Because it must rely on imperfect information, the patent system will inevitably make mistakes. To determine how the system ought to err in cases of uncertainty—and whether a given mistake is worth correcting—scholars have composed a simple picture of the consequences of error in either direction. On the one hand, erroneous patent awards impose unjustified costs. On the other hand, erroneous patent denials discourage successful inventors and reduce incentives to create in the future. The result is an essentially indeterminate balancing, in which policies of overly liberal awards drive up costs, and policies of overly cautious awards drive down incentives.
As this Article will show, this conventional approach to error costs understates the role that accuracy plays in producing the benefits of the patent system. Critically, the incentives to invent created by the patent system depend on the difference between an inventor’s expected returns if she invents and her expected returns if she does not invent. Erroneous patent awards do not simply increase the costs of the patent system but also narrow the expected difference between inventing and not inventing. Undeserved patent rights thus undermine the very incentives the system is intended to create.
This Article presents a framework for evaluating the value of accuracy in the patent system. As it turns out, the consequences of an undeserved patent depend significantly on a factor that has not been previously given much attention: whether the unsatisfied patentability requirement is one that seeks to influence a mutually exclusive choice. Some patentability doctrines satisfy this condition, but others do not. The result is that erroneous patent awards may in some ways be more harmful and in other ways less harmful than previously thought.
Today, it is an almost universally accepted proposition that the patent system makes too many mistakes. Not that there are too many randomly distributed errors, but a pattern of mistakes that result in a system that is consistently (and inappropriately) biased in a pro-patent direction. Patents, it is thought, are too easy to acquire in the first place, too difficult for challengers to revoke later on, and too profitable to enforce in dubious circumstances. Countless books and law review articles have been founded on essentially this premise,1 and in recent years both Congress and the Supreme Court have taken steps to weaken the power of patents having “suspect validity.”2
Despite the bevy of proposals intended to curb the granting and enforcement of undeserved patent rights, there is surprisingly little basis to conclude that the current state of things is actually suboptimal. It is true that the system currently makes patent rights available in some cases in which the black-letter patentability requirements have probably not been satisfied.3 But to conclude that the system ought to err differently—that is, that uncertain cases should be decided against patent protection—one must have some way of comparing the costs of an error in either direction. If the costs of erroneously denying patent protection are greater than the costs of erroneously providing patent protection, then there may be no reason to change the current balance of errors. In fact, doing so might actually increase the costs of errors overall, causing more harm than good.4
And it is here that existing theory and empirics flounder. The problem is that the conventional understanding of error costs in the patent system yields no definite conclusions. On the one hand, it is widely accepted that undeserved patents impose unjustified costs. The private value of patents necessarily comes at some expense to the public, and erroneous grants incur these costs without offsetting public benefits.5 On the other hand, it is equally accepted that mistakes in the opposite direction—denials of patent protection to those who deserve it—undermine the private incentives to invent that are the reason for having a patent system in the first place.6 The theory, after all, is that inventors will invest in research and development in expectation of receiving patent rights. When that promise is not kept, future inventors will expect smaller rewards from the patent system going forward and consequently will invest less in the very research and development that the patent system is supposed to encourage.
In the end, this understanding of errors reduces to a referendum on the costs and benefits of the patent system.7 If the marginal benefits of patent-induced innovation are large compared to the marginal costs of an incremental patent, it is preferable to grant lots of them. But, if the marginal costs of each additional patent grant are large compared to the marginal benefits of patent-induced innovation, it is better to be quite stingy with patent rights.8 And because we lack answers to these central empirical questions,9 the conventional approach yields no clear guidance one way or the other.10 Faced with this puzzle, scholars have either explicitly reserved judgment on the question of how the patent system ought to err11 or simply fallen back on (disputed) priors about the costs and benefits of patent protection.12
As this Article will show, this widely adopted framework is not only indeterminate but also incomplete. The fundamental problem is that it understates the role that accuracy plays in producing the benefits of the patent system. The reason for offering patent protection is to create incentives to do particular things: to create new, useful, and nonobvious inventions, to disclose them publicly, and to do all this while complying with a number of rules designed to protect the public and other inventors. The magnitude of the patent incentives to do these things depends both on what the system rewards and on what the system does not reward—just as the power of a prize depends on granting it when it is deserved and withholding it otherwise. Erroneous patent grants narrow the difference between the expected outcome from inventing and the expected outcome from not inventing, thus reducing the marginal reward offered to do the former instead of the latter. In this way, undeserved patents do not simply impose unjustified costs, but actively undermine the very ex ante incentives that the patent system is intended to create.
Prior scholarship has noted these incentive effects only in passing and has not explored their consequences for how the patent system should err in cases of uncertainty.13 At a minimum, adding them to the traditional account of error costs necessarily shifts the optimal balance of errors in the direction of more skepticism toward claims of patent rights. With a few basic assumptions about observability and inventors’ perceptions of the patent system’s errors, the conclusion becomes stronger. When certain conditions hold, this incentive harm can be used to show that the probability of patentability necessary to justify patent rights must be at least 50 percent—a “more likely than not” standard that is more rigorous than the de facto leniency toward questionable patent rights that exists today. This is true regardless of the marginal costs and benefits of patent protection, providing a basis for increasing scrutiny of patent rights that does not depend on disputed empirical priors about the costs and benefits of the patent system.14
But there are complications as well. Most importantly, the effect of an undeserved patent turns out to depend significantly on the reason that patent was undeserved. Some of the patentability requirements are intended to influence mutually exclusive choices—failing to enforce these requirements not only incurs unjustified costs, but also reduces marginal rewards, thus weakening the power of the incentives created by the patent system in the future. But other patentability requirements have nothing to do with shaping incentives, and exist only to mitigate the costs of the patent system. Failing to enforce these requirements drives up the costs of the patent system, but does not harm future incentives. As a result, in cases involving mutually exclusive choices, erroneous patent grants are more harmful than previously appreciated. But in other cases, errors in favor of patentability might not be quite as detrimental as previously assumed.15
This Article proceeds in five parts. Part I provides background on the traditional approach to error costs in the patent system and describes how current doctrine generally breaks in favor of patent rights in close cases. Part II shows how this traditional understanding is incomplete and develops a theory of accuracy that accounts for the relationship between false positives and future incentives. Parts III and IV apply that theory to a number of patent doctrines, illustrating how the importance of accuracy is tightly bound to a particular rule’s purpose. Part V then discusses implications for patent law and highlights several questions requiring further study.
- 1. See, for example, Robert P. Merges, As Many as Six Impossible Patents before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 Berkeley Tech L J 577, 589–91 (1999) (linking the “numerous incentives inside the PTO to issue rather than reject patent applications” to the problem of low-quality patents); John R. Thomas, Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties, 2001 U Ill L Rev 305, 314–16, 318–21; Jay P. Kesan, Carrots and Sticks to Create a Better Patent System, 17 Berkeley Tech L J 763, 767–68 (2002); John H. Barton, Non-Obviousness, 43 IDEA 475, 493–95 (2003); Adam B. Jaffe and Josh Lerner, Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do about It 136–37 (Princeton 2004); Joseph Farrell and Robert P. Merges, Incentives to Challenge and Defend Patents: Why Litigation Won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help, 19 Berkeley Tech L J 943, 944–46 (2004) (“[G]iven the rapid increase in the volume of patent applications . . . , it would be astounding if patent quality had not suffered.”); Christopher R. Leslie, The Anticompetitive Effects of Unenforced Invalid Patents, 91 Minn L Rev 101, 133–34 (2006) (discussing the ways in which courts err in favor of the patent holder during patent validity challenges); Doug Lichtman and Mark A. Lemley, Rethinking Patent Law’s Presumption of Validity, 60 Stan L Rev 45, 47–48 (2007); Dan L. Burk and Mark A. Lemley, The Patent Crisis and How the Courts Can Solve It 25, 28–29 (Chicago 2009) (describing how the current system of patent litigation encourages holdup and impedes innovation); Michael J. Burstein, Rethinking Standing in Patent Challenges, 83 Geo Wash L Rev 498, 538–42 (2015); Roger Allan Ford, The Patent Spiral, 164 U Pa L Rev 827, 837–39, 858–63 (2016). See also Jonathan Masur, Patent Inflation, 121 Yale L J 470, 473 n 5 (2011) (summarizing this literature).
- 2. See eBay Inc v MercExchange, LLC, 547 US 388, 397 (2006) (Kennedy concurring); Bilski v Kappos, 561 US 593, 608 (2010). See also Leahy-Smith America Invents Act (AIA), Pub L No 112-29, 125 Stat 284 (2011).
- 3. See Part I.B.
- 4. See John M. Golden, Patentable Subject Matter and Institutional Choice, 89 Tex L Rev 1041, 1068 (2011).
- 5. See Lear, Inc v Adkins, 395 US 653, 670–71 (1969); Mark A. Lemley and Carl Shapiro, Probabilistic Patents, 19 J Econ Persp 75, 77 (Spring 2005); Jeremy W. Bock, Does the Presumption of Validity Matter? An Experimental Assessment, 49 U Richmond L Rev 417, 449 (2015); Gregory Mandel, Patently Non-Obvious II: Experimental Study on the Hindsight Issue before the Supreme Court in KSR v. Teleflex, 9 Yale J L & Tech 1, 31–32 n 129 (2007) (questioning whether granting an undeserving patent incurs more social costs than denying a deserving patent); T. Randolph Beard, et al, Quantifying the Cost of Substandard Patents: Some Preliminary Evidence, 12 Yale J L & Tech 240, 243–45 (2010); Leslie, 91 Minn L Rev at 127 (cited in note 1); Rochelle Cooper Dreyfuss, Nonobviousness: A Comment on Three Learned Papers, 12 Lewis & Clark L Rev 431, 434–35 (2008) (noting the existence of “structural features in the patent system” that systematically generate erroneous grants); Burstein, 83 Geo Wash L Rev at 549 (cited in note 1); Shubha Ghosh and Jay Kesan, What Do Patents Purchase? In Search of Optimal Ignorance in the Patent Office, 40 Houston L Rev 1219, 1228, 1244–45 (2004); Merges, 14 Berkeley Tech L J at 592–93 (cited in note 1); Shubha Ghosh, Beyond Hatch-Waxman, 67 Rutgers L Rev 779, 801 (2015). See also Michael J. Meurer and Katherine J. Strandburg, Patent Carrots and Sticks: A Model of Nonobviousness, 12 Lewis & Clark L Rev 547, 556 (2008) (noting the typicality of the cost-benefit approach to measuring erroneous patent grants).
- 6. See Andres Sawicki, Better Mistakes in Patent Law, 39 Fla St U L Rev 735, 760 (2012); R. Polk Wagner, Understanding Patent-Quality Mechanisms, 157 U Pa L Rev 2135, 2141 (2009); Bock, 49 U Richmond L Rev at 448 (cited in note 5); Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw U L Rev 1495, 1521 (2001).
- 7. See Mayo Collaborative Services v Prometheus Laboratories, Inc, 566 US 66, 92 (2012); Sawicki, 39 Fla St U L Rev at 744 (cited in note 6); Bock, 49 U Richmond L Rev at 448–49 (cited in note 5).
- 8. See Glynn S. Lunney Jr, E-Obviousness, 7 Mich Telecom & Tech L Rev 363, 385–86 (2001); Sawicki, 39 Fla St U L Rev at 744 (cited in note 6).
- 9. See Oskar Liivak, Establishing an Island of Patent Sanity, 78 Brooklyn L Rev 1335, 1337–38 (2013); Lisa Larrimore Ouellette, Patent Experimentalism, 101 Va L Rev 65, 75–84 (2015).
- 10. See Mandel, 9 Yale J L & Tech at 31–32 n 129 (cited in note 5); Bock, 49 U Richmond L Rev at 448–49 (cited in note 5).
- 11. See, for example, Daniel J. Hemel and Lisa Larrimore Ouellette, Beyond the Patents–Prizes Debate, 92 Tex L Rev 303, 330–31 n 134 (2013); Mandel, 9 Yale J L & Tech at 31–32 n 129 (cited in note 5); Bock, 49 U Richmond L Rev at 449 (cited in note 5); Ghosh and Kesan, 40 Houston L Rev at 1227–29 (cited in note 5).
- 12. See, for example, Dreyfuss, 12 Lewis & Clark L Rev at 435–36 (cited in note 5).
- 13. See Matthew Sag and Kurt Rohde, Patent Reform and Differential Impact, 8 Minn J L Sci & Tech 1, 8–9 (2007); Einer Elhauge and Alex Krueger, Solving the Patent Settlement Puzzle, 91 Tex L Rev 283, 294–95 (2012); Murat C. Mungan, Reverse Payments, Perverse Incentives, 27 Harv J L & Tech 1, 44 (2013); Stephen Yelderman, Coordination-Focused Patent Policy, 96 BU L Rev 1565, 1592–93 & n 129 (2016); Federal Trade Commission, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy ch 5 at 1–2 (Oct 2003), archived at http://perma.cc/X8E7-UWU3.
- 14. To put this contribution in context, this Article takes substantive patent law as it stands and explores the question of how the patent system should err in the resolution of individual cases in which limited information makes the underlying facts uncertain. This should be distinguished from prior work evaluating how close questions of statutory construction in patent law should be decided, see, for example, Joseph Scott Miller, Error Costs & IP Law, 2014 U Ill L Rev 175, 180–82, or whether it is better to correct mistakes earlier or later in a patent’s life, see, for example, Lemley, 95 Nw U L Rev at 1496–97 (cited in note 6).
- 15. Although this effect has never been explored in detail, several prior scholars have suggested that undeserved patents can reduce incentives to invent. See note 13. By bringing this generalized intuition down to specifics, the present analysis reveals not only the power of this effect but also its limits.