculative, a priori reasoning of the type in which the Greek philosophers engaged before the advent of quantitative experimental and observational science.56 Economists, on the other hand, are scientists. They measure and calculate, using numbers, not words. When they solve a problem, the look for the most important effects first, using hard numbers to quantify what is most “important.” They do not, as legal analysts sometimes do, focus on possible defects in timing of the ignition when the gas tank is empty.
Perhaps the most important defect in lawyers’ and law professors’ non-quantitative approach is the failure to give transaction costs serious, quantitative treatment. Legal commentators often genuflect toward the issue,57 but few do more than that. Fewer still recognize what appears to be a growing reality: in the field of technological innovation, patent-related transactions costs are the economic tail that is beginning to wag the research dog.
Two simple estimates suggest how far transaction costs may be from the quantitative insignificance in our patent system that most legal commentators assume. The first is the estimate made above, that patenting Pfaff’s socket may have cost several times more than developing it in the first place.58 A second can be based on the number 90,000, the number of patents reported to cover various aspects of microprocessors.59 If each of those patents cost $50,000 to prosecute (a typical number for a “premium” patent law firm obtaining a patent in a crowded art), the total cost would be $ 4.5 billion dollars. Would we as a society be better off if the industry had spent that money on additional research or on several additional chip fabrication plants, rather than patenting so much chaff?
As significant as these simple estimates may seem, patent prosecution is only the tip of the iceberg. There are also patent searches by firms worried about infringing, patent validity opinions, patent infringement opinions, and licensing negotiations. All these cost time, attention and money. Not all patents are litigated but, when they are, the typical cost to each party is $2 million.60 That figure itself is just the tip of another very large iceberg, for patent litigation is highly uncertain and takes years. In the meantime, it distracts the attention of scientists from research, of executives from their business, and of creative strategic planners from new industry possibilities. A case in point was the expensive contingency plans that Research in Motion made, as the possibility of a patent injunction drew near, for modifying its far-flung wireless e-mail to avoid infringing the “troll’s” patent.61 Last but hardly least, there are the “lost opportunity costs” of deals foregone as business executives, not having the patience of Job or the memory capacity of digital computers, simply throw up their hands as the prospect of highly complex, multilateral transactions and walk away from research and development prospects.62
It seems self-evident—almost a mathematical certainty—that transaction costs will rise geometrically as the interwoven fabric of innovation in any technology is cut apart and “propertized” in smaller and more numerous patches. The effect will be worse if the cost of prosecuting, maintaining and enforcing property rights does not depend on the technical, commercial or human significance of the property protected by patent. Yet that is precisely how our patent system now works for electronics and software and how it soon may work for pharmaceuticals. It costs $50,000 to get a patent and $ 2 million to enforce it (or to defend against enforcement), regardless whether the object of those transaction costs is a piece of chaff like Pfaff’s socket or a fundamental advance like the laser or the Cohen-Boyer gene-splicing process. As the number of patents on chaff and early-stage “discoveries” without currently known applications increases, so does the multiplier for converting those individual costs into an aggregate “tax” on nationwide research and development.
Moreover, the ratio of patent-related transaction costs to research costs is also likely to rise. Much of actual research (like computer-aided design of Pfaff’s socket or automated sequencing of DNA segments) is or can automated, with considerable savings in cost. Yet patent searches, validity opinions, infringement opinions, licensing negotiation, and (most of all) litigation remain labor-intensive activities. It will be a long time, if ever, before low-priced computers take over these tasks from high-priced lawyers, who generally earn much more per hour than the scientists and engineers whose work the cost of their labor may displace.
Occam’s Razor cuts as neatly in economics and public policy as it does in scientific theory. There are obvious advantages in an efficient system with simple, stable, certain, and easily understood rules. For most of the post-war period, we had such a system. Government funding supported basic, early stage research, i.e., research without currently known applications. The results of that research became part of the “commons,” treated as basic building blocks of innovation, and available to all without charge. The role of private risk capital, attracted by patents, was limited to specific, concrete advances with known, immediate practical applications.
That system was spectacularly successful, in large measure because of its simplicity and the scientific and technical cooperation in basic research that it fostered. Pharmaceutical research, in particular, flourished under it.63 Moreover, the private market itself has validated the power and efficiency of a vibrant “public commons” in early-stage research by paying to put early-stage genomic research in the public domain and creating institutions for that purpose.64
Among the lamentable features of most patent-system policy analysis are the vast amount of bare speculation and the scarcity of empirical evidence. But the old, bifurcated system (a government-supported commons for basic research and patent-attracted risk capital for applications) has three solid pieces of undeniable practical evidence in its favor. First, it has worked spectacularly, at least in the pharmaceutical industry, for several decades. Second, when the patent system began to move toward smaller and earlier-stage proprietization, market forces sought to correct that trend through market mechanisms. Third and finally, the relative distaste for patents of the electronics and software industries, which are much further along the road toward chaff and early-stage patents than biopharmaceuticals, suggests the practical dangers of continuing along that road.
In the face of this practical evidence, proponents of permissive patenting and early-stage patents would seem at least to bear the burden of proving the benefit of a radical change from the system that has succeeded spectacularly for half a century. To justify such a change on general principles alone would be nothing more than free-market ideology run amok.
It is possible, although not likely, that some day empirical economic research might show the merits of a vastly more complex system, in which both patent and antitrust law intrude into every research laboratory and affect every advance in human health. But until it does, those who propose a vastly different system from the one that has made our nation the world’s unchallenged leader in technological innovation for half a century should at least have the burden of proof.
Fortunately, there are early but tentative signs that the patent system is turning away form early-stage patents in the biopharmaceutical field. The first gambit consisted of patents on partial sequences of the human genome whose functions were largely or wholly unknown.65 The industry largely turned away this wave of early-stage patenting with the aid of peer pressure and new, restrictive guidelines in the PTO.66 In any event, the venerable precedent of Brenner v. Manson probably would have invalidated most or all of these patents.67
But that was only the first wave. Other waves of early-stage patenting are still breaking, for there a virtually limitless ways to capture economic value from others’ later effort, before the massive effort and investment needed to prove a real product safe and effective and secure FDA approval. There are research tools, recombinant and other methods, and genetic sequences whose functions are known in part, but knowledge of which ultimately will not cure or ameliorate disease without knowledge of the participation and synergy of sequences as yet unexplored. The economic incentive to patent these early-stage developments—and thereby to secure the legal ability to “hold up” the firm that first puts all the pieces of a puzzle together and provides a safe and effective remedy for mankind’s ills—is irresistible.
But there are several reasons to resist that temptation. First and foremost, it threatens to destabilize one of the most productive and efficient social systems for innovation in human history. Second, insofar as economic systems are concerned, change and uncertainty are the enemy of private investment. Our wildly successful pharmaceutical industry has been built on the notion that he who puts up the money for laboratory research on and clinical trials of a specific drug product or other practical application of basic research gets the economic prize for improving human health. That simple rule has created a clear and “clean” patent system, in contrast to the very different (but facially similar) system for electronics and software, about which those industries are now complaining. If early-stage patents and patents on chaff increase, the innovative dynamo for biotechnology will lose its motive force.
Third, as a matter of science and technology, it is becoming increasingly clear that biological systems are incredibly complex and intricate, far beyond our present understanding. In treating cancer, in searching for vaccines for intractable diseases like AIDS and malaria, and in simply trying to understand how biological systems work, every day produces new evidence of synergy and interaction between separate and seemingly unrelated parts of the whole organism.68 In other words, biological systems are much like ecology: everything effects everything else, and no puzzle is solved until all the pieces are put together and the complete picture emerges.
Under these circumstances, providing legal exclusive rights for each piece of the puzzle would be massively counterproductive. Today economists well understand the difficulties posed by a bilateral monopoly. If A has a monopoly on the product and B on an underlying and indispensable early-stage research discovery, the battling monopolies make it awfully hard to make a deal. No obviously rational basis for negotiation appears, because each party has the power to deny the other all benefits. There is no lodestar for settlement other than greed, bluster and bluff. 69
Finally, the experience and complaints of the electronics and software industries show precisely what not to do. We already have a system with increasing amounts of early-stage patenting and enormous amounts of chaff. Witness after witness in the FTC hearings said that people working under that system don’t like it. Why would we want to replace a system that works spectacularly with one that experience and empirical evidence both say works poorly?
In one relevant respect, however, the FTC Innovation Report is misleading. At several places, it suggests that the awful system that now besets the electronics and software industries is the product of the “nature of innovation” in those industries.70 Nothing could be further from the truth. Is it conceivable, for example, that people like Pfaff would stop making new chip sockets if they could not get a patent on every one? Would Intel, AMD, and their nascent Japanese, Korean, and Taiwanese competitors stop making improvements in microprocessors if they could not patent every minor advance in process technology or component arrangement? In order to answer those questions in the affirmative, you have to believe that lawyers and minor patents, not engineers and competitive zeal, are the motive forces of innovation in a free-market economy.
It is not the nature of innovation that allows the patent system to impede innovation in these industries, but the patent system itself. No law of economics, far less any law of nature, requires minor incremental innovations to be “protected” by patents that proliferate without end, cost more (collectively and perhaps individually) to prosecute (let alone to enforce) than it costs to make the innovations they protect, and impede further innovation by blocking it and subjecting all innovation to high transaction costs and legal uncertainty. The patent “thickets” that impede research and development in software and electronics grew out of bad law and bad policy, and improvements in law and policy can cut them down.

How could we cut them down? On solution might be to declare a moratorium on early-stage patents and patents on chaff, then to “cull” existing patents with the aid of neutral, impartial experts, such as leading economists and members of the national Academy of Sciences. If a patent is not self-evidently valid and important in attracting risk capital to risky innovative activity, cancel it. One practical criterion for culling would be the existence and nature of past licensing. If a patent has never been licensed alone or in a discrete, small group of patents related to specific, identifiable products, but has been licensed only as part of portfolios consisting of dozens, hundreds of thousands of patents, it is probably not worth (to society) the economic cost of procuring and maintaining it. Patents that merit serious attention from technologists and investors do not usually get lost in the crowd.


This solution might seem radical. It could create legal problems of retroactivity and implicate the law’s solicitousness for settled expectations. But the law has had no problem retroactively extending the term of existing patents—thereby negatively impacting the settled expectations of the public and everyone but the patentee.71 So it should not hesitate to disturb the settled expectations of patentees, as long as they are treated uniformly and without partiality or discrimination.
Could Congress implement such a solution? It is hard to imagine today. But there may come a time when those who make and fund real innovation become so fed up with patents on trivia and the hobbling effect of patents on early-stage abstractions that such a solution might gain political support from the very industries that depend on innovation to survive and prosper. The globalization of innovative industries may speed this process, as American businesses held back by “thickets” of domestic patents compete with increasingly capable foreign industries not so hobbled.
But whatever we can do to save the electronics and software industries from their partially self-made mess, one thing is clear. We have a system that has worked spectacularly well for half a century—for pharmaceuticals. We have another, very different system—for electronics and software—that is increasingly dysfunctional and increasingly recognized as such. It ill behooves us to make the good system look more like the bad.
In avoiding that pitfall, it is important to recognize which deficiency is most important. Relative to injudicious early-stage patents, the problem of patent chaff is less important. To be sure, patent chaff creates a universal “tax” on innovation, paid by the scientists and engineers who innovate and the business people and investors who manage and support them to the lawyers and consultants who prosecute and litigate patents and negotiate, draft, and amend licensing and cross-licensing agreements. The use of large portfolios of patent chaff also may create a regressive increase in industrial concentration, giving a legal and economic advantage to large firms with large portfolios and disadvantaging smaller firms.

Yet relative to early-stage patents on abstractions, chaff patents have two virtues. First, because by definition they are numerous and minor in economic importance, they and the “tax” they create impede innovation uniformly but at a low and constant level. They are therefore like background noise or a low-grade fever in the innovative corpus. They reduce the rate of innovation slightly and generally, but they do not particularly impact any important advance, and they generally do not discriminate against any particular technologies.


The effect of injudicious early-stage patenting, however, is much more pernicious.

As the Blackberry and eBay cases amply demonstrate, early-stage patents can bring vibrant, innovative industries to their knees. The $612.5 million settlement in the Blackberry case72 was not fatal to a billion-dollar business, but it was a serious body blow to one of the most innovative and admired companies in the electronics industry today. By virtue of the Supreme Court’s decision on the standard for injunctive relief,73 eBay has temporarily avoided a similar body blow that might have shut it down or forced it to change its business model, which is also highly successful and universally admired. Yet the district court may still grant an injunction with these unfortunate results on remand.


Somehow, in both cases, obscure patentees never known or recognized for innovation, industry or commerce have sought to enrich themselves by bringing real innovators who build industries to their knees. If nothing else, this is certainly an anomaly in post-war American history. Although not everyone knows their names, the public knows of the existence of pioneering individual inventors and firms responsible for such important advances as the laser (Schalow and Towns), gene-splicing (Cohen and Boyer), integrated circuits (Fairchild), and personal computers (Apple). They or their successors were the ones who invested fortunes in and built industries on these advances. They earned the rewards and got the glory. Now we have obscure unknowns, whose “contributions,” if any, are understood only by patent lawyers, siphoning off the returns from industry builders. You don’t have to appreciate the intricacies of patent law or economics to know that there is something wrong with this picture.




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