(Up)grading Innovation: The Simple Step that Would Repair the US Patent System

Our patent system is replete with low-quality inventions that represent only a minor advancement over prior art. By some counts, 97% of patent applications are ultimately approved, which stands in striking dissonance with courts’ invalidation rates: remarkably, approximately 50% of all patents that are litigated to a final judgment are rendered invalid.

The root cause of the problem is typically attributed to patent examiners, who are predisposed to confer patent privileges instead of conducting a meticulous, impartial and merit-based examination. This tendency emanates from their incentive structure: the performance of examiners is assessed by simple efficiency standards, measured, inter alia, by the average time they allot to reviewing an application. Interestingly, a decision to deny an application appears to consume much more time compared to simply granting patent protection. Denial entails dedicating time and resources to thoroughly reviewing the application and rigorously studying prior art—all of which may undermine an examiner’s perceived effectiveness. More so, rejection might ignite an endless stream of repeated applications by denied inventors, which effectively initiates the review process anew. Rejections thus spell future work for examiners; acceptance is instant and finite. Similarly, since most patents are never litigated to a final validity judgment—the bulk of the disputes just end in settlement—there is a relatively low likelihood that examiners will be held accountable for a false-positive mistake, and therefore, the individual examiner’s cost of erroneous grant seems fairly low.

But instead of blaming the PTO for the ubiquity of low-quality patents, our new article spotlights a simple feature in patent law: binarity. The current review process provides examiners with an ‘all or nothing’ choice, which is highly vulnerable to the aforementioned structural incentives that induce the bestowment of patent protection. Moreover, since any ‘grant’ choice yields a one-size-fits-all protection, this binary treatment maximizes the costs of erroneous grants instead of minimizing them. With this in mind, we propose a fundamental yet simple improvement to patent law. Instead of a threshold-based regime under which examiners merely decide whether an invention is patentable, we call for the adoption of Patent Scores. According to our proposal, once a patent office determines that an invention is eligible for patent protection, it would proceed to assign it a score—on a 1-to-5 scale—that would reflect the quality of the invention. A patent’s score would determine its protection term (ranging from a four-year protection term for score-1 patents to the standard twenty-year term for score-5 patents) and scope (the nature—ability to receive injunctions—and magnitude of damages for infringement would vary proportionally to the score). Patent scores would also be made public and accessible to potential licensees, industry participants and courts. By tailoring protection to quality and representing more accurate information via patents, scores would eliminate or significantly ameliorate the abuses that arise under the present patent system.

When granting a patent, society basically trades off the benefits arising from the production of inventions against the costs that users and follow-on inventors must incur to enjoy these technological advances. The ‘cost’ of a patent, then, is the exclusivity conferred upon patentholders, which allows them to engage in monopolistic pricing and hold up follow-on improvements and developments of their own invention. It bears emphasis, though, that the benefits society elicits from technological progress vary widely across inventions. While some innovations certainly justify full protection, inventions that represent only a minor advancement relative to the preexisting state of knowledge hardly do. The social benefits from low-quality inventions are typically outweighed by bestowing upon them 20 years of exclusivity, with an ability to file for preliminary injunctions and collect exorbitant infringement damages. At present, society ends up paying the same price for all qualifying inventions irrespective of their level of innovativeness, ie, regardless of the benefit it derives from them. Calibrating patent protection to patent scores is consistent with the hypothetical bargain justification for patents, according to which patent protection is predicated on a quid pro quo transaction between society and inventors. In standard market transactions, the price paid always reflects the value or quality received. The logic used to justify the patent system dictates a differential compensation (or price) scheme.

Along similar lines, consider litigation. Patent litigation is enveloped by a veil of ambiguity. The high rate of invalidations, on the one hand, and courts’ tendency to award high damages if infringement is found, on the other, increase the risks involved in litigation and induce parties to prioritize out-of-court settlements. The reluctance to litigate to a final judgment yields unjust and inefficient outcomes at once. In some cases, plaintiffs whose justified patent rights have been bluntly infringed by users will be willing to settle for an amount considerably lower than that which they deserve. In other instances, defendants with compelling arguments against the patent’s validity may prefer to transfer excessive payments instead of rolling the dice in trial. The uncertainty that surrounds patent litigation thus taxes high-quality inventions and subsidizes low-quality patents.

When confronting the current binary framework, parties lack substantial information with respect to the plaintiff’s probability of prevailing. The plaintiff’s odds of winning a patent infringement suit are affected, first and foremost, by whether the court is expected to defer to the USPTO’s original patentability decision. Under a binary review process, the entire information that parties observe—the sole ‘signal’ they receive about the state of the world—is the fact that a patent has been approved. But when accounting for examiners’ bias toward granting patents, it can be readily realized that this is nothing but an empty, uninformative signal, since patentability decisions are very weakly correlated with the inventions’ quality. Courts’ validity decisions, on the other hand, are in fact driven by the quality of the relevant invention, as judges do not share patent examiners’ systemic bias toward admitting patents.

The informational surplus that patent scores embody is critical for fixing the distortive effect of uncertainty, as it precludes certain actors—typically well-informed corporate entities—from taking advantage of the surrounding ambiguity and extracting an imbalanced settlement agreement. Actors may reasonably rely on the assumption that a lower (resp., higher) score implies a higher (lower) likelihood of reversal, and consequently, accord by estimating the relevant patentee’s probability of winning an infringement suit as relatively low (high). This probability would be translated into a possible settlement agreement that better reflects the suit’s expected value. Holders of low-quality patents—most prominently, patent trolls—are less likely to solicit users into a predatory settlement payment, whereas owners of high-quality patents can pursue an infringement suit with more confidence, without being deterred by the prospect of judicial intervention which is much less likely for inventions that enjoy high scores.

Much more can be said about the advantageousness of the proposed scoring mechanism vis-à-vis the current patent system. The proposal might sound drastic and far-reaching, but this is just because we were accustomed to binarity all along. After all, we rank things all the time. We rank student exams on the basis of merit; we rank crimes by differentiating punishment on the basis of their severity; we rank workers on the basis of performance. There is no apparent reason to exclude innovation.

Roy Baharad is a Doctoral Candidate at the University of Chicago Law School.

Gideon Parchomovsky is a Robert G. Fuller, Jr. Professor of Law at the University of Pennsylvania Carey Law School and Wachtel, Lipton, Rosen & Katz Professor of Corporate Law at The Hebrew University Faculty of Law.