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Address Patent Flaws or Face the Economic Consequences | Commentary

The U.S. became the world’s largest economy, in part, because its policies supported innovation and entrepreneurship. From Thomas Edison to Steve Jobs, U.S. entrepreneurs invented many of the innovations that drove the 20th century global economy, with patents playing an indispensable role in this innovation process — which may explain the prolonged push for congressional patent reform.

Without patents, the incentives for innovators, investors, and entrepreneurs to undertake the long and risky invention process would be severely diminished. Patents provide entrepreneurs and innovative companies the exclusive right to use their invention in order to recoup their capital costs. This is as it should be.

In recent years, however, the patent litigation system has been exploited to restrict competition and undermine innovation — abundantly clear in Washington as legislators near the passage of a patent reform bill.

Consider that patent litigation costs have more than quadrupled in the last decade (from $7 billion in 2005 to $29 billion in 2011) — a time when productivity growth from inventions have been dismal. A PricewaterhouseCoopers study noted that before 2012, there were only three patent infringement cases where damages exceeded $1 billion; but, in 2012 alone, damages in three cases exceeded $1 billion.

So-called patent trolls are a major part of this problem. Most patent applicants intend to produce an innovative product or leverage the patent for future research. Patent trolls, on the other hand, have no intention of creating new goods or research; these organizations find patents to file with the sole purpose of extorting money from companies already using that technology.

The problems of patent litigation also extend beyond the traditional definition of patent trolls. Vagaries are making it very difficult to differentiate between legitimate patent claims versus frivolous claims filed solely to maintain market control or to impose a threat of excessive legal costs that simply scares away potential competitors.

For instance, Procter & Gamble claims CLIO, a maker of generic teeth whitening strips that are almost half the cost of P&G’s premium-priced Crest strips, infringed on their patents. CLIO claims that P&G is orchestrating a campaign to eject a more affordable consumer product from the market to control the $450 million teeth-whitening market. The U.S. Patent and Trademark Office has ruled that P&G’s infringement claims are invalid. The case is now on appeal in the federal district court in Cincinnati.

In another example, since 2002, Apple has been a party to hundreds of federal cases that resulted in 730 legal entries in the U.S. National Index Case locator. In recent months, Apple waged a legal challenge against Samsung, insisting it pay Apple an excessive per-device patent fee for some Samsung devices — fees that would have unnecessarily increased costs for consumers. Fortunately for consumers this time, a jury recently rejected Apple’s outrageous demands and awarded it a more modest figure.

One thing is clear from these examples: Excessive patent litigation is burdening the economy with new obstacles to innovation and competition, lessening the American entrepreneurial spirit. In fact, the increasing cost created by excessive patent litigation is one of the problems dimming the prospects for robust economic growth in core U.S. industries.

The U.S. patent system should be promoting innovations and fostering an open and competitive marketplace. The growing glut of litigation is creating the opposite incentives. Reforms by lawmakers and regulators are, consequently, necessary. Patent reforms ushered in by Congress should create greater clarity with respect to the rights and limitations of patent holders. They should also impose larger costs on entities that file frivolous patent cases.

Effective patent tort reform can help reduce the growing problem of excessive patent tort cases that are stifling innovation and reducing the vibrancy of the U.S. economy.

Wayne Winegarden, PhD is a senior fellow at the Pacific Research Institute and a contributing editor to EconoSTATS at George Mason University.