How to fix the semiconductor chip shortage (it’s more than manufacturing)

The summer auto-sales season is usually robust, so it is shocking to see auto plants that are idle because necessary semiconductor chips are unavailable. Ford Motor Co., for example, reported a 26.9 percent drop in its June 2021 U.S. sales, compared with its June 2020 sales, reflecting the automaker’s dependence on semiconductor chips. Automakers are not alone. Many industries are trying to ramp up production now that the pandemic is beginning to ease, but the semiconductor chip shortage comes at the worst possible time.  

The chip shortage is not just an economic problem. Commerce Secretary Gina Raimondo recently testified before Congress, stating, “Not that long ago, America led the world in making leading-edge semiconductor chips. Today we produce 0 percent of those chips in America — 0 percent. That’s a national security risk and an economic security risk.” 

Raimondo is correct. Virtually no advanced semiconductor chip manufacturing occurs in the United States. Almost all of it has been outsourced to Asia. As a recent Wall Street Journal report detailed, Taiwan Semiconductor Manufacturing Co. makes “92 percent of the world’s most sophisticated chips.” With supply lines unreliable, even for chips needed by our defense establishment, a new path is needed.

What few know is that the proportion of venture capital investment in chip manufacturing has fallen to a small fraction of what it was a decade ago. Advanced chip design and production are extremely expensive. A state-of-the-art semiconductor fabrication facility (a “fab” or “foundry”) costs approximately $10 billion to build. The capital investment is, quite simply, enormous. With decreasing investment over the past decade, fewer advances in chip manufacturing have come from U.S.-based companies — as well as fewer advances in the newest technologies, because prime chips are needed for the products of the 21st century.

While the cause for decreasing investment is certainly multifaceted, one important reason is the decreasing reliability of U.S. patent protection. Investing in chip fabs and chip manufacturing technologies requires some assurance of an adequate return on investment. No rational business would build a $10 billion chip fab if it could not obtain a reasonable return on that investment.  In earlier years, reliable patent protection provided the economic incentive. Now the protection is weak because of harmful Supreme Court decisions disrupting settled legal rules and well-intentioned reforms by Congress that turned out to be overcorrections with many unintended and deleterious consequences, including making patents too easy to kill.

The net effect is that investors no longer consider patents reliable. And patents are more costly than ever to defend and enforce.

Without reliable patent protection, new innovations can be copied with impunity by rivals, who can then undersell the innovators because they do not need to pay for the research and development costs themselves. Business executives and outside investors know that this is the reality. In their view, their investment funds are better directed to industries such as entertainment and hospitality that are less risky and not dependent on patents.

It would surprise most Americans to learn that patents issued years ago (after expert review by the U.S. Patent Office) are routinely declared invalid years later — ineligible under new court decisions. How can that be? Well, the goalposts were moved. The settled law was upended by new Supreme Court decisions. Those decisions narrowed eligibility in unexpected ways not seen in Europe or Asia, including China.

In addition to shrinking eligibility, these decisions created vast uncertainty, which only further discourages much needed investment in chip technology. Business and investment leaders repeatedly say they can adjust to unfavorable legal decisions but cannot abide by uncertain ones that keep changing in unpredictable ways.

Our country needs to tackle the economic and national security problem that lies in the chip manufacturing shortage. A comprehensive solution will require multiple changes. Congress can overrule the harmful court decisions because patent law is a creature of statutes enacted by Congress. When courts misinterpret Congress’s intent, it can revise the Patent Act to make the proper rules plain. Besides, in a democracy, we want basic economic and innovation policy to be made not by unelected judges but by elected representatives who are better equipped to do so soundly.

In the years since the high court’s decisions of 2012 through 2014, many experts have asked Congress to fix patent laws in an effort to encourage more investment in innovation. Recently, movements in this direction were begun by Sens. Christopher Coons (D-Del.) and Thom Tillis (R-N.C.). Other senators, led by Sens. Chuck Schumer (D-N.Y.) and Todd Young (R-Ind.), propose boosting federal funding on basic scientific research. Over time, that will help.

To be sure, improving the patent laws will not by itself solve the chip shortage problem.  Congress needs to foster innovation by creating the proper economic ecosystems.  

But a key missing link is the need for reliable patent protection. For every public dollar provided, private sources must invest many more dollars to translate such basic research into products and actually bring them to market. For example, Intel recently announced a $20 billion investment to build two new U.S. chip factories. Reliable patent protection could encourage other companies to make similar investments. The long-term solution to the chip shortage must, therefore, include improvements in the U.S. patent system to ensure that our country has reliable and secure sources of manufacturing for critically important semiconductor chips. 

Paul R. Michel served on the U.S. Court of Appeals for the Federal Circuit for 22 years, the last six as chief judge, until retiring in 2010. He previously helped craft legislation as counsel to a U.S. senator, served in the Justice Department as associate deputy attorney general and was a Watergate special prosecutor.

Matthew J. Dowd is the founder and managing partner of Dowd Scheffel PLLC, a law firm focusing on intellectual property matters. He served as a clerk for Judge Michel.