PublishedDecember 9, 2022

Boosting Economic Growth through Renewed Innovation

Recent economic news has been setting off alarm bells. Fears of inflation, along with lackluster economic growth, have raised concerns over the post-pandemic recovery. While policymakers appear to be particularly focused on inflation, boosting economic activity is also important. One option that should be considered is patent reform. Properly applied, patents prompt invention that can boost productivity and economic growth. Improperly applied, patents can actually impede innovation and hamper economic progress—and there is plenty of evidence to suggest that current patent policies pose an obstacle to many would-be innovators.

Economic growth has slowed globally for a number of reasons, from supply chain disruptions due to COVID-19 to shocks attributable to conflict in the Ukraine. Many economists are forecasting the return of stagflation, a situation in which rising prices and high unemployment yield sluggish economic growth. The World Bank’s most recent report on global economic prospects finds that economic growth “has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s.” In the United States, forecasters see similar economic challenges. Despite recent favorable employment numbers, inflation in 2022 reached 9 percent—well above the Federal Reserve Board’s (Fed) targeted rate of 2 percent. Former Treasury Secretary Lawrence Summers and others warn that as the Fed raises interest rates to reach its goal, unemployment may rise significantly.

Today’s economic woes bring to mind the economic malaise of the 1970s. Today, as then, broad policy reforms are necessary to facilitate an economic recovery that avoids a hard landing. The Fed’s monetary policies target the macroeconomic fundamentals in an effort to tame inflation. But it is also important to identify areas where existing policies may unnecessarily impede economic activity. In the 1980s, supply-side policies included sweeping deregulation initiatives to boost production and free up important sectors of the economy, including airlines, trucking and telecommunications. 

Similarly, President Joe Biden’s competition Executive Order last year is an attempt to identify and remove impediments to economic activity. While some may debate the various targets identified in the Executive Order, the thinking behind the order seeks to identify areas where production could be increased through enhanced competition.

One such policy prescription included is patent reform. Patents play a key role in spurring innovation across the economy, from the tech sector to pharmaceuticals. Ideally, a patent grants a period of exclusivity that provides inventors the ability to recoup their costs. In exchange, the patent includes a description of the invention that will be available to all after the patent expires (typically 20 years). 

Unfortunately, this grand bargain can fail in the real world. Poor quality patents, strategic behavior by patent owners and institutional constraints at the U.S. Patent and Trademark Office (USPTO) can make it difficult for true inventors to compete in the marketplace. Patents are being issued at an increasing rate, with over 388,000 granted last year alone. Yet the USPTO remains capacity constrained, leaving patent examiners an average of 19 hours to review a patent application. As a result, poor quality and overly broad patents can find their way into the market. When applied against new inventors trying to navigate the patent system, innovation can be thwarted. This problem has been made worse by the emergence of “patent assertion entities,” who amass large portfolios of patents—not to bring new products to market, but to fuel litigation against corporations and manufacturers that are trying to innovate. 

Over the past 20 years, the Supreme Court has issued a series of decisions addressing these problems, including what is eligible to be patented and the use of injunctions. And in 2011, concerned about frivolous lawsuits and patent abuse, Congress passed the America Invents Act (AIA) which included key provisions designed to establish more cost-effective mechanisms for challenging invalid patents that should never have been granted. Crucially, the new law provided an alternative to costly and lengthy legal proceedings. The AIA established the Patent Trial and Appeal Board (PTAB) within the USPTO, allowing challenges against the validity of patents. The PTAB relies on experienced administrative law judges with technical expertise rather than juries to resolve patent disputes. Through the PTAB, questions of patent validity are addressed through inter partes review (IPR), a process that takes only 12 to 18 months at a much lower cost than a traditional lawsuit.

Yet IPR is hardly the “death squad” its opponents describe. PTAB has generated results similar to those of costlier legal proceedings, and it has proved effective for eliminating weak secondary patents that more often than not hamper rather than promote invention. When evaluating PTAB decisions, the Federal Circuit has affirmed all elements of a PTAB decision 73 percent of the time, while only reversing decisions 13 percent of the time.

Despite—or perhaps due to—the PTAB’s effectiveness, there has been concerted pushback against the IPR process. Special interests who benefited from the previous legal gamesmanship launched legislative efforts to overturn the AIA and the previous USPTO director implemented a series of administrative changes to narrow the scope and reach of the PTAB process, especially through the use of discretionary denials. This led to an increasing number of instances where the facts were not even examined before the IPR was denied.

The debate over the IPR process has come to the attention of recently appointed USPTO administrator Katherine Vidal, who has issued interim guidance on the role discretionary denials. The decision suggests that discretionary denials may have become too arbitrary, and the guidance lays out a number of cases where a request for denial is inappropriate when considering whether to institute an IPR. For example, the guidance states, among other things, that when there is compelling evidence of unpatentability, or where there is a parallel proceeding at the International Trade Commission, the institution of an IPR should not be denied. Instead, the IPR will ultimately determine the case.

These changes are welcome, and it is hoped that longer-term changes can be implemented to clarify and strengthen the role of PTAB as an alternative to more costly legal proceedings for challenging invalid patents. As suggested by President Biden’s executive order, getting patent policy right can provide a signification boost for innovation that ultimately enhances productivity and boosts economic growth. The AIA’s creation of the PTAB has proved to be a successful addition to patent policy that provides an efficacious mechanism for removing invalid patents that are introduced into the system. Director Vidal is right to focus on actions that have limited the scope of the IPR process; moving forward, it would be welcome for the office to strengthen PTAB as an institution and make the IPR process easier to use and a more viable option to litigation.

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Wayne Brough

Policy Director, Technology and Innovation, R Street Institute

Wayne Brough is policy director for R Street’s Technology and Innovation team. He manages product flow on technology policy issues while also continuing his own research in competition policy and intellectual property.

Prior to R Street, Wayne was the president of the Innovation Defense Foundation, a free-market think tank focusing on technology policy that he co-founded. Additionally, Wayne was the chief economist and vice president for research for FreedomWorks, where he oversaw research on a broad portfolio of issues, promoting market-based solutions to public policy questions.

Wayne received his PhD in economics from George Mason University, with a focus in industrial organization and public choice.

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