Winter 2006

The Power of Ideas

Reforming the Patent Thicket
Professor Carl Shapiro on how an ailing patent system impedes innovation in the US

By Ute Frey

Earlier this year, millions of BlackBerry users were facing the possibility of their handheld e-mail gadgets going dark as a result of a bitter patent lawsuit. BlackBerry maker Research in Motion, or RIM, of Canada, ultimately settled the suit, but not before the uncertainty surrounding the case hurt sales.

"The BlackBerry is the perfect example of what’s wrong with our patent system, but it is certainly not the only one," says Haas School Professor Carl Shapiro.

Shapiro, who holds the Transamerica Chair in Business Strategy, is a strong voice in a nationwide chorus of economic, law, and public policy experts calling for reform of the patent system. He first laid out the complexities of the patent system in his paper, "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting" (Innovation Policy and the Economy, 2001).

Shapiro is among a cadre of UC Berkeley faculty who have established the university as a leading force in the patent reform effort. In 2002, Shapiro and Michael Katz (business), Joseph Farrell and Richard Gilbert (economics), Rob Merges (law), and Pam Samuelson (information management) brought the Federal Trade Commission Hearings on intellectual property to Haas, and in 2004 they organized the Patent Reform Conference on campus. Shapiro himself testified twice in 2005 before the Antitrust Modernization Commission.

In the BlackBerry case, RIM paid $612.5 million to settle a patent suit filed by NTP, a Virginia holding company, just days before a judge was expected to shut down the e-mail service.

While the BlackBerry case was a relatively straightforward case, the "patent thicket" Shapiro refers to in his paper describes a more typical, overlapping set of patent rights that requires those seeking to commercialize a new technology to obtain licenses from multiple patentees. Sometimes new products inadvertently infringe on patents issued after these products were designed, known as a hold-up.

"We have a patent system that is out of balance and in some respects is impeding innovation and economic growth," Shapiro explains.

The crux of the problem lies with the US Patent and Trademark Office (PTO), which is understaffed and overwhelmed by an increasing number of patent applications — 380,000 alone in fiscal year 2005. The average examiner spends only around 18 hours to review an application, which has resulted in too many patents that may not reflect a genuine innovation.

In addition, the courts afford patents the presumption of validity, which greatly strengthens the bargaining position of patent holders — even those whose innovative contributions are dubious, according to Shapiro.

"Companies are dealing with this offensively and defensively," he explains. Some companies aggressively apply for patents in a quest for royalties, thereby exacerbating the problem. Others pay royalties, crosslicense, and hire a team of lawyers to fend off disputes.

Many tech companies, including Qualcomm, IBM, and Texas Instruments, now pursue royalty payments on old or obscure patents as a regular line of business. In recent years Texas Instruments has netted close to $1 billion annually from patent licenses and settlements alone.

Other companies, including NTP in the BlackBerry case, just hold patents but do not manufacture any products. Because these holding companies sue those infringing on their patents but do not face the risk of a counter-suit, they are often referred to as "patent trolls."

Weak patents also have become a troubling source of abuses in the pharmaceutical industry. The most egregious cases involve companies paying enormous ‘reverse payments’ to others trying to introduce generic drugs. In exchange for these payments, the generic manufacturers agree not to challenge the patents in court and not to introduce a generic version of a patented drug.

"These anti-competitive settlements in the pharmaceutical industry are a major anti-trust problem," says Shapiro, who served as the deputy assistant attorney general for Economics in the Antitrust Division of the US Department of Justice in 1995-96. "These settlements are thwarting competition and depriving consumers of the benefits of low-cost generic drugs."

Shapiro supports several reforms to the patent system. Providing more resources to the PTO would allow its examiners to spend more time researching applications and to better understand what "prior art" is. He also suggests establishing procedures that allow patents to be challenged as soon as they are published or issued.

In his new paper, "Prior User Rights" (December 2005), Shapiro proposes another change. He suggests giving prior users of innovations that are later patented by someone else the right to continue using their innovations without having to pay royalties, as long as they can prove their prior use of the innovation. Europe already has such prior user rights.

Shapiro’s deep involvement in these issues is both personal and professional. He says he feels good about fighting for improvements such as lowering prices of drugs that can save lives. Nationwide, he says what’s at stake is nothing less than the rate of our economic growth.

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