Whither the patent system?

Does the patent system as it is currently constituted serve to advance useful progress as the U.S. Constitution insists it should? Or is it the case, as some lobbyists and others claim, that there is little evidence available to tell? In fact there is a large and increasing body of evidence documenting that the concretely quantifiable costs of the current system greatly exceed the largely hypothetical benefits. We report here the consensus among academic researchers of the patent system that the system as currently constituted is failing, serves to discourage rather than encourage innovation, and is in desperate need of reform.

Over the last five years, academic researchers have published over two dozen empirical studies on patent litigation and its economic impacts. These studies have been conducted by researchers with diverse views and using different methodologies. The preponderant economic picture these studies present is that patent litigation now imposes substantial costs, particularly on small and innovative firms, and that these costs have tended overall to reduce R&D, venture capital investment, and firm startups. Not one study of the economic impact of current patent litigation concludes that the effects are negligible.

{mosads}The number of defendants in patent lawsuits filed in 2009 was five times the annual number during the 1980s. By most tallies, the majority of lawsuits are now filed by so-called “patent assertion entities” (PAEs), popularly known as patent trolls. Estimates based on surveys, on firm 10-K filings, and on stock prices suggest that PAE litigation has been costing firms tens of billions of dollars per year since 2007. Startups and venture-backed firms, especially, report significant operational impacts from PAE lawsuits in survey-based studies.
An econometric analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that extensive lawsuits caused small firms to sharply reduce R&D spending; and yet another two found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending. Although each of these studies has limitations and none is conclusive by itself, a consistent picture emerges: the patent system provides strong protection without excessive litigation in a few sectors such as pharmaceuticals, but substantial evidence highlights serious problems with patent litigation in many other industries.

Congress, the courts, and the Patent and Trademark Office have all made changes in recent years that help mitigate this problem – but this is too little and is not having the needed effect. Many hundreds of invalid patents, many already involved in litigation, have been revoked. Patentability standards and penalties for bad faith litigation have been strengthened. This has had the modest effect of leading to a small one-year decline  in patent lawsuits from the record setting levels of the previous year. To put this in perspective over the last three decades patent litigation went up by a factor of five. Now it has, briefly at least, fallen by 20%. We still have a 480% to make up for.

There are two basic facts that need to be contended with. The first was the creation of a special patent court more than three decades ago. Not surprisingly this court – made up primarily of patent attorneys – loves patent litigation. The second is the technique of carrying out patent litigation by selling patents to patent trolls. While real firms with real products have every incentive to collaborate and avoid mutual destruction through patent litigation, patent trolls have no such incentive. Patent reform to bring both the rogue courts and rogue litigators under control is desperately needed.

Boldrin is the Joseph G. Hoyt Distinguished University Professor of Economics Washington University in St. Louis and Levine is the Joseph G. Hoyt Distinguished University Professor of Economics Washington University in St. Louis.


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