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Everything you need to know about patents

What’s a patent?

A patent is a document that gives its owner a legal monopoly over an invention. You can get patent protection for a new cancer drug, a better method for manufacturing electric motors, or a better mousetrap.

The idea behind patents is to create a financial incentive to promote innovation: patents ensure that the inventor of a new idea can get compensated for it, rather than seeing her idea immediately ripped off by copycats.

But in some industries, the patent system might actually be discouraging innovation. In the last decade, there has been a dramatic increase in patent litigation, creating legal costs for innovators who infringe patents by accident.

That has created political pressure for Congress and the courts to improve patent law. Congress passed patent legislation in 2011, and Congress considered, but did not pass, further legislation in 2013 and 2014. The Supreme Court has also been hearing an unusually large number of patent cases in recent years.

Patents cover inventions, including machines, processes, and compositions of matter. In contrast, copyrights cover creative works that are written or recorded. These include books, songs, movies, and computer software.

Getting a patent requires filing a complex and expensive application with the Patent and Trademark Office. Copyrights are granted automatically when a new work is created. Copyrights generally last for the life of the author plus 70 years — which can be more than a century. Patents generally expire 20 years from the date the application was first filed.

Both types of protection grant the owner the right to exclude anyone from using the covered work or invention without permission. But there’s an important difference. Copyright infringement only occurs if someone deliberately copies a protected work. In contrast, patent infringement can be accidental. Someone who independently discovers a patented idea can be sued even if she has never heard of the original invention.

Most types of innovation are eligible for either copyright or patent protection, but not both. An important exception is software. Software is eligible for copyright protection, and the patent office has also issued hundreds of thousands of software patents — though these patents have come under increasing scrutiny from the courts.

What’s a patent troll?

A patent troll, more formally known as a “non-practicing entity,” is a company that makes no useful products of its own but makes money by threatening lawsuits against other companies. Some trolls are startups who turn to patent litigation as a business strategy after their products fail. Others are companies that buy patents from third parties with the explicit goal of making money by threatening patent lawsuits.

Ordinarily, companies are reluctant to sue their competitors for patent infringement because they have to worry about the competitor responding in kind. But trolls don’t have any products of their own, so they don’t have to worry about countersuits. That allows trolls to pursue patent litigation more aggressively.

How big of a problem is patent litigation?

In one study, four scholars estimated the costs of patent infringement by looking at how the announcement of patent infringement lawsuits affected the stock prices of defendant firms whose stock was publicly traded. They found these costs rose from $3.6 billion in 1984 to $61 billion in 2009:

(Data from James Bessen, Peter Neuhäusler, John Turner, and Jonathan Williams)

Another study with the same lead author focused only on litigation brought by patent trolls. It used a more conservative methodology, surveying publicly-traded companies about the direct costs (such as legal fees and expenses, but not intangible costs like CEO distraction and delayed product launches) they faced due to litigation. The researchers found that patent trolls imposed $29 billion in direct litigation costs on publicly-traded defendant companies in 2011.

Why are the costs of patent litigation rising so fast?

Several factors have contributed to the trend:

  • The number of patents issued each year has quadrupled over the last 25 years. Critics have argued that this reflects lower standards at the Patent Office rather than a dramatic increase in innovation.
  • In the 1990s, the courts adopted a more permissive attitude toward two types of patents that are particularly susceptible to litigation: patents on software and business methods.
  • Changes to patent law have made patents easier to enforce and harder to invalidate.
  • Patent trolls have become more common and more aggressive.

Is the Patent Office to blame for the patent system’s problems?

The United States Patent and Trademark Office is responsible for granting new patents. Some people believe it has become too lax in examining patent applications. Critics argue the resulting proliferation of low-quality patents has given trolls ammunition to use against productive companies.

The Patent Office has around 8,000 examiners who processed more than 600,000 patents in 2013. Given the complexity of the examination process, that doesn’t leave much time for examiners to scrutinize applications and search for evidence to invalidate them. The Patent Office has also struggled to recruit examiners with the technical expertise to evaluate complex patent applications — especially in new and fast-changing fields like software — leading to a lot of dubious patents being granted.

But the Patent Office is ultimately enforcing rules established by Congress and the courts. In some cases, the Patent Office has rejected patents only to have those rejections overruled by courts. So ultimately, the other branches of government probably bear more responsibility for the state of the patent system than the USPTO does.

Are the courts to blame for the patent system’s problems?

The court most responsible for the state of patent law is the Federal Circuit Appeals Court. Congress created this court in 1982 and gave it jurisdiction over appeals in all patent courses. That’s a departure from the American tradition, in which most legal issues are handled by 12 generalist, geographically-based appeals courts. Congress wanted to bring more uniformity to patent law, and it was concerned that patent law was too complex for generalist courts to understand.

The Federal Circuit has brought uniformity and greater expertise to patent law just as Congress hoped. But the court has also proven to have a one-sided view of patent law. Federal Circuit judges spend a lot of time interacting with patent attorneys, and the court seems to have absorbed the patent bar’s pro-patent biases. Thanks to the Federal Circuit’s rulings, patents are available for a broader range of technologies, easier to get, and easier to enforce against alleged infringers than in the 1970s.

After giving the Federal Circuit free rein for two decades, the Supreme Court has become increasingly active on patent issues. The high court has overruled a number of patent-friendly decisions over the last decade. But because the Supreme Court only reviews a fraction of Federal Circuit rulings, the lower court still has outsized influence.

How does President Obama want to reform the patent system?

Recently, there has been growing concern about the problem of patent trolls. In the past, trolls had mainly focused on suing large technology companies. But in the last few years, grocery stores, restaurants, airlines, hotels, and many other types of businesses have faced threats of patent litigation over their use of technologies like scanners and wifi networking.

In June 2013, the Obama Administration responded to this outcry with a 7-point plan for patent reform. It would do several things, including:

  • Establish a "loser-pays" rule for patent litigation. The administration wants to make it easier for winning defendants to recover legal costs from patent plaintiffs.
  • Require patent owners to be more transparent. Patent trolls often create shell companies to hide the true owners of their patents. The White House wants to require plaintiffs to disclose everyone who has a financial stake in a patent.
  • Protect end users from patent lawsuits. A favored troll tactic is to threaten technology users rather than manufacturers, since customers are less likely to mount a strong defense. The Obama administration proposes allowing vendors to step into their customers’ shoes.
  • Expand a Patent Office program to invalidate low-quality patents. The so-called covered business method program allows defendants in cases involving financial patents to challenge them at the patent office. The White House wants to expand the program to cover more software patents.

What has Congress done to improve the patent system?

In 2011, Congress passed the America Invents Act, which made some significant changes to the patent system. That legislation changed the rules so that patents go to the first inventor to file a patent application — even if someone else discovered the invention first but filed his application later. The legislation also gave the Patent Office greater control over its fee revenues and created new processes for challenging patents that had already been granted.

However, the 2011 legislation did little to address the skyrocketing cost of patent litigation. For example, proposals to reduce the damages awarded to victorious patent plaintiffs were left on the cutting-room floor. As litigation continued to soar, Congress faced pressure to do more.

In December 2013, the House of Representatives passed the Innovation Act in a 325-91 vote. It included several key provisions that had been proposed by the White House earlier in the year. The bill would have made it easier for defendants to recover legal fees, required greater transparency in patent ownership, and allowed technology vendors to step into the shoes of their customers.

But the Senate has yet to pass companion legislation, and the odds of that happening this Congress are growing slim. Sen. Patrick Leahy (D-VT), the chairman of the Senate Judiciary Committee, was working on companion legislation in the Senate earlier this year, but he threw in the towel in May under pressure from pharmaceutical companies and trial lawyers.

What else could Congress be doing to bring down the costs of patent litigation?

The major provisions of the Innovation Act that passed the House of Representatives last year make changes to the patent litigation process that are designed to discourage lawsuits by trolls. But some patent reform advocates fault the legislation for failing to address a more fundamental issue: low-quality patents. In their view, as long as there are thousands of broad, vague patents in existence, people will figure out how to use them to make mischief.

There are several things Congress could do to address the problem. It could tighten up the rules for granting new patents or provide the Patent Office with more resources so that existing rules could be enforced more strictly. Congress could disallow categories of patents, such as those for software or business methods, that are prone to quality problems. And it could make it easier to challenge the validity of patents that have already been granted.

You didn't answer my question!

This is very much a work in progress. It will continue to be updated as events unfold, new research gets published, and fresh questions emerge.

So if you have additional questions or comments or quibbles or complaints, send a note to Timothy B. Lee:

Where can I read more about patents?

Innovation and Its Discontents is a decade old, but it remains an accessible introduction to the patent debate.

Patent Failure is a careful empirical analysis of the costs and benefits of the patent system. Its authors, Boston University scholars James Bessen and Michael Meurer, argue that litigation has made the patent system detrimental to innovation in many industries. More recently, the pair estimated that patent trolling costs defendants $29 billion, a figure that has been repeated by patent reform advocates, including the White House.

In the 2005 book Math You Can't Use, Brookings Institute scholar Ben Klemens makes the case against software patents.

In a 2012 paper, I argued that a major source of patent litigation is the difficulty firms have identifying patents they might infringe. That same year, in an article for Ars Technica, I argued that the Federal Circuit Appeals Court is responsible for a lot of the patent system's problems.

How have these cards changed?

This is a running list of substantive updates, corrections, and additions to this card stack.

  • May 21: I updated a card to reflect the death of patent reform in the Senate Judiciary Committee. The card has since been deleted.
  • May 24: A since-deleted card was updated to reflect recent developments in the Senate.
  • June 22: There were previously cards on why patent reform is coming up now and on the House patent bill. I added key points from these cards into card 8 and card 9 and deleted the other cards. I expanded a card to include mentions of Google, Microsoft, and IBM. And I updated another card to reflect the CLS v. Alice decision. (These last two cards were later moved to the software patent cardstack.)
  • July 1: Added a point about the covered business method program to card 8.
  • October 7: Did a general overhaul of the early cards, and also moved cards related to software patents to a new cardstack.

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