Innovation is the implementation of ideas into new and improved goods, services, processes, and business models. The practice of American innovation requires a legal and policy framework. From its founding, America’s Constitution has encouraged, protected, and rewarded creations of the human mind, so called intellectual property (IP), with provisions for copyrights, patents, trademarks, and trade secrets. With digital revolutions in communications and computing, America’s companies invest even more to research, develop, and commercialize these intangible IP assets.
As multiple reports demonstrate, IP-intensive industries (semiconductors, pharmaceuticals, software, advanced tools and machines etc.) drive the US economy and jobs. In 2019, IP intensive industries accounted for 41 percent of output ($7.8 trillion) and 44 percent of jobs (63 million jobs). Workers in IP-intensive industries tend to earn higher wages, work in larger companies (500 employees or more); participate in employer-sponsored health insurance retirement plans; have a college degree; and be veterans. Ninety percent of US exports involve IP. Simply put, the profits of these industries allow them to pay workers well, invest in R&D, and grow.
All is not well, however. While America’s regime generously grants patents, its legal system is under attack by patent trolls or non-practicing entities (NPEs) already costing some $60 billion annually in firm wealth in 2014. This means that a significant portion of the value of the IP-economy is frittered away by courtroom opportunists. The abuse, theft and infringement of IP is associated with hundreds of thousands of jobs lost annually. Indeed, some 12,000 IP cases are filed annually in the US, about two-thirds of all court cases, demonstrating the extent of the abuse of the legal system. Patent infringement lawsuits have quintupled in the last two decades, with 2021 being one of the busiest years yet for NPEs.
The threat to IP-intensive manufacturers continues to increase, as productive companies are regularly sued or shaken down for hefty, undeserved royalty payments by plaintiffs wielding vague, low-quality patents, many of which should have never been granted in the first place by the US Patent and Trademark Office (USPTO). The economic impact of infringement lawsuits filed by trolls is significant as litigation can take five-to-seven years to resolve and cost $5 million or more. Companies must pay lawyers for defense rather than hire workers to innovate new products. And the situation is rendered even more problematic, because in addition to court litigation, trolls are simultaneously launching super-charged, fast track IP complaints against multiple companies at a little known federal body called the United States International Trade Commission (ITC).
Reform the ITC
The ITC was created in 1916 to protect American industry from anti-competitive practices like dumping and counterfeiting by foreign firms. However, as I’ve written before, the USITC has become the refuge for patent trolls. They use Section 337 cases to wield the threat of ITC exclusion orders, which are sweeping product import bans. Trolls use this dire remedy to extort huge, unfair financial windfalls from productive, innovative companies. Not only have these non-productive trolls hijacked the ITC to weaponize US laws against companies contributing jobs and innovation to the American economy, but their filings overwhelmingly feature patents which can be – and usually are – already being adjudicated in regular courts. This comes at a high price to US companies as litigating a complex case through trial can cost more than $5 million.
Exclusion orders on modern products pose a great threat to already challenged supply chains and put the US at a disadvantage globally, particularly in relation to China where a lever of government could never be used by patent trolls to hurt Chinese companies.
The good news is that there is common-sense bipartisan legislation pending in Congress to reform this agency and make it harder for trolls to use the agency for financial gain at the expense of the US economy and innovation. Congress should act on this right away, to eliminate this drag on the U.S. market and ensure we can build American innovation and infrastructure as effectively as possible.
Remove junk patents from the system
One of the other important ways to improve the quality of our nation’s patent system is to weed out bad patents. Congress created a tool to accomplish this task through the America Invents Act; the tool is called Inter Partes Review (IPR). Unfortunately, the IPR process is under attack and has been weakened in recent years. New PTO Director Kathi Vidal should act aggressively to strengthen the USPTO’s Patent Trial and Appeal Board (PTAB) and enhance access to the IPR process to remove low quality and vague patents from the patent system. The validity of a patent can only be challenged in two ways: before the USPTO, or through resort to a federal court, where the judge and jury generally know little or nothing about patents, technology, or the complexities of manufacturing.
IPR is an administrative process that looks a lot like a trial, but it is only judging one thing – whether a certain patent should have been issued by the USPTO in the first place. Unlike a trial in federal court, the “judges” are highly experienced patent examiners and subject matter experts. These experts only “take the case” and review patents they believe may be questionable. The whole process lasts under 18 months. And the cost – while hardly cheap at $300,000 to $1 million on average – is far less expensive than a trial in federal court.
The US has important institutions like the ITC and USPTO to protect IP. However if they are delivering the opposite of their intended purpose, it’s time to change, reform, and modernize them. Reforming the ITC and strengthening the IPR process at USPTO can restore billions of dollars to the US economy and bring many new jobs.