Policy Solutions to Repair the US Patent System and Restore Productivity Growth

By Neal Solomon
October 6, 2016

businessman pressing an policy concept button.

The declines in productivity growth in recent years are undisputed. There is some controversy over the causes of these declines, particularly, the sources of the declines in technology investment. However, the arguments of the present article elucidating a decline in the patent system suggest a clear and potent explanation for the declines in technology investment and in productivity growth. If this line of reasoning is accurate, there is some good news. Since the source of the productivity growth declines are traced to patent system weakening, the solutions include modifying policies to fortify the patent system. From these policy solutions lie management opportunities for improved economic growth.

Historically, the right has encouraged tax cuts aimed at the wealthy as a policy to improve economic growth. In the main, these work only if they are targeted to induce technology investment. However, the clear consequence of tax cuts for the wealthy is inequality, which has unforeseen adverse consequences that tend to destabilize socio-economic systems in the long-run.

With poor aggregate economic growth, the Fed is compelled to provide low interest rates for an extended time. However, a low interest rate regime reinforces economic stagnation, which presents a set of economic challenges.

The key problem is to find ways to incentivize investment in technology R&D. For centuries, Article I constitutional rights were sufficient to provide these incentives. These incentives need to be strengthened.

Historically, the U.S. has maintained strong economic growth with a strong patent system. The patent system embeds limited exclusive rights in a patent in order to induce investors to risk capital in expectation of a robust return on investment. The disintegration of the property right in patents in the last decade has destabilized the patent system, with consequences of discouraging technology investment. Alternatively, restoration of a strong patent system would create predictability in patent law, which would preserve technology investment in the long-run and enable investors to achieve a return without requiring expensive enforcement. In the present paradigm of a weak patent regime, the “efficient infringement” model encourages free riders and discourages investments in technology. The simple solution, then, is to strength patent law and to encourage enforcement of the law.

The tech cartel has been relentless in denying opportunities for patent holders to enforce patents. The three main ways for attacking patents include instituting IPRs in the PTO, constraining enforcement in federal court and limiting damages. Each of these must be retuned.

First, the PTO should modify its PTAB procedures to align with federal court rules for adjudicating patent validity. Adopting neutral procedures and raising the bar for patent challenges would provide fairness in IPR proceedings. Furthermore, the PTO should allow claim amendments, which is consistent with the language and intent of the AIA. A clear definition of standards to challenge patents, including standards for obviousness challenges, should be considered. If the PTO institutes a high bar for IPRs, consistent with rules of patent validity challenges in federal district courts, they will show a respect for the presumption of validity and Supreme Court jurisprudence. IPRs should be reviewable by Article III federal district courts, which historically have determined patent validity.

In addition, the PTO should reduce patent fees for small entities, which doubled in the last five years. These dramatically higher fees represent a burdensome tax on small entities. Such high fees are particularly harmful to minorities and the middle class. One way to modulate patent application fees is to reconsider the interpretation of a micro-entity as an entity with fewer than 50 employees rather than an individual with less than five patents. Currently, small entities are interpreted as less than 500 employees; however, the distinction between 50 and 500 is substantial. Cutting fees in half only for small entities with fewer than 50 employees affects less than 10% of total PTO fees, but supplies an increase in potential applicants of two- to four-fold because this is a key price point that enables individual inventors to participate in the U.S. patent system.

The courts can make a major difference in providing a neutral setting to adjudicate patent infringement matters based on the merits of each case rather than blind ideology. In one example, cases can be fast tracked for access to trials in order to enable plaintiffs to have their Seventh Amendment right to a jury trial.

The courts can develop common sense FRAND principles for licensing rates in each industry, consistent with standards setting organization licensing principles. This approach tends to enable a framework of discussion of valuation for patent licensing.

The problem of limited injunctions for patent remedies has been created by the Federal Circuit’s unusually broad interpretation of eBay. In general, it is very difficult to obtain an injunction in a patent case. Yet, without an injunction, there is no credible enforcement of an exclusive patent right. Much of the problem centers on the issue of hold up of a larger device for a single patented component, which is a legitimate problem. The solution is for courts to restore a narrowly targeted injunction for specific components in order to protect the exclusive right. With a narrowly tailored injunction, there is no overreaching, while still enabling the patent holder to maintain control of the patent rights. This solution limits hold out and encourages the infringer to a design work-around that enables increased competition. The notion of a targeted and carefully crafted injunction is a common sense solution to a cumbersome problem.

In Halo, The Supreme Court recently overturned Seagate, which governed the law of enhanced damages in patent infringement cases.[1] This is a good start to restore enhanced damages to plaintiffs for particularly egregious infringing behaviors. For serial infringers, patent damages should be enhanced until their behavior is normalized.

The federal judiciary should establish regional specialist courts to enable rapid access to trials, including a compressed period of discovery of no more than a year. Further, the judiciary should establish a layer of court system for adjudication of matters with claims of under $5M for particularly rapid administration. In order to facilitate these rapid court tracks, mediators may be involved to resolve disputes quickly. These changes would cut transaction costs appreciably for all parties.

ITC rules should be modified to enable American inventors and invent-and-license companies to qualify as a domestic industry.

The courts should recognize and encourage the university technology transfer model. The ecosystem of very large corporations, for pharmaceuticals or high technology, ought to learn to partner with small companies. FRAND licensing principles should dominate the negotiations between the parties employing the licensing model. Hence, incentives should be provided to large companies to partner with innovative small companies.

Some economists argue that innovation has peaked and that we can therefore expect declining productivity growth and slow economic growth in the future. However, the view that productivity growth is endogenous to the economy implies that innovation is itself a human component that, if properly motivated, can supply inexhaustible ingenuity and opportunity. This suggests that human or intellectual capital is itself a commodity that can be managed.

The U.S. government can increase funding for basic research, technology education and technology research infrastructure. But the government has a poor record of selecting winners and should maintain its neutrality. Still, the government can broaden access to STEM education and opportunities for women and minorities, which are famously underrepresented in the technology industry. For example, the government can encourage modifications of science education away from an emphasis on measurement and towards qualitative approaches.

Directions for Future Research

There is general consensus among economists that productivity growth is the central feature of a growing economy. The economists disagree on what causes productivity growth and how to encourage investment in technology research that stimulates productivity growth. The present article contributes to the literature by identifying sources of the challenges to productivity growth that explain the trends and by suggesting solutions to repair the problems. Clearly, this article’s thesis of the cause of productivity growth decline derived from a weakened patent system as well as a description of the mechanisms of changes that adversely affect investment in technology research provide a contribution that requires further investigation.

Further research may be directed at identifying the components of TFP and the dynamics of capital, labor and intellectual capital. The complex combinations of the constituent components in TFP are important to trace.

Future scholars should identify the dynamics of the role of the patent system in TFP changes and in aggregate productivity growth declines. These complex and cross-disciplinary mechanisms require exploration.

Scholars can identify the connections of TFP and technology investment. The connections of technology investment and the patent system should be a major research area that beckons. Without incentives to invest in technology, why would anyone risk capital? Without a patent system, there is no clear way to obtain a return on capital. These connections need to be detailed, perhaps with intensive empirical research.

In addition to analytic investigations, historical investigations may supply insight into the causes of TFP decline. Scholars can apply multiple methodologies to trace the relationships of TFP growth decline, wage growth decline and aggregate economic decline.

One way to explore these complex connections between patent policy and technology investment is to apply data analytics. Analytics sort data to identify sources of the productivity growth declines. Analytics could also be applied to identify the correlations between the declines in productivity growth, technology investment and the patent system. Specific patent law elements may be identified as particularly important to encouragement of technology investment.

Considerable analysis can be applied to understanding the impact of transaction costs on innovators. For example, the reduction of transaction costs may facilitate the return of a voluntary licensing market. Investigation into these processes would be worthwhile.

The connections between industry competition and productivity growth declines should be identified. Concentrated competitive configurations in the technology industry provide a strong disincentive to invest in technology. With a weak patent system that fails to protect market entrants, the competitive configuration of technology industry segments provides a particular drag on productivity growth. For example, a weak antitrust law regime may affect the concentration of technology companies, a critical link that may require strong patent policy changes in order to encourage competition. These connections need to be described in order to identify policy solutions.

While economics research is valuable, policy research is important as well. Researching the connection between technology industry competition and patent policy dynamics could yield important revelations that will affect future policy reforms. Remarkably, very little empirical evidence was involved in recent patent law changes, suggesting that this area of research is critical.

Research into the influences of policy changes, including ideological influences and the socio-economics of lobbying organizations, can supply valuable insight into the operation of policy making institutions.

Finally, economists need a meta-analysis of their own profession. After all, economists neither anticipated nor predicted the recession, the financial crisis, the depth and duration of the recession, economic growth rates after the recession, productivity growth rates after the recession or labor market trends after the recession. The fact is that in recent years the economics profession has proven to be poor at prediction. If the thesis of this article is correct, and the evidence is compelling, then economists missed the logic of productivity growth decline as well. Like many academic professions, economists may be too isolated or too focused on measurement and the language of mathematics to realize critical relationships that explain complex economic phenomena. One suggestion is for increased collaboration between economists, the legal profession and policy makers.

One key problem is that recent radical patent law changes are attributed to ideological influences of the far left and the far right. These influences may require analysis in order to develop effective solutions. Only an interdisciplinary approach will yield solutions to these difficult problems.

Editorial Note: This is the final installment of Neal Solomon’s series on the decline of productivity growth in the U.S. To read the series from the beginning please see: Economic Trends and Productivity Growth in America. To do download a PDF of the entire series see Policy Solutions to the Productivity Growth Crisis

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[1] See Solomon, N., The Problem of Willfulness in Patent Infringement Litigation,” 2010.

The Author

Neal Solomon

Neal Solomon is CEO of Advanced System Technologies Inc. A prolific inventor of technologies involving semiconductors, communications, data management, imaging, robotics and healthcare, he holds degrees from Reed College and the University of Chicago.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 4 Comments comments.

  1. EG October 6, 2016 10:11 am

    Hey Neal,

    A great series of articles on why we need strong patent system to encourage not only innovation, but also increased productivity growth.

    The only additional fix I would suggest is to clarify and strengthen patent-eligibility to include a broad class of potentially patentable subject matter. In particular, SCOTUS’ nonsensical Mayo/Alice framework that creates a chaotic standard for patent-eligibility outside the express statutory language needs to be overruled, with a return to the Diehr standard that patent-eligibility be judged based on the claimed subject matter “as a whole” with no judicial exceptions to be written into the express statutory language in 35 USC 101. Until that happens, all efforts to patent computer-implemented or medical diagnostic technology will be at risk, and will encourage protecting such technology by trade secrets, if that is possible.

  2. Chris Gallagher October 7, 2016 2:51 pm

    Chris Gallagher
    Agree with both EG points. Your career as a commentator should not close with this recent IP Watchdog series. Your multi-disciplined perspective is a welcome addition to its multi-faceted complexity.

  3. Eric Berend October 7, 2016 3:24 pm

    Please keep up the good work, Mr. Solomon. We need more reasoned voices with articulate statements of the relevant arguments, that make the connection between inventor’s interests and the overall economic welfare of the U.S.; which of course, is the very ‘raison d’etre’ of the Patent system and its American jurisprudence, in the first place.

    In fact, the very first Patent granted, was for a process, not a physical apparatus; yet here we are: seeing notions of unending expansion of the concept of abstraction, applied in hindsight in Unconstitutional ways by bureaucrats supplied by the very interests which stand to benefit from these machinations.

    Frankly, the Fed. Circuit had it right in KSR v. Teleflex (2007), and then got slapped down by the SCOTUS; and things haven’t been the same, since. Add in the AIA of 2011, and the U.S. Patent laws might as well have been repealed altogether, for all that their worth is to genuine inventors, now.

  4. Anon October 7, 2016 5:39 pm

    Here is a “policy solution”

    From Congress,
    To the Supreme Court:

    Get out and stay out of our role in patent law.

    Yours truly,

    THE branch of the government that the Constitution provided the authority to write the statutory law that is patent law/