The tide could be turning for US patent protection: China won’t be pleased

After decades of eroding U.S. patent rights, the tide could be turning with two new bipartisan bills hitting the Senate floor.

Sens. Thom Tillis (R-N.C.) and Chris Coons (D-Del.) introduced the Patent Eligibility Restoration Act (PERA), which provides guidance to early-stage innovators on what kinds of technology are patentable in emerging fields like gene therapy. It was followed by the Promoting and Respecting Economically Vital American Innovation Leadership (PREVAIL) Act, which reforms the Patent Trial and Appeal Board (PTAB), the body responsible for adjudicating patent validity disputes, to make it harder for valid patents to be canceled or mired in court challenges without sufficient evidence.

Patents are intellectual property (IP) instruments that recognize an inventor’s exclusive right to profit from and license their invention or innovation for a period of time. They recognize that commercial reward is essential for incentivizing the typically large volumes of investment, time and resources necessary to develop and bring new technologies to the market. However, conventional thinking isn’t always sympathetic to patents.

Opponents argue that patents lock in incumbents’ advantages and raise the cost of propagating new technology, causing less follow-up innovation, less technology diffusion and more concentrated markets. They argue that patents are vexatious legal instruments used by well-resourced patent holders to extract costs from innocent producers through the threat of costly, prolonged lawsuits — even when the products fall outside the patent’s scope or the technology should never have been patented.

In other words, these critics seek to compel greater access to incumbents’ technologies through invalidated patents and higher bars for infringement lawsuits, thus lowering market entry barriers and increasing competition. This, in theory, benefits consumers since exorbitant licensing and litigation fees won’t be passed to them.

However, the reality isn’t so simple. Weaker patent rights are often favored by large incumbents enjoying extensive production, financing and distribution systems and resources. Conversely, smaller and less integrated research-intensive companies rely on patents to monetize innovation investments. Difficulty in protecting their inventions from infringement makes it harder for startups to attract funding and devalues them for reasons other than their capabilities. This means less innovation and competition.

In 2011, Congress created the PTAB — an expedited alternative to courts for challenging patents. It was intended to make patent challenges easier by applying a lower standard of proof. Since then, tech giants seeking to invalidate opponents’ patents have benefited the most.

The PTAB also grants entities that aren’t even industry participants standing to bring predatory lawsuits against patent holders. For instance, hedge funds have brought patent challenges to depress holders’ stock prices and short their stock. This deters innovation without benefiting consumers.

Worse still, patent challengers who fail in court can try again under the PTAB’s lower standard of proof, potentially doubling patent holders’ litigation costs. Patent holders are unlikely to succeed in challenging unfavorable PTAB rulings since the federal court often defers to preexisting PTAB determinations on factual issues despite PTAB’s lower standard of proof.

America’s competitors have benefited from the weakened patent protections. Patents rejected here have been upheld in Chinese and European courts. Long guilty of stealing and exploiting American IP, China now profits from American innovation in another way: by expanding its own subject matter and making Chinese patents harder to invalidate. This makes it more attractive for American researchers, investors and entrepreneurs in research-intensive sectors like software and pharmaceuticals to shift capital and patent their inventions abroad.

Governments don’t tend to pursue this strategy because they’re ideologically committed to IP. They do it to position themselves as forerunners in the global innovation economy with its concomitant economic rewards.

The PERA and PREVAIL Acts attempt to remedy these issues. Although PERA commendably confirms the patentability of some cutting-edge technologies, its flaw is that it effectively prohibits patenting novel business methods. Though not always technologies in and of themselves, patenting business methods facilitates the commercialization of new technologies.

The PREVAIL Act requires patent challengers to face infringement lawsuits before granting standing to contest patents. It reduces duplicative lawsuits by blocking funders of existing lawsuits from bringing their own. Challengers must also choose either the PTAB or district court as a venue. Importantly, the PTAB would have to stop making invalidation decisions on the “balance of probabilities.” The required “clear and convincing evidence” for patent invalidity would be necessary, in-line with district court standards. Finally, introducing a code of conduct and transparency requirements for PTAB judges would also reduce conflicts of interest. These changes would maintain the PTAB as an expedited forum for contesting faulty patents whilst better balancing the interests of patent holders and challengers.

Whatever shape both reforms ultimately take, there is no reason why the United States can’t continue being a world leader in innovation by protecting intellectual property. With ongoing external threats of IP theft, we shouldn’t handicap ourselves at home.

Satya Marar is a visiting postgraduate fellow with the Mercatus Center at George Mason University.