time, the number of patents issued in the United States has nearly tripled from 66,290 in 1980 to 184,172 in 2001. Although the surge in patenting has been widely distributed across technologies and industries, decisions by the U.S. Patent and Trademark Office and the courts have expanded patent rights into three important areas of technology in which previously the patentability of innovations was presumed dubious: genetics, software, and business methods.3 As in other areas of innovation, patents in these fields must meet standards of usefulness, novelty, and nonobviousness. A serious concern, however, in newly emerging areas of technology is that patent examiners may lack the expertise to assess the novelty or nonobviousness of inventions, leading to a large number of patents likely to be invalidated on closer scrutiny by the courts.

Although similar examples could be drawn from the early years of biotechnology and software patenting, economists in particular will appreciate that many recently granted patents on business methods fail to meet a commonsense test for novelty and nonobviousness. Presumably, this occurs because the relevant prior art is unfamiliar to patent examiners trained in science and engineering. Consider U.S. Patent No. 5,822,736, which claims as an invention the act of classifying products in terms of their price sensitivities and charging higher markups for products with low price sensitivity rather than a constant markup for all products. The prior art most relevant to judging the novelty of this application is neither documented in earlier patents nor found in the scientific and technical literature normally consulted by patent examiners. Instead, it is found in textbooks on imperfect competition, public utility pricing, or optimal taxation.

The almost certain unenforceability of this particular business method patent may render it of limited economic value, but other debatable patents have already been employed to exclude potential entrants or extract royalties. A much publicized example is Jay Walker’s patent (U.S. Patent No. 5,794,207) covering the price-matching system used by Priceline.com. After several years of legal wrangling, Microsoft Expedia agreed to pay royalties for allegedly infringing on this patent. Many economists, however, would object that Walker’s patent covers only a slight variation on procurement mechanisms that have been used for hundreds if not thousands of years. Interestingly, in terms of prior art, Walker’s patent application cites several previous patents but not a single book or academic article on auctions, procurement, or market exchange mechanisms.

If challenged in court, a patent on the “inverse elasticity rule” would likely be invalidated for failing to meet the test of novelty or nonobviousness. The Walker patent, a closer call, also might not survive such scrutiny. Current U.S. law, however, permits third-party challenges only under very limited circum


Three landmark cases regarding, respectively, genetics, software, and business methods, are Diamond v. Chakrabarty, 447 U.S. 303 (1980); Diamond v. Diehr, 450 U.S. 175 (1981); and State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed Cir 1998).

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