An Overview of the U.S. Patent System

Thursday, 31 July 2014 01:07 by The Lunatic

(Note: This was a term paper I wrote for an MBA class in 2012. I recently ran across it in my files and thought it would be a good addition to my blog. Enjoy!)

An Overview of the U.S. Patent System
David M. H. Workman


A Patent is a form of legal protection for an invention, allowing the patent holder to have exclusive rights to make, use, or sell the invention for a specific period of time (typically either 14 or 20 years in the U.S., depending on the type of patent).

To secure a patent, a Patent Application is submitted to the U.S. Patent and Trademark Office (USPTO); the application consists of two major elements: a description of the invention, and certain claims (which define the scope of protections desired under the patent application). The USPTO may grant the patent for the invention, but allow or disallow each of the claims individually. “Broad” claims mean that the applicant is asking for the invention to be protected in a wide range of uses, and are more likely to be rejected (and if allowed, are more likely to be challenged by competitors). “Narrow” claims mean that the invention has very focused and well defined commercial applications, which are less likely to be challenged.

For a patent application to be approved, it must meet a certain bar for (1) Novelty, (2) Non-Obviousness, and (3) either Utility, Distinctiveness, or Ornamentality (depending on whether it is a “Utility”, “Plant”, or “Design” patent, respectively). The USPTO reviews the patent application to ensure that the patent, and each of the claims, meets the bar for each criterion.

During the application process, the patent may be rejected if “prior art” (i.e. any published diagrams or descriptions which show that the invention is not original) is found by the USPTO, or if any aspect of the invention was publicly disclosed by the inventor before the filing date. Even after the patent has been granted, others may challenge the validity of the patent (or any of the individual claims) if prior art is presented which is proven to have been publicly available before the application date.

Patents cover an amazingly diverse range of ideas – from describing the optimal radius of the bend in a wire paper clip, to what is arguably the most important invention of our age: the development of the silicon bipolar transistor (Shockley, Bardeen, and Brattain, 1947).

Ownership, Transfer of Ownership, and Licensing of Patents

Patents are classified as “personal property” which may be sold, mortgaged, and even passed to the heirs of a deceased inventor. Transfer of ownership is accomplished by an “assignment” to another party, which gives the new owner all the rights and protections as if they had applied for the patent themselves; patent holders can also retain ownership but license certain “rights” to the patent on either an exclusive or non-exclusive basis.

Unlike the process in many other countries, patents in the U.S. are only granted to the individual inventors, not to corporate entities. However, many U.S. employment agreements stipulate that the company will own any inventions made by an employee in the normal course of work; because of this, the initial patent application is often filed with an automatic assignment to the employer. As such, there is little functional difference between the U.S. and other countries that allow a corporation to apply for a patent directly.

Once a patent is issued, assignment is a simple process of transferring title from one owner to another. In addition to granting patents, the USPTO also acts as a title registry for recording patent assignments.

Patent licensing, on the other hand, does not require registration and can take many forms. The “Licensor” (owner) of a patent will grant certain rights to the “Licensee” in exchange for payment or other consideration. Payment structures range from lump sum payments to “per unit” arrangements (where the licensee pays a royalty based on the number of units sold). Instead of cash payments, patents are frequently licensed in trade with other patents (which are known as “cross-licensing agreements”).

An exclusive license agreement means that the licensor and licensee are the only two parties that would be allowed to capitalize on the invention (i.e. the licensor promises not to license the patent to other parties). A non-exclusive agreement means that the patent holder can license the technology to many competing companies at once. Some agreements may also stipulate that the licensee can “sub-license” the patent to others.

Patents may be “pooled” together and licensed in a single agreement. To manufacture a Blu-Ray disc player, for example, would normally require licensing over 100 technologies from 27 different companies. But this can be easily accomplished with a single license agreement via the “One-Blue” patent pool, which has a fixed $9.00 per unit fee for all patents needed to manufacture a Blu-Ray player.

While patent license agreements range from very simple to very complex, the main idea is that the patent holder promises not to sue the other party for using the invention. As such, disagreements that arise after a patent has been licensed typically fall into the realm of “breach of contract” rather than “patent violation”.

Defensive Publication

Oftentimes, an inventor wants to immediately put their invention into the public domain – either because of altruistic ideals or because it would not be economical to defend the patent in the prevailing legal environment. Defensive Publication is a strategy whereby an inventor publicizes all aspects of the invention in a public forum. With widespread availability of “prior art”, this strategy ensures that no one else will be able to patent the idea.

Pharmaceutical Patents

The majority of inventions can be commercialized fairly quickly, and the additional investment required to commercialize a product, over and above routine product development costs, is typically relatively small. Products in the Biotechnology and Pharmaceutical industry are the primary exception, as FDA approval is required to ensure the safety and efficacy of these products before they can be sold to the public. FDA approval for a new drug requires a substantial amount of pre-clinical research and then three phases of clinical trials, which in total costs between $750 million and one billion dollars – and can take upwards of ten years.

Since the patent is only valid for 20 years from the date of filing, the ten years it takes for research and clinical trials means that the company needs to recoup their investment in the remaining ten years, which results in very expensive drugs for the relatively short period that they are “on patent”.

Critics of current patent law have argued that for pharmaceutical patents, the twenty year term should not start until regulatory approval is granted. This could substantially lower the cost of new drugs – but with the side effect that they would still cost more than generics for a longer period of time.

Many people take the opposing view, saying that pharmaceutical patents make drugs more expensive overall, and they should not be patentable. However, there is no doubt that without patents or other forms of legal protection on the large investment required to gain FDA approval, the medicines in question would never have gotten developed in the first place.

Other patent issues in the current business environment

The primary intention of a patent is to “allow the patent holder to have exclusive rights to make, use, or sell the invention for a specific period of time”. However, patent laws are written so that in reality the patent owner has “the right to exclude others from making, using, or selling the invention”.

While the difference in wording is subtle, the impact on the business environment is tremendous. From a competitive standpoint, not caring about the “exclusive rights to use” an invention but having the right to “exclude others from utilizing” said invention has given rise to a business entity commonly referred to as a “patent pirate”.

A patent pirate (or patent troll) is a person or company who acquires patents with no intention to manufacture or market the patented invention (a “non-operating entity” without concern for their rights to utilize the patent); their only wish is to “exclude others” who may be infringing on the patent. This exclusion allows them to negotiate settlements for amounts that are far out of line of what the patent would normally be licensed for.

In cases of patent infringement, one remedy available to a patent holder is an injunction (a court order requiring the infringer to stop manufacturing, using, or selling products utilizing the patented invention). Under the threat of an injunction, a patent pirate can extort large amounts of money out of the infringing company no matter how incidental the violation might be.

One highly publicized case of patent piracy was NTP, Inc. vs. Research In Motion, Ltd (United States District Court for the Eastern District of Virginia, 2000). NTP had acquired patents from a bankrupt company, Telefind Corp, and subsequently sued Research in Motion (makers of the popular Blackberry mobile phone) for patent infringement. Although industry experts estimated that the value of the patents in question – even under extremely unfavorable licensing terms – was no more than $25 million, NTP used the threat of injunction (which would have shut down RIM’s entire global service for the Blackberry) to secure a judgment of $612.5 million (including interest, penalties, and punitive damages).

Another example was InterTrust vs. Microsoft (U.S. District Court for the Northern District of California, 2001), regarding patents for Digital Rights Management (DRM) software. The infringement was considered to be incidental by patent analysts, but InterTrust rejected all reasonable licensing offers and leveraged the threat of injunction against the Windows Operating System, Microsoft Office, and the Windows Media Player as a bargaining tool. In 2004 the two parties reached an out of court settlement, whereby Microsoft paid $440 Million for non-exclusive rights to a subset of the InterTrust patents.

When questioned about the seemingly outrageous amount, Brad Smith (senior vice president and general counsel of Microsoft) was quoted as saying “We still maintain there was no infringement. The agreement reflects our desire to avoid a preliminary injunction, during which time shipments of products which make up 85% of our revenue would be disrupted.”

Other companies that have fallen victim to so-called patent pirates include Apple, Motorola, and Google.

Many critics of current patent law promote the idea that a “non-operating entity” (a company that has no intention of marketing or commercializing products based on a patented invention) should only receive reasonable license fees, as they have no competitive products in the marketplace and therefor have no profits which are “at risk” of being damaged. Alternate proposals include eliminating damages if the violation started before the current owner acquired the patent (meaning that the prior owner didn’t care about the infringement, so implied rights are “grandfathered in”).

Should software be patentable?

The InterTrust vs. Microsoft case brings up a larger issue of software patents. When it comes to patents, software has its own unique set of issues.

Many USPTO applications for software patents are considered to be “trivial” routines that in and of themselves are just solutions to a problem – any competent software engineer could solve the problem if assigned to work on a project that required a solution to that particular problem.

Because of this, companies that develop competing products in parallel will oftentimes develop different solution to the same problem. “Company A” might think it’s just a few lines of code not worthy of a second thought while “Company B” might decide to patent their implementation. The line between “obviousness” and “non-obviousness” gets very blurry. This results in frequent cases of “incidental violation”, since it is impossible for a company to check every line of code to see if it might be infringing on someone else’s patent. In many of these cases, it’s not the actual invention that gets fought in court, but how broadly the claims are written and how they might apply to an independently developed solution to the same problem.

In addition, patents are occasionally granted for software routines that really should be classified as “mathematical algorithms”. Such routines are supposed to be exempt from patent protection as the general rule is that algorithms actually exist in nature and are only “discovered” rather than “invented.”

A very strong argument has been made that software is only a set of instructions for a general purpose microprocessor, which is the device that is actually doing the work. This argument says that the only truly patentable software is for routines that the modern day processor is incapable of doing using its pre-programmed instruction set. To make the software work, a new hardware device would be required to support the new instructions – and it’s the hardware that is the patentable item.

Another issue with software patents is that the examination process is too slow. The design cycle of modern software is very short, and oftentimes the product is obsolete before the patent is even issued.

One proposed solution to many of these problems would be to utilize “trade secrets” and “copyrights” rather than patents for protection of commercial software. This idea, which has many vocal supporters, means that the lines of code themselves would be copyrighted. Using someone else’s code would be an infringement on their copyright (or a violation of trade secrets in the case of an employee taking code with them to a new company), but a completely different software implementation of the same idea would be allowed.


The entire U.S. legal system is based on a philosophy of adaptability to change. Changes in society, technology, and our economy have been the impetus for updates to large sections of our laws – especially as they relate to business (development of the Uniform Commercial Code, for example).

There is no doubt that patents have had a tremendously positive effect on our society; the ability to protect inventions via patents has been a major component of our economic growth over the past century, as it encourages inventors to put forth the effort and ingenuity to design products that can become successful in the marketplace.

However, there is growing evidence that some portions of the legal underpinning of our patent system are in need of shoring up in order to continue to be effective in the modern business world.

In addition, this modern business world is global but patents are territorial by the nature of their legal protections. Applying for patents in every region is problematic and an invention might pass the bar for “uniqueness” in one country, but not in another. Many countries have insufficient legal protections, and lack enforcement of the laws they do have in place. The World Trade Organization (WTO) has made strides in this area, but more work is required.

In order to adapt to an increasingly global and interconnected environment, the USPTO will need to address these issues and continue to work with other countries and the WTO to provide a global environment that continues to promote investment in new technologies. History has shown that innovation and invention provides the economic growth needed for an economy to thrive, and protection of these inventions requires vigilance and vigorous enforcement of the laws.


  • Smith and Robersons Business Law, 15th Edition – pages 827 – 829
  • One-Blue patent pool,
  • Microsoft Press Pass, Statements by Brad Smith
  • US Patent Trademark Office glossary of Patent Terms,
  • article on Patent Assignments,
  • General Patent Corporation article on Patent Licensing,
  • Understanding How Damages Are Determined in Patent Litigation - Arnold B. Silverman, partner at Eckert Seamans Cherin & Mellott,
  • Patents, Copyright, and Software - Ben Klemens, Brookings Institution Press, 2005
  • Wikipedia articles on: Patent, Patentability, Assignment_(law), Claim_(patent), Patent_troll, criticism_of_Patents, Software_patent_debate

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