Supreme Court Leaves Patent System a Mess
(Bloomberg View) -- Along with class-action lawsuits and hedge-fund activism, a patent dispute is sand in the gears of commerce: costly, time-consuming and distracting. Tuesday’s Supreme Court patent decision in Oil States Energy Services LLC v. Greene’s Energy Group LLC is a reminder of just what a mess the patent system has become.
The issue before the court was narrow: whether a relatively new mechanism for resolving disputes, called the inter partes review, was constitutional. In a 7-2 decision, the court said, correctly, that it was.
The inter partes review has been controversial ever since it became law as part of the 2012 America Invents Act. It established the Patent Trial and Appeal Board, within the U.S. Patent and Trademark Office, to take a second look at approved patents when there is a dispute about their legitimacy. The review process has two purposes. First, it is supposed to provide a quicker, less expensive way to settle disputes than fighting it out in court. Second, it is supposed to be a way of diminishing the ability of so-called patent trolls from extracting money from corporations by claiming patent infringement.
Tech companies love the inter partes review and lobbied for its inclusion in the bill. Devices like Apple Inc.’s iPhones require literally thousands of patents, and Big Tech is always in the middle of fights over who might be infringing on whose patent. Prior to the America Invents Act, companies’ only recourse if they thought a patent claim was unjustified was to defend their patents in court (often in Marshall, Texas, where plaintiffs loved to file patent suits). With inter partes review, they could go back to the patent office to try to get the plaintiff’s patent invalidated.
Drug companies, on the other hand, hate the inter partes review process. That’s because one of their primary means of maintaining profitability is by extending their monopoly on branded drugs. How do they do that? By adding dozens of new patents to the drug on the eve of the expiration of the original patent. This is called erecting a “patent fortress.” If the generics companies can’t break through the fortress by knocking down those patents, they can’t put out a cheaper form of the drug.
Not surprisingly, makers of generics have used the inter partes review process to get those add-on patents invalidated. Although they don’t always succeed, Big Pharma has found this process enormously frustrating. That’s why, for instance, Allergan PLC pulled its infamous Indian tribe switcheroo last year, transferring the patent rights to its eye medication Restasis to the St. Regis Mohawk Tribe. Because the tribe was a sovereign entity, Allergan argued, the patent office had no jurisdiction. And thus, the Patent Trial and Appeals Board would not be able to rule on the new patents Allergan had filed to maintain Restasis’s monopoly. (The courts have ruled that this stratagem was invalid.)
Oh, and one other thing: because patent holders can still go to court, the inter partes review is not saving anybody time or money. Just the opposite: It is adding years and millions to the process of trying to sort out which patents are valid and which are not.
In its ruling, the Supreme Court essentially said that Congress has the constitutional right to pass laws overseeing the patent process, even if it means reopening a patent that was already approved. But the real question, which was far outside the scope of the case, is this: Why in the world do we need a new group of experts to re-examine the work of the patent office’s 8,147 examiners? Why aren’t the patent examiners getting it right in the first place?
One answer is that patent examiners are overwhelmed with applications; there were 647,388 last year, on top of 650,411 in 2016, 618,062 in 2015, and so on. Examiners are always behind, and always under pressure to go faster. They often don’t have enough time to do the necessary research to know if the patent is truly original.
There’s also the pay. The patent office says its starting salary for a scientist or engineer is between $54,857 and $83,242. Those are healthy sums for most job entrants, but not for scientists and engineers. It’s fair to say that the patent office doesn’t get the crème de la crème.
Finally, patent holders -- and it’s not just trolls, but universities, small companies and real inventors -- have their own complaints. Thanks to a 2006 Supreme Court decision , it is nearly impossible to get an injunction against a company that is infringing on a patent, which would force the removal of the offending product from the market until the dispute is settled. As a result, they say, big tech companies now infringe on patents with impunity, knowing that the worst that can happen is they’ll have to pay some money when they’re sued. In Silicon Valley, this is called “efficient infringing.”
Once you begin to grasp the dimensions of the problem, you begin to see that the inter partes review process is, at best, a Band-Aid. And that there is a decent case to be made that it has actually made things worse.
Either way, patent disputes are going to continue to be a problem unless Congress takes a far more radical approach. Although I don’t have much hope of that happening anytime soon, here are a few suggestions:
- Allow pharmaceutical patents only on the molecules themselves, and ban add-on patents when the original patent expires. That way, generic drugs can get to consumers faster, just as Congress originally intended, saving the health-care system millions.
- Allow the patent office to reap all the user fees it takes in -- right now Congress skims off some of it -- and use that money to strengthen the office. Hire more qualified examiners, for instance, and pay them competitive salaries. Create rules that raise the bar for what counts as a legitimate patent.
- Patent trolls with valid patents should have the same rights as every other patent holder. The problem comes when they write (or buy) overly broad or weak patents and then try to extract licensing fees from thousands of companies. This practice needs to be stopped not in the courts but in the patent office, by examiners who have been trained to weed out weak patents and reject them. That would be a huge stop forward.
- There are still going to be disputes between companies and patent holders who claim infringement. Right now, for instance, universities have started to become aggressive about suing companies and then attempting to negotiate large settlements. Companies complain that they are being forced to pay sums that are far in excess of the value of the patent because universities are sympathetic plaintiffs suing in their hometowns.
The answer? How about if Congress passed a law imposing baseball arbitration on these disputes. This form of arbitration, which was invented by Marvin Miller, the original head of the Major League Baseball Players Association, works like this: Each party submits a number, in this case, their view of the value of the patent. After a hearing, an arbitrator chooses whichever of the two numbers he thinks comes closest to the real value.
When baseball arbitration was first used for baseball players in a salary dispute, the two numbers were sometimes wildly different. It led to results that were unfair to the losing side. But baseball learned that this form of arbitration required them to submit a number that was reasonable. Over time, the range narrowed. The same thing is likely to happen with tech patents. As the range narrows, the process will become more efficient, and the need for courts -- and inter partes review -- will diminish.
And some of the sand will be swept out of those gears.
Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."
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