Don't Just Attack the Patent Trolls--Fix the System

Today the Senate Judiciary Committee will hold a mark-up on patent reform legislation. It is clear that current patent law is not “promoting the useful arts,” and therefore is in urgent need of reform. The proposed Senate legislation is designed to fix this problem by going after so called “patent trolls,” non-practicing entities that sit on a large pool of what are often junk patents and sue small businesses that are innovating to extract a rent. 

Over 200 years ago, James Madison ominously warned us that copyright and patents must be “guarded with strictness against abuse” because each instrument could be so easily abused. Today, Congress must heed Madison’s warning and substantively fix patents by addressing patent quality.

Action that deals with patent misuse by patent trolls, provided that the policy is effective and protects the legitimate rights of patent holders, is a good thing, but the substantive solution requires dealing with junk patents that should never have been issued to begin with (e.g., slide to unlock, one-click checkout, hyperlinking, spell-check redlining in word processors, podcasting). Junk patents provide the “swamp” that is allowing for patent trolls to kill innovation.

The Federal Trade Commission issued a report on patents in 2003, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” in which it concluded that:

Poor patent quality and legal standards and procedures that inadvertently may have anticompetitive effects can cause unwarranted market power and can unjustifiably increase costs. Such effects can hamper competition that otherwise would stimulate innovation.

Microsoft’s founder Bill Gates illustrated this point well in an all-company memo in 1991, warning that “I feel certain that some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.” 

That is precisely what we have seen in many sectors of the economy. As Gates explained, “A future startup with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors.That is what is happening in the modern economy. When patents are issued for non-inventions they shut down competition and it stifles innovation, thus failing to meet the Constitutional requirement of “promot[ing] the useful arts.”

Copyright and patents are two of the major tools of the federal government to influence innovation: the Constitution gives Congress the enumerated authority to create them, if it so chooses, but only for a specified purpose, “to promote the sciences and useful arts.” When managed correctly, patents can incentivize innovation and content creation--and the US is a world leader--but when done poorly they stifle innovation and content creation. The Founders feared that these government-issued instruments would be abused.

Today, as Madison predicted, there is overwhelming evidence of these tools being misused and hindering innovation and content creation. So-called patent trolls were estimated to cost the economy $29 billion in 2011 alone in just direct legal costs--not even counting diversion of resources, delays in new products, and loss of market share. In total, the losses to the economy far exceed $29 billion per year, when one also accounts for the impact of big companies acquiring patents for non-inventions and hindering innovation.

Patent law exists for a specific purpose: “promoting the useful arts.” How do we know that?  The Constitution (A1,S8,C8), explicitly tells us so in stark, unequivocal language that is nearly as clear as the mandatory minimum age requirement for serving in Congress (25 years old), how many Senators each state has (2 per state), how many states have to ratify an amendment (three-fourths), and where bills that raise taxes should originate from (the House)--except Congress doesn’t really follow the Origination Clause either, and neither does it follow the Copyright and Patents Clause of the Constitution.

To be specific: Clause 8 of Article I, Section 8 states that Congress may, if it so chooses, provide limited-term patents for inventors, but solely for the purpose of “promot[ing] the progress of...the useful arts” [emphasis added]. The Constitutional text provides three key points relating to copyright and patents: 1) they must be limited in duration, 2) they are optional for Congress to create, and not a traditional property right, 3) they are limited to specific purpose, “promot[ing] the useful arts.”

In the case of patents--which are government-granted monopolies to create or utilize an invention exclusively--patents are for something novel, rather than for just any idea. As the Supreme Court stated in Brenner v. Manson (1966), “The basic quid pro quo contemplated by the Constitution and the Congress for granting a patent monopoly is the benefit derived by the public from an invention with substantial utility.’” That is because all patents come with a cost. As Nobel Laureate economist Gary Becker, a senior fellow at Hoover Institution, explains: “It has long been recognized that patents impose costs on society since patents keep out competition, so that the monopoly power of patent holders enables them to raise prices and lower outputs.”

Our Founders were learned men who knew of the stories of cronyism and government-sponsored monopolies distorting the free market. Given a long history of these systems being abused by England, several Founders were extremely skeptical of their new Republic granting any patents. Their fear of patents and copyrights being abused was manifest, as the Founders referred to both instruments of federal regulation as “monopolies” that could easily be misused by special interests (which they had a history of experiencing). They feared that monopolies, as a limitation on individual liberty, were too fraught with potential danger.  

James Madison noted that the Constitution had limited government granted monopolies “to two cases, the authors of Books, and of useful inventions.” Madison conceded that “[m]onopolies are justly classed among the greates nusances in Government.” But he argued that, in the case of copyrights and patents, they were justified because they provided an actual community “benefit” which was “encouragements to literary works and ingenious discovered,” and because the monopoly is “temporary.” Madison concluded that “under that limitation a sufficient recompence and encouragement may be given.” Thus Madison argued that these restrictions on individual liberty should be tolerated in so far as it provided necessary incentives.  

Since the Founders had extensive experience with patents being abused, they took great care to limit the Congressional power to create them with a specific listed purpose for the Congressional power and temporal limitation (“Limited Times”). The specific inclusion of a stated purpose for the Copyright and Patent Clause makes it particularly unique within the framework of the Constitution. Our Constitution is the shortest constitution in the world at 4400 words, but the section on Congressional powers devotes 27 words of the section’s 431 words just to the topic of patents and copyright.

The Constitution does not tell us why we protect the freedom of speech or why the federal government can regulate interstate commerce (which in retrospect could have been a useful limitation), but it does tell us why we have copyright and patents.  The reason is not surprising: copyrights and patents alter the natural functioning of the free market in order to reward inventors for the research needed for inventions and content creators for creation. 

Further, copyright and patents are a form of restraint on individual freedom. A patent confers a right to exclude others from making, using, or selling in the United States the invention claimed by the patent. Every Tuesday, there are roughly 4500 new things that no American is allowed to do (Tuesday is when patents are issued). As the Federal Trade Commission restated it in 2005, patents must be issued to “benefit the public.”

But instead of seriously solving the holistic problem of junk patents, Washington is avoiding going after the big players that have large patent portfolios for non-inventions.  While big companies with large patent portfolios are increasingly coming around to supporting the idea of dealing with patent trolls, not surprisingly, they thus far have opposed legislation to solve the bigger problem that helps enable patent trolls. 

Patent trolls should be dealt with, but if big companies are able to continue to obtain junk patents for things that are not inventions and then act like patent trolls, then they will be able to continue to corner markets and ensure that new emerging technologies can’t compete with them. 

We know that the system is being abused. It’s up to policy-makers to respond to Madison’s warning. For copyright and patent law, we need less government intervention and less regulatory uncertainty. We need a system that compensates content holders and inventors, and clearly defines the rules of the roads, but does so for the constitutionally-enumerated purpose of spurring innovation and content creation, not at the costs of inhibiting them.


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