If you’ve read our coverage of the Electronic Frontier Foundation’s “Stupid Patent of the Month” series, you know America has a patent quality problem. People apply for patents on ideas that are obvious, vague, or were invented years earlier. Too often, applications get approved and low-quality patents fall into the hands of patent trolls, creating headaches for real innovators.

Why don’t more low-quality patents get rejected? A recent paper published by the Brookings Institution offers fascinating insights into this question. Written by legal scholars Michael Frakes and Melissa Wasserman, the paper identifies three ways the patent process encourages approval of low-quality patents:

• The United States Patent and Trademark Office (USPTO) is funded by fees—and the agency gets more fees if it approves an application.
• Unlimited opportunities to refile rejected applications means sometimes granting a patent is the only way to get rid of a persistent applicant.
• Patent examiners are given less time to review patent applications as they gain seniority, leading to less thorough reviews.

None of these observations is entirely new. For example, we have covered the problems created by unlimited re-applications in the past. But what sets Frakes and Wasserman’s work apart is that they have convincing empirical evidence for all three theories.

They have data showing that these features of the patent system systematically bias it in the direction of granting more patents. Which means that if we reformed the patent process in the ways they advocate, we’d likely wind up with fewer bogus patents floating around.

The fee system creates perverse incentives to approve patents

Three revenue sources pay for about 85 percent of the USPTO’s patent operating budget, according to the researchers. There’s an application fee paid when an application is filed. There’s an issuance fee paid when a patent is approved. And there are renewal fees paid during a patent’s term. If fee revenues fall, the patent office can face a budget shortfall.

The issuance fee creates an obvious potential conflict of interest for patent office administrators. When money is tight, the USPTO has an incentive to grant more patents to get more issuance fees. And in a 2013 paper summarized in their new report, Frakes and Wasserman found empirical evidence that this is exactly what happens.

The researchers used freedom-of-information requests to gather data about patent office decisions on millions of patent applications filed between 1983 and 2010. This large data set allowed them to compare the patent office’s behavior before and after 1991—the year Congress first made the patent office dependent on fees to fund its patent operations.

Obviously, it would be too simplistic to merely compare acceptance rates before and after the change, since the patent office might have been allowing more patents for reasons unrelated to the new fee system. Instead, the researchers did something more sophisticated: they compared changes for patent categories that generate a lot of fee revenue to categories that are less lucrative for the patent office.

One category they considered is patents held by large companies. Patents filed by large entities are lucrative for the patent office because large companies pay the full fee while smaller companies get discounts on patent fees. The other category the researchers studied is patents from technology categories—like semiconductors and communications equipment—where patents get renewed (generating renewal fees) more often than average.

“Our findings suggest the PTO is preferentially granting patents on technologies with high renewal rates and patents filed by large entities,” the researchers wrote in 2013. The researchers found that this effect was strongest in years when the budget office was facing the prospect of a budget shortfall. When money was tight, the patent office started becoming relatively more generous to bigger companies that paid higher fees—relative to other companies and individual investors who paid less. When the budget picture improved, this bias diminished.

To be clear, this doesn’t prove that the patent office ever had a deliberate policy of favoring larger entities or technologies with high renewal rates. It’s more likely that subtle—perhaps even subconscious—pressures explain these shifts. But it does suggest that insulating the patent office from these financial pressures could lead to a more rigorous patent examination process.

Frakes and Wasserman recommend eliminating the issuance fee and boosting the application fee by a corresponding amount. That way, the patent office would get the same revenue whether it approved a patent or rejected it.

Of course, renewal fees create similar problems, but the authors don’t favor eliminating those because they encourage patent holders to let low-quality patents expire. Instead, Frakes and Wasserman argue that all renewal fees should be put into a special fund that would be used to rebate some of the fees of small and medium patent applicants.

This would allow the patent office to charge everyone the same fees—eliminating the incentive to preferentially grant patents to larger entities. However, smaller companies and individuals would get some of their fee revenue back, helping to ensure that smaller players are not priced out of the patent system. In this world, revenue shortfalls would lead to smaller entities paying modestly higher fees than they otherwise would—a better outcome than making the patent office financially dependent on large companies.

https://arstechnica.com/?p=1235023