The current patent system in the U.S. drains entrepreneurship and small-business growth, a new study shows. Problems include high litigation costs, a decline in patent quality and differences among nations in terms of patent law.

Amid the increasing complexity of patent legislation, most patents today fail to meet set standards, according to a new report from the Small Business and Entrepreneurship Council (SBEC).

“Considering that 99.9 percent of the 26.8 million American businesses are ‘small businesses’ and that they contribute a more significant source of innovative products and services than larger enterprises do, it is undeniable that small businesses demand and deserve a fair, pro-innovation patent system,” Raymond Keating, the group’s chief economist, said in a statement.

Current shortcomings in the U.S. patent system have induced legal and cost barriers for the nation’s firms, particularly for small firms. “Studies show small patenting firms produce 13 to 14 times more patents per employee than large firms,” Inc.com recently pointed out.

The problems, according to the report, include high litigation costs, a decline in patent quality and differences among nations in terms of patent law.

As such, Keating believes the patent system needs restructuring to bolster patent quality while reducing costs. Other reforms, he added, should include patent litigation, international harmonization and a shift to a first-inventor-to-file approach as opposed to first-to-invent.

But it’s not just the SBEC noticing what’s at stake when it comes to patent reform.

“The patent office traces the root of its problems to the enormous backlog of patent applications of ever-increasing complexity — 700,000 last year,” Medical Design reports. Uneven examination quality also irritates patent applicants.

However, the U.S. Patent Office (USPO) reports relatively high examination quality in the medical-device field (86.6 percent compliance rate compared with an office-wide average of 82 percent). The USPO also claims a slightly higher rate of erroneous allowances (6.43 percent as compared with an office-wide average of 5.32 percent).

If and when patent reform occurs, it may also lead to a shifting of burdens from the Patent Office to patent applicants. They might have to “explain the relevance of submitted documents and to prove the invention’s uniqueness,” Medical Design notes:

Accelerated examination rules, which are the only proposed rules to have taken effect, force applicants seeking accelerated examination to conduct a pre-filing search and submit an analysis to the ‘most closely’ related references.

Though some medical-device designers and manufacturers have organized to voice their concerns about patent reform, many other manufacturers would do well to start thinking about stanching the flow of unprotected intellectual property (IP) from their offices and manufacturing plants.

“Among 150 companies benchmarked, 48 percent reported lost market share, 44 percent lost sales, 30 percent experienced product commoditization and 27 percent had lower margins because of compromised product intellectual property,” according to Aberdeen Group (via Innovate Forum) last year.

Specifically, this cautionary data refers to team members who share computer-aided design (CAD) files, send e-mail, CDs, flash drives and more to suppliers, partners and perhaps customers to design and develop a new product as quickly as possible. “Technology solutions like encryption and public key infrastructure provide effective security for data ‘at rest’ and ‘in transit,’ but do not address the protection of data ‘in-use’ by CAD users, which is critical to manufacturers,” adds Innovate Forum.

So, as collaboration increases in importance, Aberdeen Group explains, “documenting IP and enabling legal protection, and safeguarding product data, including enhancing IT security and digital rights management” can make sharing files safer.

It’s essential for businesses with IP to view it as akin to some number of dollars (NTP Inc., for example, won a $612.5 million infringement suit against Research In Motion.), not to mention the value of reputation as it relates to patenting. Nonetheless, “most businesses are flying blind with unfocused R&D programs that can erode returns on investments, and overlooked patents that can lead to lost revenues,” Forbes recently explained. “Worst of all, companies that lack a precise understanding of their IP portfolio can end up fighting off claims that a technology for a key product actually belongs to someone else.”

As for small-business needs, the recent SBEC report noted that the patent system is plagued by excessive and costly litigation. “Of course, large firms have the resources to better weather litigation, while just one lawsuit can terminate a small, entrepreneurial firm,” the report continued.

Many reforms are included in the bipartisan Patent Reform Act of 2007, which was approved by the House last year. A number of organizations have lobbied for or against aspects of the bill.

Resources

Patent Reform: Protecting IP, Enabling Innovation & Bolstering Entrepreneurship
by Raymond J. Keating
Small Business & Entrepreneurship Council, Feb. 13, 2008

Study Highlights Positive Impact of Patent Reform on Small Businesses, Offers Policy Options
Small Business & Entrepreneurship Council, Feb. 13, 2008

Study: Patents Failing Small Business
by Alexandra Zendrian
Inc.com, Feb. 21, 2008

Is Patent Reform the Answer?
by Courtenay Brinckerhoff
Medical Design, Sept. 1, 2007

The Protecting Product IP Benchmark Report: Safeguarding Design Intellectual Property in a Global Market
by Jim Brown
The Aberdeen Group, November 2006

Highlights from Project Vote Smart
GovTrack.US

Patenting for Profits
by Vinit Bhatia and Gib Carey
Forbes.com, Dec. 20, 2007

Protecting Your IP in China
by Jill Jusko
IndustryWeek, April 1, 2008

US Senate Moves Toward Vote On Reform To Patent Regime
by Dugie Standeford
Intellectual Property Watch, March 18, 2008