Albie's Food Inc., a small grocery and catering company in Gaylord, Mich., received an unusual letter in 2001 from the law firm representing jelly giant J.M. Smucker Co. The letter accused Albie's—which sells pastries and sandwiches in northern Michigan—of violating Smucker's intellectual property by selling crustless peanut butter and jelly sandwiches.

In particular, Smucker's claimed that Albie's had infringed Smucker's recently granted U.S. Patent No. 6004596, which gives the Orrville, Ohio, company broad protection on its "sealed crustless sandwich." In a move that undoubtedly surprised the jam magnates, Albie's decided to defend itself in federal court. Albie's law firm noted in its filings that the "pasty"—a meat pie with crimped edges—has been popular fare in northern Michigan since the immigration of copper and iron miners from Cornwall, England, in the 19th century.

A battle in federal court over peanut butter and jelly sandwiches may seem merely funny and a little pathetic. But it is symptomatic of the larger and more profound problems with the U.S. patent system. We have reached the point where serious lawyers are being paid serious fees by a big company to shut down the PB and J operation of a grocery store.

The U.S. Congress set us on this road in 1982, when it created a centralized appellate court for patent cases called the U.S. Court of Appeals for the Federal Circuit. A decade later, Congress ordered that the U.S. Patent and Trademark Office (PTO), which up until then had been funded by tax revenues, instead fund itself through application and maintenance fees. Both changes were described as administrative and procedural rather than substantive.

But now, after still another decade, it is apparent that together these changes have resulted in the most profound transformation in U.S. patent policy and practice since the Patent Act of 1836. They make it easier to obtain patents, to enforce patents against others, and to extract large financial awards from such enforcement but harder for those accused of infringing patents to challenge the patents' validity.

What's more, the changes increase the risks associated with innovation—and not just for U.S. companies and inventors. Of the 169 028 U.S. patents issued in 2003, nearly half were issued to foreign entities.

Flawed as it is at times, the free enterprise system has demonstrated a unique ability to generate new technology. Industrialized capitalist economies have increased their productivity more in the last two centuries than in all the millennia of previous human history. The basis for this advance is the pursuit of profits, which forces companies to innovate. This incentive depends fundamentally on the smooth functioning of the institutions that determine and administer ownership of the fruits of research and development—the patents, trade secrets, and copyrighted material.