WHY PATENTS ARE NOT WHAT THEY USED TO BE (Part 3)
The America Invents Act (AIA) of 2011 fundamentally altered the U.S. patent landscape, introducing new mechanisms for challenging patent validity outside of traditional federal court litigation. While proponents argued these reforms would improve patent quality and reduce frivolous litigation, critics contend the AIA has created serious constitutional concerns and undermined the innovation economy.
Background: The Patent System Before and After the AIA
Historical Foundation
For over two centuries, the U.S. patent system operated on well-established principles. Patents were treated as presumptively valid property rights that could only be invalidated through Article III federal courts, where defendants challenging patent validity faced a “clear and convincing evidence” standard. This system provided inventors with relatively stable intellectual property rights that could attract investment and support commercialization efforts.
The AIA’s Key Changes
The AIA introduced several significant modifications:
- Transition to First-to-File System: Aligned the U.S. with international practice
- Creation of the Patent Trial and Appeal Board (PTAB): Established new administrative review processes
- New Challenge Mechanisms: Introduced IPR, Post Grant Review (PGR), and Covered Business Method Review (CBM)
While the first-to-file change received significant attention during legislative debates, the creation of PTAB procedures has proven more consequential for patent holders.
When a patent owner sues an infringer for patent infringement, the infringer almost automatically files an IPR to challenge the patent in the U.S. Patent and Trademark Office. While patents were traditionally presumed to be valid, this new procedure allows an issued patent to be challenged in the patent office, typically by submitting some newly found piece of prior art that the examiner hadn’t considered. The cost of such a procedure is typically $200,000-350,000. This is a much lower cost to the infringer than proceeding in the patent infringement suit. A patent infringement suit typically costs 2.5 million or so through trial. With this lower cost option that may potentially invalidate the patent, the infringer will inevitably roll the dice with the IPR procedure. The judge in the infringement suit that the patent owner started will stay (delay) the infringement proceedings pending a decision on the IPR. The judge is happy to temporarily avoid the work and, if the patent is found to be invalid, doesn’t need to worry about the patent trial. The patent owner has to pay a similar 200,000-350,000 on this IPR procedure that the infringer initiated.
If the infringer loses in the IPR procedure, guess what? They can file another one. And another one. There is no limit. When comparing the 2.5 million cost of a trial to the 200,000-350,000 cost of an IPR, it is an almost sure thing that the infringer will will an IPR.
So to have real leverage, a patent holder really needs a portfolio of patents, hopefully multiple of which are infringed. If the patent holder has 10 potentially infringed patents, the math changes. 350,000 x 10 or the trial cost of 3.5 million, maybe they actually go to trial or seek a settlement.
One could say that the creation of the IPR process has substantially reduced the value of utility patents.
Economic Impact on Innovation and Investment
Decline in Patent Value and Investment
The post-AIA patent environment has witnessed a marked deterioration in patent asset values. Several factors contribute to this decline:
Reduced Investment Confidence: Early-stage technology companies traditionally relied on patents to attract venture capital and other forms of investment. Patents served as both protection against infringement and collateral for investment recovery. The increased ease of patent invalidation through PTAB procedures has made patents appear more as liabilities than assets to potential investors.
Startup Formation Impact: The uncertainty surrounding patent validity has created barriers to new company formation in technology sectors where patents traditionally provided competitive advantages and investor confidence.
The Patent Troll Narrative
The legislative push for the AIA relied heavily on concerns about “patent trolls” – entities that acquire patents primarily for litigation rather than commercialization. However, examination of the evidence base for this concern reveals:
- Limited documented cases of genuinely abusive patent enforcement
- Investigation by the New York Attorney General found only six examples of problematic demand letters in a nationwide search
- The focus on patent trolls may have obscured the broader impact on legitimate inventors and technology companies
- Universities are non-practicing entities, are they therefore “patent trolls”?
Impact on Independent Inventors
Individual inventors and small entities face particular challenges under the post-AIA system:
Higher Costs and Risks: Defending patents through PTAB proceedings can cost hundreds of thousands of dollars, often exceeding the financial capacity of independent inventors.
Reduced Licensing Opportunities: The decreased stability of patent rights has made licensing agreements less attractive to potential partners, limiting inventors’ ability to monetize their innovations.
Deterrent Effect: The prospect of costly and uncertain patent challenges may discourage individuals from pursuing patents in the first place, potentially reducing overall innovation activity.
Constitutional Analysis of IPR Procedures
Takings Clause Analysis
The Fifth Amendment also prohibits government taking of private property for public use without just compensation. IPR procedures potentially violate this clause in several ways:
Property Status of Patents: Long-standing Supreme Court precedent establishes patents as private property rights. The Court in Oil States Energy Services v. Greene’s Energy Group deliberately limited its holding to Article III and Seventh Amendment issues, leaving open questions about Takings Clause implications.
Taking Without Compensation: When IPRs invalidate patents, the government effectively transfers the patent holder’s exclusive rights to the public without providing any compensation. This differs from traditional property takings where owners receive payment.
Federal Circuit Interpretation
The Federal Circuit has attempted to distinguish between valid and invalid patents for Takings Clause purposes, arguing that invalidating patents that “should never have been granted” does not constitute a taking. However, this reasoning faces several challenges:
- Presumption of Invalidity: This approach assumes IPR outcomes are always correct, ignoring the possibility of administrative error
- Inconsistency with Precedent: Supreme Court decisions suggest patents convey property rights upon issuance, regardless of later validity determinations
- Value Recognition: Even improperly issued patents may have legitimate economic value that merits constitutional protection
Broader Policy Implications
Innovation Economy Effects
The changes wrought by the AIA extend beyond individual patent holders to affect the broader innovation economy:
Job Creation Impact: Technology startups, particularly those dependent on patent protection, historically generate significant job growth. Reduced patent reliability may constrain new company formation and expansion.
International Competitiveness: Other major economies maintain stronger patent protection systems, potentially creating competitive disadvantages for U.S. inventors and technology companies.
Investment Capital Flow: Venture capital and other forms of technology investment may shift away from patent-dependent sectors or toward jurisdictions with stronger patent protection.
Relationship to Other Patent Law Developments
The AIA’s impact must be considered alongside other developments in patent law:
eBay v. MercExchange: This 2006 Supreme Court decision made injunctive relief less automatic in patent cases, reducing the practical value of patent rights even before the AIA.
Patent Eligibility Restrictions: Judicial decisions limiting patent eligibility under 35 U.S.C. § 101 have further constrained patent protection, particularly in software and business method areas.
Combined Effect: These various developments have created a cumulative impact on patent value that extends beyond any single reform.
Conclusion
The America Invents Act was a fundamental shift in U.S. patent policy with far-reaching implications for innovation, investment, and constitutional law. While the legislation aimed to improve patent quality and reduce litigation costs, evidence suggests it has created significant challenges for inventors, particularly smaller entities and independent innovators.
This is Part 3 of 4 part article. Read Part 1, Part 2, or Part 4.