The U.S. Supreme Court rarely weighs in on patent law, so three of its recent decisions are noteworthy–and may even be historic. In effect, they address some unintended consequences of the 1982 act of Congress that created a new patent appellate court, the Federal Circuit, which brought uniformity to patent law and reduced the likelihood that a patent would be found “invalid.” Before 1982, there was always the risk that a prospective licensee would make a preëmptive strike, filing suit in a jurisdiction that routinely found patents to be “obvious” and therefore invalid. This correction spurred investments in technology and an increase in patenting to protect them. But over the past several years, the patent system’s high transaction costs have threatened to offset its benefits.
Established businesses have hotly argued that the patent system needs reform. Some charge that the U.S. Patent and Trademark Office is a major problem: because patent examiners are in short supply and have an evaluation system that favors allowances over rejections, unworthy patents are granted. But the angriest complaints are about unscrupulous patent-licensing companies–known as “trolls”–that aggressively seek licensing fees.
Good patent-licensing companies have long helped individuals and small companies get compensation for their inventions. Trolls are different. They send demand letters to thousands of putative patent infringers, often without doing their due diligence. They sometimes file suits against dozens of defendants, or in jurisdictions viewed as friendly to plaintiffs. Legislation limiting such suits to jurisdictions where the defendants are located or do business, or where infringement has occurred, has gone nowhere. Some trolls will pull the trigger on everyone in sight and let the grind of litigation soften up the defendants for settlement, the merits of the cases be damned.
It wasn’t always like this. Until 25 years ago, most companies obtained patents to prevent competitors from copying their significant new inventions. Aggressive use of patents to sue others was infrequent, since having a patent declared invalid was a significant risk; former Supreme Court justice William O. Douglas, for example, wanted “inventive genius” to remain the standard for validity. Things changed significantly with the advent of the Federal Circuit. Previously, many appellate courts viewed patents as archaic and undesirable monopolies. But with patents more likely to be found valid, companies began to assert them. Technology-focused companies began demanding license fees under the implicit threat of litigation. Texas Instruments, for instance, garnered more than $1 billion in licensing fees.
In response, large companies bulked up their patent portfolios to ensure that any lawsuit by a competitor would result in patent infringement counterclaims. That put everyone on edge. After all, a successful claim concerning any one of hundreds or thousands of patents in a company’s portfolio could result in a patent injunction–a commandment by a judge to stop making, using, or selling goods or services infringing a patent. Having a war chest of patents gave a company leverage, and the possibility of negotiating a cross-license if a competitor sued. Then, in 1998, the Federal Circuit held that business methods could be patented. A flood of patent applications, some based on simple improvements in business operations, ensued. Many, because they were “obvious,” should have been denied but were not.