How the U.S. Patent System Fails Small Businesses

When I practiced patent prosecution, I felt conflicted about doing work for smaller clients, such as small businesses and individual inventors.¹ On one hand, I was grateful for their business. But on the other, I felt that I was not providing a service that would benefit them.

A few months ago, I left private practice. And I’m finally at liberty to speak candidly about my experience with the U.S. patent system and how it works against small entities.

Fundamentally, state-backed protection of intellectual property serves an important function in encouraging innovation by protecting ROI. A U.S. patent grants the holder a right to exclude others from practicing—i.e., making, using, selling, or importing—the patented invention within the country.

But the inefficiencies, lack of rigor, and hefty fees in the U.S. patent system cut against the value of patents. For small businesses with limited resources, these obstacles hit especially hard.

For example, while the cost of filing a patent application is fairly predictable, it is almost impossible to forecast the total cost of obtaining a patent. The reason is that even the most seasoned lawyers cannot foresee how many rounds of rejections an application will face before it is allowed.² The number of rejections depends on a variety of factors, including the patent examiner assigned to the application. The patent examiner is not a lawyer, but a person with a degree in science. Depth of technical knowledge varies wildly among examiners. Their ability to understand the invention may determine how they “examine” it.³ For example, an examiner’s understanding of an invention may determine what search terms and databases they use to search for prior art—e.g., earlier-filed applications, publications, existing technology, etc.—and what prior art they consider relevant.⁴ Law surrounding “subject matter eligibility” is an additional source of uncertainty in estimating the number of rejection cycles an application will endure. Subject matter eligibility, which finds statutory basis in 35 U.S.C. § 101, is the requirement that an invention be technological, rather than a law of nature, natural phenomena, or abstract idea.⁵ But, as noted by Judge Plager of the Federal Circuit, “a search for a definition of ‘abstract ideas’ in the cases on § 101 from the Supreme Court, as well as from this court, reveals that there is no single, succinct, usable definition anywhere available.”⁶ Rather, the abstract idea inquiry has been applied by the Federal Circuit many different ways.

The United States Patent and Trademark Office (USPTO) has published guidance defining three classes of abstract ideas (mental processes, mathematical concepts, and methods of organizing human activity).⁷ But the guidance is non-binding and has not been adopted by the courts. Thus, examiners are left to rely on their own interpretations of what is abstract. Subject to the examiners’ whims, satisfaction of the eligibility requirement is a black box.

The number of rejections also depends on the breadth of the claims. Broader claims are likely to run into more prior art. But since the claims delineate what the applicant has invented (what they own), it is not prudent to file an application with narrow claims merely for the purpose of getting a faster allowance.

After receiving a rejection, which includes citations to prior art, the applicant may amend the claims. For example, the applicant may narrow the claims to be distinct from the prior art. But scoping claims to maximize breadth while minimizing the number of rejections is largely guesswork.

For these reasons, a potential applicant enters the process not knowing how much it will cost or how long it will take. Without a good estimate, a small entity cannot accurately assess whether filing an application is worthwhile. Bigger entities, on the other hand, are better able to absorb the costs with little effect on their bottom line.

Sometimes, large corporations even file applications with little hope of obtaining a patent in order to further adjacent goals. For example, corporations may file applications to alert competitors, clear the way for future products, bulk up IP portfolios, or stroke the egos of employee inventors. For them, abandoning an application represents a small cost that is worth the adjacent benefits it provides.

Often these “junk” applications lack sufficient technical detail to even describe an invention. Although “enablement” is a requirement for patentability, it is not a requirement for prior art.⁸ So these superficial applications still present obstacles to earnest ones.

Furthermore, even if a patent is granted, there is no guarantee that it won’t later be invalidated. Invalidation occurs when another party, such as a competitor or a counterparty, files a challenge to the patent in court or with the USPTO’s Patent Trial and Appeals Board (PTAB).⁹ The challenge may allege that the patent fails to meet a requirement of patentability, such as novelty, non-obviousness, or subject matter eligibility.

A challenge for lack of novelty or non-obviousness may be based on a finding of relevant prior art. Novelty/non-obviousness challenges highlight the importance of the examiner performing a thorough search during prosecution. While applicants always hope for speedy allowances, if the examination is not diligent, the patent may be moot.

Challenges based on subject matter eligibility are made more likely by the lack of a clear test for satisfaction of the requirement. A keen challenger could leverage the ambiguity to their advantage. It’s also possible that the courts will adopt a consistent definition of “abstract idea.” Even if an application is deemed to meet the current standards for subject matter eligibility and passes to allowance, if the law later shifts, the patent can be invalidated.

Invalidation is not uncommon. Only 4 percent of PTAB decisions uphold all challenged claims as valid.¹⁰ Approximately one-third of patents that are litigated to final judgment are found invalid.¹¹ Invalidation renders the applicant’s time, money, and effort in filing the application futile. Moreover, if the applicant relied on the patent in forming their business strategy, the invalidation may leave them in dire straits.

Even if a patent survives a validity challenge, the cost of defending against the challenge can be significant. Expenses may include litigation costs, attorney fees, and filing fees.

Even an unchallenged patent has questionable utility. U.S. patents only grant holders rights in the United States. An applicant must file foreign applications if they want any rights abroad. Though a treaty known as the Paris Convention streamlines the process of applying in member countries, each application carries additional costs and delays.¹² Enforcing a patent in the United States is not simple or cheap. Patent infringement lawsuits are notoriously expensive. The cost is largely due to their length. The median time-to-trial for patent disputes is two and a half years.¹³ Many cases settle before reaching trial, but not before racking up attorney, expert, discovery, and validity challenge fees.

The costs of obtaining, defending, and enforcing a patent can cast doubt on the notion that the patent will provide a competitive edge. Inventors may do better by keeping their innovation a trade secret. Where a patent grants rights to an invention in exchange for public disclosure of the invention, a trade secret derives its value from not being generally known. Unlike patents, trade secrets do not require maintenance fees, do not involve an application process, and do not expire. U.S. law criminalizes theft of a trade secret and establishes a civil cause of action for misappropriation of a trade secret.¹⁴ But if secrecy is not practicable, such as if an invention is to be sold as a product that can be reverse-engineered or the invention is to be practiced publicly, inventors are left with few other options. The only way for a small inventor to monetize their innovation may be to sell the idea to a corporation that has deeper pockets.

These inequities highlight the need for change at the system level. I believe the USPTO should adopt more rigorous and standardized examination practices, and the courts should clearly identify and maintain stable patentability requirements.

Under current policies, small businesses and individual inventors stand no chance against large corporations who have the resources to file applications indiscriminately, fund prolonged prosecution, and absorb costs of litigation. This imbalance is antithetical to the American ethos of entrepreneurism. And without reform, innovation at the low-capitalization level will continue to be severely limited.

Originally published by the Washington State Bar News.