The first two proposals aim to make the PTO more effective at a reasonable cost. The third addresses the reality that since even the best of all possible PTOs will make mistakes, we need a court system capable of correcting them.

The U.S. patent nightmare began with an apparently benign change in the nation's judicial process. Almost all formal disputes involving patents are tried in the federal judicial system, with the initial litigation undertaken in a federal district court. Before 1982, appeals of patent cases were heard in the appellate courts of the various circuits. These courts differed considerably in their interpretation of patent law; some courts were more than twice as likely to uphold patent claims as others. The differences persisted because the U.S. Supreme Court, which normally steps in to ensure national legal uniformity, rarely heard "banal" patent cases.

This judicial variety encouraged litigants to shop for the best legal forum for their patent cases. Patent applicants would crowd the hallway in the patent office in Arlington, Va., where the list of patent awards was distributed at noon each Tuesday. On discovering that their patent was issued, new patent holders would rush to the pay phones to instruct their lawyers to file suit against some alleged infringer in a patent-friendly district court.

Meanwhile, representatives of firms that might be accused of infringing the new patent would race to the phone bank as well, ordering their lawyers to sue the new patent holder for infringing an old patent of theirs or, occasionally, to seek to have the new patent declared invalid in a district known to be skeptical of patents. Such dueling lawsuits would usually be combined into a single action, heard in the district court in which the earliest filing was made. Often the fate of the case—and many millions of dollars in damages—would depend on which lawyer got an earlier date-time stamp on the filing documents.

In 1982, the U.S. Congress decided to address this situation by establishing a central appellate court for patent cases, the U.S. Court of Appeals for the Federal Circuit (CAFC). The change was presented in congressional hearings as bringing consistency to the chaotic world of patent litigation.

But over the next decade, the new court significantly broadened and strengthened the rights of patent holders. The share of cases in which the CAFC upheld a district court finding of patent infringement increased from 62 percent to 90 percent, and the share of cases in which it reversed an earlier finding that a patent holder was not entitled to damages rose from 12 percent to 28 percent [again, see graph, "U.S. Patents Found Valid and Infringed"]. The CAFC also made it easier to shut down a rival's business even before a trial and to extract significantly greater damages from infringers.

Decisions of the CAFC encouraged more patent applications by expanding the realm of patentable subject matter to include software, business methods, and certain kinds of biotechnology. These decisions also contributed to lowering the standards of proving an invention's novelty and nonobviousness, which made it easier to qualify for a patent and to enforce patents, making the patents more valuable. As a result, the rate of patent application and litigation in the United States began to soar [see graph, "Annual U.S. Patent Applications and Awards"].