The free market does an admirable job of bringing new innovations to where they are needed most, but nothing is perfect. An unfettered market often needs that external restriction. In pharmaceuticals, for example, patents have proven successful as an intervention of last resort. There is no proven means of conducting drug research without government-granted monopolies, so we accept them as the price for new pharmaceuticals.

Indeed, such intervention should be a last resort because it is so far-reaching. Every pharma company must perform constant patent searches to ensure that it is not treading on competitors’ formulas. But because drug development requires such expensive capital, the playing field is limited. Companies observe each other’s research to begin with, thereby keeping the costs of complying with patents within the range of normal operating costs.

In 1994, the Court of Appeals for the Federal Circuit (CAFC) expanded the scope of patents immensely. It ruled that a novel, nonphysical design with a trivial physical step appended, such as loading a new algorithm onto a stock computer, is patentable. Because a competent patent draftsman can add a trivial physical step to any given design, this ruling has led to patent claims for mathematical algorithms. In 1998, the CAFC stated that a means of conducting business is a useful process, and because patent statutes mention useful processes as patentable, all business methods must be patentable. Therefore, even though U.S. courts had determined that business methods are not patentable all the way back to 1908, the CAFC determined that those courts had all erred. Today we see patent claims for price lists and furniture arrangements.

Losing at Monopoly
But unlike pharmaceuticals, many novel industries, from software development to screenwriting and interior decorating, can be resoundingly innovative without the help of patents, because they enjoy multiple ways to make money on nonphysical designs beyond shrink-wrapping them and selling them.

Companies that use software and business methods cover the entire economy. With such a large pool of players, the potential market distortions caused by government-induced monopolies are magnified immensely. It is not surprising that the holders of patents in novel fields can find companies to sue, but rather that they have found so few.

Two branches of government have a strong incentive to expand the scope of patents. Patent law is all but written by the judiciary’s CAFC, which employs a number of former patent attorneys as judges. Clearly, CAFC judges have been seeing patents everywhere. Meanwhile, the budget of the executive branch’s Patent and Trademark Office is directly affected by the number of patent applications. It has enthusiastically welcomed patents in novel fields, stating that "there is currently no judicially recognized separate ‘technological arts’ test to determine patent-eligible subject matter. We decline to create one."

In Congress, the minority of companies in fields that profit from patents are lobbying to retain their government-granted edge over their competitors. The House has already put forth a patent reform bill that glaringly omits any mention of subject-matter problems in patents. Senators are drafting a bill that may suffer the same omission.

The lawsuits making news today are based on patents in which the sole physical step consists of writing down numbers or handing out cash. They demonstrate the legal dangers that companies in all markets face when patents become a default feature, rather than a last-resort intervention. It is up to Congress to end the experiment in monopoly granting for nonphysical inventions.

Art by Matt Mahurin.

Ben Klemens is a guest scholar at the Brookings Institution and the author of Math You Can’t Use: Patents, Copyright and Software.