When Congress 'Reins In' Lawyers, Lawyers Always Win

There are still a handful of truths about America about which nearly everyone agrees. One is the centrality of innovation for future prosperity.

This truth stretches back to the beginning of the nation. As every aspiring patent lawyer learns in first year, the Founding Fathers enshrined into the Constitution itself-not just in an amendment-the protection of patents in order to ensure "the progress of science and the useful arts."

Now comes the 114th Congress with legislation (H.R. 9, the "Innovation Act") to radically restructure the long-standing rules-of-the-game in the patent system because of an ostensible crisis. The claimed crisis is, in a phrase, lawyers gone wild. We are told that we are now in a new era of patent wars with an explosive growth in patent litigation that threatens innovation everywhere.

The idea of reducing the wanton use or cost of litigation is seductive. But one feels compelled to note that any time the Congress, where 45 percent of its members have a law degree, seeks to restrain its favored profession from the enthusiastic pursuit of litigation, the effect in the past has, on average, been equal and opposite to that intended.

Because the stakes are so high for so many, there is already a dense thicket of opinion published on the proposed reforms from legal scholars and patent experts to pundits, Congressman, entrepreneurs, and venture capitalists. But you only need to know two things to calibrate everything that's being written and debated on this matter.

First, is patent litigation more common now, specious or otherwise (since one person's specious is another's survival)? And second, as with any fight, how do the players line up on each side?

Start with the players: aligned with the proposition that patent reform is urgently needed, we find the likes of such modern mega corporations as Intel, Google, Apple, Oracle and Cisco, companies that are collectively valued at nearly $2 trillion. Such businesses have deep legal pockets and political clout. On the other side, the just-leave-it-alone crowd, we find venture capitalists who by definition fund innovative start-ups, small businesses and universities.

The creation of new businesses has been the hallmark of the American story. Over the past few decades venture capital has created more Horatio Algers than the Founders ever likely imagined. And it is indisputable that the diversity and talent within universities provides the seed corn of technological revolutions. In terms of political muscle, this does not look like a fair fight.

But what about the core claim that patent litigation has run amok leading to innovation-killing clogging of the courts?

It is true that there is a lot more patent litigation now compared to 1990, the beginning of the modern Age of Irrational Exuberance and the ascendance of Silicon Valley. The number of annual patent cases has risen from about 1,000 to nearly 5,000. But, over the same period the number of patents granted has risen too, from about 100,000 to nearly 300,000 per year. There is just a whole lot more innovating going on. What's not to like about that?

It is the frequency of patent litigation that is the critical indicator of whether or not there is something foundationally different about the state of play today. When considering the size of the economy and the number of patents issued, the historic data show that patent litigation is no more frequent today than in previous eras of American jurisprudence. And as a class, patent litigation comprises less than 2 percent of all Federal civil suits. Nothing here raises patent suits to crisis levels.

Nonetheless many claim "there be trolls," patent trolls specifically, those ill-defined entities that create or buy patents not to build something but to ‘force' other businesses to pay a toll for using the ideas covered by a patent. Set aside whether it is illegal or immoral (and it's not) for the owner of intellectual property to charge rent for others to use that property, the real weakness with the troll bugaboo is found in the above noted data. Even if trolls were a scourge, they haven't yet managed to change the overall national frequency of patent litigation, which suggests that, at most, the trolls are grabbing a bigger share of the pie but not making the pie bigger. Hence no endemic crisis that rises to the level of a Congressional fire drill.

This is not to say that there are not good arguments for improvements to various aspects of the patent system, as has been done many times by Congress over the centuries. But the evidence is weak if not specious that we should rush into fundamental re-structuring.

There are few things more basic to the identity and success of the "American experiment" as the protection of property rights, both intellectual and physical. At its best, this system allows individuals and small businesses an equal footing with mega-corporations. Such protections have led to the flourishing of entrepreneurs and small companies across every domain. Small businesses, it bears noting, have been responsible for over 60 percent of all net new U.S. jobs created since 1992.

Abraham Lincoln once said: "The Patent System added the fuel of interest to the fire of genius." He doubtless meant self-interest, the same profit motive that, according to Adam Smith (and many scholars since), distinguishes the success of a market economy from socialist and planned economies. Edmund Phelps, who won the 2013 Nobel in economics, recently said: "We see the distinctive stuff that modern economies are made of: It is ideas. The visible ‘goods and services' of the national income statistics are mostly embodiments of past ideas."

If there is a problem, it is not that patent litigation is more frequent but that there are more total lawsuits precisely because of economic growth and the pace of innovation. A problem of this character would suggest that the Congress consider focusing first on the court system, not the patent system.

If the courts can't handle the bigger volume in our booming innovation ecosystem, then Congress should create more patent courts and judges. There is an instructive precedent. It was in 1982 that Congress created a new Court of Appeals for the Federal Circuit to help remedy the messy situation that had evolved in the regional circuit courts dealing with patents. That was a good model. This may be one of those rare times that both Democrats and Republicans can agree to expand a government service.