Shifting patent power: the Supreme Court takes up "patent reform" where Congress fails to act.

During its long history, (1) patent protection in the United States has been highly cyclical. Periods of weak patent protection have followed--and been followed by--periods of strong patents with surprising repetition. While the dynamics are not entirely clear, economic developments and related changes in popular, business, and academic thinking seem to have driven most of these swings. (2)

The last quarter century saw a rapid increase in the strength of US patents and in the numbers of patents being issued. This has given us high levels of patent protection for roughly 15 years and may have stimulated US innovation. With related changes in technology and commerce, however, it has also exposed US producing companies to substantially increased risks from claims of patent infringement. Critics also say that the escalating numbers of patents often impede, rather than stimulate, innovation. (3)

Now there are signs that the high tide of patent protection has passed and at least a modest downturn has begun. While "patent reform" proposals have stalled on Capitol Hill, the US Supreme Court has already made one important class of patent lawsuits substantially less threatening to US manufacturers and technology companies. Judging by the Court's recent actions, many of the Justices have broader interests: limiting or reversing some of the excesses many observers see in the last 20 years of ever-more, and ever-stronger, patents.

A new "weak patents" period in the US does not seem imminent. There is a good chance, however, that developments in the next 12 months will further reduce the tactical advantages many patent holders have enjoyed, reduce the risks producers face from important types of patent infringement claims, and continue somewhat to reduce the monetary value of some categories of patents.

Recent Evolution: Weak Patents Grow Strong

After prior cycles of strength and weakness, patent protection in the US was notoriously weak from about 1930 through the 1970s. Strong antitrust sentiments and distrust of patent monopolies led some courts to outright hostility toward patents and produced numerous rulings invalidating patents on a variety of grounds. (4) Apart from actual hostility, large differences in patent law among the federal judicial circuits often allowed infringers to select favorable fora in which to challenge patents they thought they might be infringing. This reduced the amount of protection actually available to patent holders to substantially less than seemed to be available legally.

By the 1980s, the changing commercial and economic environment had made patents seem less dangerous to free markets and more useful to the US economy. The post-war dominance of US producers over their foreign counterparts had disappeared in most industries, and antitrust sentiments faded as foreign producers confronted US producers with vigorous and sometimes fatal price competition in industry after industry. Indeed, foreign producers often came to dominate industries that had been created by relatively recent US inventions. Economists and political leaders in the US worried that the US was lagging behind other countries in both competitiveness and innovation. (5) Moreover, at the time, a large majority of US patents were still owned by US individuals or companies. (6) Accordingly, stronger patents seemed likely both to stimulate US innovation and to protect US enterprises against foreign competition.

Beginning about 1980, Congress made a number of pro-patent changes to the US patent laws and the Judicial Code. (7) Among the more important changes was the creation of the US Court of Appeals for the Federal Circuit and the assignment there of nearly all appeals from patent cases regardless of where in the US those cases were filed and tried. The Federal Circuit's main express mandate was to eliminate the inconsistencies that had plagued patent law for decades. An additional mandate was largely implicit but widely understood, namely to strengthen US patent protection in hopes of stimulating US innovation and the US economy.

True to its mandates, the Federal Circuit issued numerous rulings clarifying and bringing consistency to patent law but also strengthening patents in a variety of ways. These have included narrowing some of the main defenses that can be asserted against patent infringement claims, strengthening the statutory presumptions of validity and enforceability, broadening the types of inventions that are eligible for patenting, increasing the availability of remedies for patent infringement, and limiting the circumstances when declaratory judgment actions can be instituted to challenge outstanding patents. (8)

Technical and commercial developments further strengthened the hands of patent holders--and correspondingly increased the patent-based risks to a wide variety of US industrial and technology companies. Technology raced ahead, creating huge numbers of new patentable methods, devices, and improvements. (9) Concurrently, Japanese companies, and later some US companies, began to seek US patents for as many of their discoveries and improvements as possible, both as "defensive patenting" and, in some cases, to create monetizeable portfolios of intellectual property. (10) In addition, products in technology-based industries grew more complex. In many fields, new products now typically include dozens of separate parts or processes that are covered by existing, unexpired patents. (11) These developments multiplied the likelihood that infringement of some existing patent can plausibly be alleged as to large percentages of newly introduced products.

Administrative factors also helped boost the numbers of new patents being issued and the resulting dangers to US producers. These include: (i) the statutory requirement that the US Patent & Trademark Office (PTO) allow the issuance of each requested patent unless the examiner can find and articulate sufficient prior art--or other good reasons--why no patent can issue, (12) (ii) the lenient standards for non-obviousness the Federal Circuit has adopted for assessments of patentability, (13) and (iii) practical problems the PTO has faced in applying even those lenient standards effectively. (14) The result has been issuance of large numbers of patents, with many having dubious validity but all benefiting from the Federal Circuit's strong-patents rulings.

By the mid-1990s, these developments had altered the balance of power--and the economics--of patent enforcement. Litigation had become more dangerous for accused infringers, and patent-holder plaintiffs enjoyed improved prospects for substantial recoveries via settlements or judgments. The new economics spawned a whole new industry: acquisition and enforcement of existing US patents by entities that had no involvement in either the underlying inventions or the commercialization or production of the resulting products. Such entities are often derisively referred to as "patent trolls." A number of these entities attracted substantial amounts of venture capital funding, and, in recent years, they have carried out some of the most systematic and troublesome patent-based attacks on US industrial companies. (15)

One factor, in particular, made patent infringement suits dangerous for US producers and contributed to the trolls' success: the near certainty that a …