The Costs and Benefits of Patents to Innovators

by James Bessen and Michael J. Meurer

Do patents encourage economic growth, stimulate R&D investment, or deliver wealth to innovators? In our previous post we reviewed the empirical research in economics and we could not find consistently positive evidence about the performance of patents.

In this post we narrow our focus. We ask whether the modern American patent system encourages innovation by large (publicly traded) American firms. We answer this question with empirical research that is presented in chapters 5 and 6 of our book Patent Failure. We find that the patent system discourages investment in innovation by the average publicly traded American firm. Although the patent system provides positive incentives in some industries like pharmaceuticals, it provides negative incentives in most industries. Further, the performance has deteriorated over time.

Our conclusion is based on separate estimates of the benefits and costs of patents to innovative firms. We use two different techniques to estimate the value of patents to their owners.

The first technique examines the decision to pay patent maintenance fees. The size of the fee sets a lower bound on the expected value of the patent at each payment date. A large fraction of patents lapse each time maintenance fees are due. Using well-known econometric tools, we use payment information on a large set of patents to calculate patent value.

The second technique relies on the stock market valuation of publicly traded firms. Firm share value is determined by investor expectations about future firm profits. Expected future profits depend on the assets owned by a firm; both physical assets and intangible assets including patents. We use standard econometric tools to apportion share value to the different assets owned by a firm. Thus, we can calculate the value of a firm’s patent portfolio, and from that, the value of the average patent.

These two rather different techniques produce estimates that roughly correspond. We calculate a mean worldwide patent value of $370,000 for publicly traded American firms (This number is presented in 1992 dollars; updating for inflation yields $512,800 in 2007 dollars.) Like other researchers, we find that patent values vary tremendously depending on the industry. The average value of patents held by large pharmaceutical firms is easily an order of magnitude larger than the average value of patents held by firms in other industries. Also, the distribution of patent value is skewed so that the median patent value is nearly an order of magnitude smaller than the mean.

Innovative firms are rewarded with patents and enjoy the expected value of patent ownership. But patents also impose expected costs on innovators as defendants in litigation. When an innovator commercializes a new technology there is a risk that a patent owner will assert a patent against the innovator. Innovators sometimes respond to this risk by licensing patents in advance that might be asserted against them, or by designing a product that steers clear of any possible patent assertion. For most innovators these strategies are often not profitable (and often not even feasible). In our next post, we provide the reasons and evidence that patent notice often fails badly and makes ex ante licensing or patent avoidance unlikely in most industries. Assuming we are right, then typical innovators face an unavoidable risk of having to defend against patent lawsuits. This is the largest cost that patents impose on innovators.

We measure this cost by gauging the stock market reaction to the filing of a patent lawsuit against an alleged infringer. We study lawsuits filed against publicly traded American firms from 1984-1999 and we find that the median defendant faces a total litigation cost of $2.9 million (1992 dollars), and a mean litigation cost of $28.7 million (1992 dollars). (Updating for inflation to 2007, the median is about $4 million and the mean is $39.8 million.) Some of this cost is borne by pirates or other non-innovating firms, but we will argue in our next post that most of this cost falls upon firms because they have commercialized innovative technology. Furthermore, in our book we explain that we made conservative assumptions and probably underestimated litigation cost. We conclude that in industries other than chemicals and pharmaceuticals, defense against American patent lawsuits amounts to 13% of R&D spending by defendant firms (19% in 1999). In contrast, our studies of patent value indicate that worldwide patent value amounts to only 6% of R&D spending by these same firms. The result — patents impose a tax of at least 7% on R&D investments outside of the chemical and pharmaceutical industries.

The two figures below summarize total patent costs and benefits for publicly traded firms. The red line shows the annual aggregate costs to these firms of defending against patent litigation. The blue line shows an estimate of the incremental annual profit flow derived from all patents worldwide held by publicly traded American firms. The first figure shows that chemical and pharmaceutical firms earn far more from their patents than they lose to litigation. But for other firms, the second figure tells a simple but dramatic story: during the 1980s, these firms might have, at best, broken even from patents, but in the mid-1990s litigation costs exploded. By almost any interpretation, the patent system could not be providing overall positive incentives for these firms by the end of the 1990s.

Fig 1A

Fig 1b

We conclude with three important notes. First, patents do provide profits for their owners, so it makes sense for firms to get them. But taking the effect of other firms’ patents into account, including the risk of litigation, the average public firm outside the chemical and pharmaceutical industries would be better off if patents did not exist. Second, our best evidence relates to the eighties and nineties, but the evidence we have for this decade suggests that the patent tax has grown with the continued growth of patent lawsuits. We find no offsetting evidence that patents have become substantially more valuable in this century. Third, we find that small publicly traded firms get small positive R&D incentives from patents. This is also very likely to be true for small, non-publicly traded firms and non-profit inventors.

52 thoughts on “The Costs and Benefits of Patents to Innovators

  1. Is ironic that a book subtitled “How Judges, Bureaucrats, and Lawyers Put Innovators At Risk.” is not well recieved on a blog frequented by patent attorneys.

    Regardless, the statement that the patent system imposes a net-economic-cost is absurd. It would be interesting to see if the statistical research was subjected to peer review, and if so what resulted.

  2. A lot of people here seem to be up in arms about Bessen and Meurer’s book.
    Perhaps that’s because of the subtitle, which I’m certain the authors
    themselves did not choose. If you read the book itself — which you should –
    you’ll find that it’s entirely straightforward and rigorous. They’re not
    trying to pull the wool over anyone’s eyes. They’re not in the thrall of
    patent-heavy corporations. I wrote a review of the book on my blog:

    link to laniels.org

    Cheers,
    Steve

  3. Defector:
    [QUOTE]Your final statement suggests some kind of blind faith in free markets. What you apparently don’t understand (and what I have been trying to explain) is that patents actually promote competition by providing an entré into existing markets for new competitors.[/QUOTE]

    I’ve provided examples of patent abuse by large incumbents. You have not provided a single example of patents protecting a small player in a market dominated by large incumbents.

    Let us take an example – lets say I (a small player) have discovered a new innovative feature in Office Suites that make end-users more productive. Do you think a patent on such an innovation in Office Suites will provide me a profitable niche in a market dominated by an incumbent as large as Microsoft?

    Truth is that you can’t demonstrate such a benefit of patents. Simply because an incumbent as large as Microsoft will:
    a) either buy me (the small player) and absorb my innovation, thus ridding the market of competition, or
    b) hammer me with patent violation law-suits of trivial patents that, in theory, it should be easy enough to prove prior art. Except that I’m a small player and can’t afford to. Again, the large incumbent has rid the market of competition.

    Until you find a way to PROTECT consumers, small players and ENCOURAGE competition in the face of large incumbents, you can’t really demonstrate that patents are doing any good to the market. All patents are doing is protecting large incumbents and allowing them to build monopolies.

  4. Defector:
    [QUOTE]If that is your utopian view, please explain to the rest of us why anyone would invest the necessary money to enter am existing market knowing their “great idea” would be immediately ripped off by the market leader, who would then price the new player out of the market based on their superior economies of scale.[/QUOTE]

    I’m afraid it’s your view that’s utopian – and more than a little naive. Patents do exactly what you’ve just described in that statement – protect large incumbents and raise the barrier to entry for new small players. Look at Microsoft for example. And they’re not the only ones – theres many examples of patent abuse by large incumbents. You only have to look around you, wherever you are.

    It’s you who will have to give examples of large players NOT abusing the patent system and of a negligible entry barrier for small players. As it stands, the patents system deny a level playing field to small players. Not the other way round – as you unfortunately keep implying.

  5. I also “challenge B&M to post on this blog a list (or a link to a list) of all the 1999 patent litigation cases they compiled including their respective litigation awards/cost estimates that support their figures.”

  6. I have two comments on Bessen and Maurer’s (B&M) article. The first is on its fundamentally flawed R&D based premise and the second is on data quality and their underlying facts that appear inconsistent with other historical studies on patent damage awards.

    1) The Flawed R&D Costs Predicate

    B&M make the following astonishing statement:

    “[D]efense against American patent lawsuits amounts to 13% of R&D spending by defendant firms (19% in 1999). In contrast, our studies of patent value indicate that worldwide patent value amounts to only 6% of R&D spending by these same firms. The result — patents impose a tax of at least 7% on R&D investments outside of the chemical and pharmaceutical industries.”

    In characterizing infringement damage payments by firms as economically equivalent to a “tax on their R&D spending”, B&M apparently misapprehended what patent damage awards are all about. Patent damage awards are based on PROFITS or REVENUES from these firms’ infringing products. Comparing such infringement damage awards to these firms’ spending on R&D or to the value of their own patents is simply nonsensical. Instead, in entertaining the concept of infringement damage awards as a “tax”, B&M should present data on the growth of these firm’s REVENUES and PROFITS in that period and show such damage awards as a percentage of these figures. If such analysis were done for these firms, the likely findings would be that this percentage is nowhere near 13% but rather ORDERS OF MAGNITUDE SMALLER. Moreover, the historical data over the last 15 years shows more broadly that U.S. corporate profits grew slightly MORE RAPIDLY than the aggregate patent damage awards. This can be seen in data from the study by PricewaterhouseCoopers (PWC) based on all patent litigation cases reported by Westlaw, as shown in Slide 20 of my presentation at link to whitehouse.gov .

    B&M’s notion that acquisition costs of patent rights required by a firm to sell its products should be in line with some nominal fraction of its R&D spending is absurd. This follows from the simple realization that the less a firm invests on its own R&D, the more expenses it is likely to incur for acquiring patent rights arising out of the R&D fruits of OTHERS. By their distorted logic of using R&D spending as some proxy, B&M demonstrate a lack of understanding of basic aspects of licensing and how innovations come to market. B&M’s findings that publicly traded companies which they tracked from 1984 to 1999 make lower R&D investments in relative terms compared to their costs for infringing patents of others is no evidence of “patent failure”. B&M’s inference of “failure” cannot be considered as scholarship but as mere advocacy. B&M merely advocate the position of firms that seek to weaken the U.S. patent system. In a rare candid passage, B&M identify such a firm as “the average public firm outside the chemical and pharmaceutical industries [that] would be better off if patents did not exist”.

    2) Data Quality

    As the slide I referred to above shows, total patent litigation awards fluctuated radically from year to year and a substantial dip in such awards took place in the years right after 1999, which B&M’s graphs do not cover. In fact, the year-to-year extreme variability of the data suggests caution in drawing conclusions as to “typical” magnitudes for patent damage awards. In any event, the dramatic rise in U.S. patent litigation award costs from 1994 to 1999 that B&M report in their graphs is inconsistent with the data compiled by PWC, which indicates a trend of DECLINING total awards during those years. As a potential (but unlikely) explanation, note that PWC’s data is based on awards reached in court. B&M’s data presumably also includes costs for other cases that settled out of court. Roughly three out of four patent cases filed in court settle, but B&M did not describe how they obtained such settlement cost information for many thousands of cases. The manual labor and costs for doing so on a case-by-case basis must have been prohibitive. To the extent that B&M did not use specific settlement data for every case in their database, their assumed generic model used to compute settlement costs to alleged infringers should be disclosed and carefully analyzed because their thesis rests on the very estimates of these costs.

    A clue as to the burden B&M face in supporting their data for U.S. patent litigation costs can be gleamed from their assertion that it reached $16 Billion (’92 dollars) in 1999. This comprises the $4 Billion and $12 Billion in their first and second graphs respectively. Therefore, the real dollar costs in 1999 must have been in excess of $20 Billion according to B&M. I challenge B&M to post on this blog a list (or a link to a list) of all the 1999 patent litigation cases they compiled including their respective litigation awards/cost estimates that support their figures. I shall remain skeptical until I see such data.

    - Ron Katznelson

  7. G. Fernandes, you might be more convincing if you had one cogent argument buried amongst all those conclusions or could back up just one of your conclusory statements.

    Your final statement suggests some kind of blind faith in free markets. What you apparently don’t understand (and what I have been trying to explain) is that patents actually promote competition by providing an entré into existing markets for new competitors.

    You state that, “Sellers should be forced to compete on the merits of their product with the full knowledge that any other seller can copy, improve and provide their customers with a better product.” If that is your utopian view, please explain to the rest of us why anyone would invest the necessary money to enter am existing market knowing their “great idea” would be immediately ripped off by the market leader, who would then price the new player out of the market based on their superior economies of scale.

  8. To build upon an existing idea, it is necessary to copy that idea. This is the most cost-effective way of innovating. Any other suggestion amounts to re-inventing the wheel. Re-inventing the wheel is a most silly way to innovate.

    Licensing a patent is out of the question for basic infrastructure. Yet patent-holders hold entire industries to ransom by getting patents on trivial infrastructure.

    The patent system is a gross failure in every way, including in the Pharmaceutical industry, where the authors say patents actually help. Even in this (Pharmaceutical) industry, patent holders have found ways to abuse the patent system to hold entire countries (note the UK, with Gaviscon – the entire country has been played for a fool with tax-payers money, while the manufacturers of Gaviscon are laughing all the way to the bank many years after their patent has died) to ransom with high-cost drugs that can be easily substituted by generic drugs after the patent has expired.

    Without EXTREMELY STRONG protection AGAINST gaming the system the whole idea of patents is a sorry joke. As it stands today, the patents system is WIDE open to gaming in the most laughably trivial of ways.

    Not surprisingly then, instead of fulfilling it’s said purpose, all the patents system has effectively managed to do is (what the authors have found, incidentally) to raise the cost for innovation to the point of dissuading it completely.

    Patents, as they stand today, should honestly be made illegal. They don’t protect any invention. They dissuade innovation and attempt to game the system by protecting the interests of large incumbents.

    The first priority MUST be protecting customer interests. Without any way to do that, talking about protecting “inventors” is a sorry joke.

    Truth is that customers are most benefited by a completely open market without ANY protection to sellers. Sellers should be forced to compete on the merits of their product with the full knowledge that any other seller can copy, improve and provide their customers with a better product. That’s the only way to protect customer interests and ensure customers ALWAYS get a fair deal.

  9. G. Fernandes, I agree completely. The question that you have not addressed is whether it is necessary to infringe a patent to improve upon an idea, and if so, whether the costs are the same as simply copying the patented invention outright.

    My view is that if you create a great invention, but cannot practice it because it builds on already patented technology, then you are better off than if you simply decide to be an infringer. This is because if you build on the previously patented technology you at least are bringing something worthwhile to the table, and have a good opportunity to some sort of cross-licensing deal with the holder of the earlier patent.

    If you can’t make a deal, you can at least lock them out of using your technology and then when the earlier patent expires you are free to make your invention without competition (at least with regard to your patented feature). On the other hand, if you simply want to copy someone else’s patented technology, you either must pay to license the patent or wait for it to expire. Even then you are competing at a disadvantage because you can’t differentiate your product or service and can’t compete on price during the pendency of the patent (because you have the additional burden of paying the royalty) or else are late to market.

    All of the above presupposes that your invention builds on technology covered by a pending patent. Of course it is possible to make an invention that is not covered by a pending patent (e.g., improvement to something not patented or to something for which the patent has expired). In that case, you can simply practice your invention and gain market share by touting your patented distinguishing feature.

  10. [QUOTE]G. Fernandes, I don’t understand what your argument is.[/QUOTE]

    Lets go back to:
    “”But patents also impose expected costs on -i-n-n-o-v-a-t-o-r-s- _c_o_p_y_i_s_t_s_ as defendants in litigation.”"

    I take that as meaning “patents impose expected costs on people who copy an invention…”. The original word “innovators” is correct. Your take on it – “copyists” – is a very narrow view on the subject.

    My argument is exactly this – there is NO human invention that is/was useful in it’s original shape or form. Every human invention has been an evolution of an idea. Or, in other words, a copy-and-enhance process.

    If you can not build upon an idea, you can not innovate. Copying is the first step of building upon an idea.

  11. Defector:

    And while you’re reading the wikipedia link, I might suggest you pick up “Guns, Germs and Steel” by Jared Diamond and read it. You might find some more fundamental historical evidence supporting my argument.

  12. Ex’r6K wrote: “I’d measure it up, and smack any arguments towards it being wonderful, by saying that any benefit of having it disclosed “earlier” is vastly offset in the negative by creating a monopoly for 20 years. VASTLY.”

    Early disclosure is nice, but my argument centered on early innovation. Without the pressure of startups and other market entrants constantly improving and innovating on top of or around existing technology (and patenting those innovations), the large established companies with significant market shares would not be so motivated to keep dumping dollars into R&D, pushing and motivating their own engineers to stay ahead of the curve. You argue that without patents, the pace of innovation would hum along at even a faster pace with everyone improving everyone else’s technology without the burden of avoiding patented inventions. This is a naive utopian view, in my humble opinion.

    In the real world, without the incentive patents provide, there would be no incentive for any company, big or small, to enter an established market because no market entrant could hope to compete against an established company, who could, without fear of patent infringement, quickly and easily duplicate anything the market entrant could come up with. Without any appreciable competition from market entrants and without the other pressures that patents provide, the corporate executives and shareholders of established companies would sooner pay themselves more money than put it into R&D. This would effectively shift the R&D burden onto others, whom they may simply copy if the new idea attracts attention in the market.

    Therefore, there would be no incentive for anyone to innovate, which would result in technological stagnation. In an age where we are relying almost exclusively on yet-to-be created technologies to solve the worlds problems, whether it is shortages of energy, water, food, etc., global warming, failures in education, terrorism, electronic security, privacy, etc. etc., I personally think that allowing the pace of innovation to stagnate would be a bad thing.

  13. [QUOTE]

    G. wrote: “EVERY human “invention” is a “copy-and-enhancement” of a lesser human “invention”. I challenge you to give me ONE example of a human “invention” invented by exactly ONE person/entity, completely devoid of input from any other person/entity.”

    I don’t understand your argument. Are you suggesting that there is no difference between inventing and copying? If you are confused between the two, I humbly suggest that you re-read Graham v. Deere. Here, I’ll even provide a link:

    link to caselaw.lp.findlaw.com
    [/QUOTE]

    And I humbly suggest you read this: link to en.wikipedia.org

    and tell me who “invented” the light bulb.

  14. Some companies with active filing strategies use a service, such as Derwent’s PRAS (Patent Rights Alert System), and have published apps and patents e-mailed to them on a weekly basis for review by their engineers and/or in-house/outside attorneys.

    It’s not perfect, but it has its benefits.

  15. Dear 6K, you write “many companies don’t read patents”. And there was me, innocently supposing that the main readership of the world’s output of WO and 18 month A publications was employees of innovating companies. Those A publications show which way their tech road is going, and what legal roadblocks might be under construction along it. At least in Europe, the number of WO and EP-A to be read (rigorously filtered through the EPO-improved IPC) is not unmanageable. Any sane and adequately informed shareholder would expect his CEO’s reading list to include scans of what the competition is up to, no? BUT, post-Seagate, are you still right? I thought it was the threat of being found to have infringed willfully that was the reason for the company blindfold, deployed to prevent anybody reading WO and A docs. Maybe post-Seagate, companies are removing their self-inflicted blindfolds?

  16. “I don’t believe that is true, and I challenge you to back that number up. But, even if it is, the losing defendants invariably created the invention too late. So, if nothing else, you can say that patents encourage innovation at a faster pace than they otherwise would. How do you value “pace of innovation” in a global market?”

    If that 99% number is true (which I doubt it’s actually 99%, but I wouldn’t doubt 95%+, considering so many companies don’t read patents and couldn’t read enough to see all that’s out there anyway) I’d measure it up, and smack any arguments towards it being wonderful, by saying that any benefit of having it disclosed “earlier” is vastly offset in the negative by creating a monopoly for 20 years. VASTLY.

  17. I wonder how many U.S. public companies got their start based on a patented invention. Please name some you intelligent patentlyo readers.

  18. G. wrote: “EVERY human “invention” is a “copy-and-enhancement” of a lesser human “invention”. I challenge you to give me ONE example of a human “invention” invented by exactly ONE person/entity, completely devoid of input from any other person/entity.”

    I don’t understand your argument. Are you suggesting that there is no difference between inventing and copying? If you are confused between the two, I humbly suggest that you re-read Graham v. Deere. Here, I’ll even provide a link:

    link to caselaw.lp.findlaw.com

  19. Mr. Hutz wrote: “Over 99% of defendants independently invent and do not copy.”

    I don’t believe that is true, and I challenge you to back that number up. But, even if it is, the losing defendants invariably created the invention too late. So, if nothing else, you can say that patents encourage innovation at a faster pace than they otherwise would. How do you value “pace of innovation” in a global market?

    Secondly, for every dollar counted as being spent on damages for infringing an *earlier* inventor’s patent, it merely cancels out the dollar of revenue brought in by the patent on the side of the patent holder, which means you have at best a zero-sum game for litigated patents. Meanwhile, most licensing occurs outside the realm of litigation. Are you as confident of your 99% figure for non-litigated licensing arrangements?

    BTW, I agree with you with respect to Mr. Meurer, who is a former professor of mine, and for whom I have a great deal of respect. He is apparently sadly misinformed on this issue, however.

  20. I actually worked at a large (huge multinational) corporation. One of my jobs was to evaluate technology to decide whether to buy (license) or build. Part of the analysis was do they have IP protection.

    I have also worked at and with start-ups for 25 years. The first job I had was with a software start-up in Boston. Now I am an attorney that protects IP.

    Would anyone who has real experience with large corporations, IP, and start-ups take this book seriously? No. They have built a little model of the world that is not accurate and applied a silly methodolgy to get some title that will get some attention.

    And, only a bunch of professors would have the time and ethics to produce a book like this.

  21. “All they’re referring to is that tech’s can be independently developed and then the 2nd guy is deemed “non innovative” when indeed he came up with the idea all by himself, which while technically true by SOME definitions of innovative, certainly is not true by all definitions and isn’t very fair to the 2nd guy whatsoever. Furthermore, that fairness is important because we are talking about public policy.”

    There’s this concept in patent law called “Freedom-to-Operate”. If you don’t want to do the study, don’t play the game.

  22. Caveman,

    I actually know (or knew) Michael Meurer. While you may disagree with his conclusions, I do not believe he is the mouthpiece for any organization or company.

  23. Defector,

    Must you bring up that old canard. Over 99% of defendants independently invent and do not copy.

  24. [QUOTE]

    “But patents also impose expected costs on -i-n-n-o-v-a-t-o-r-s- _c_o_p_y_i_s_t_s_ as defendants in litigation.”

    There, fixed that for you.
    [/QUOTE]

    EVERY human “invention” is a “copy-and-enhancement” of a lesser human “invention”. I challenge you to give me ONE example of a human “invention” invented by exactly ONE person/entity, completely devoid of input from any other person/entity.

  25. “When an innovator commercializes a new technology there is a risk that a patent owner will assert a patent against the innovator.”

    All they’re referring to is that tech’s can be independently developed and then the 2nd guy is deemed “non innovative” when indeed he came up with the idea all by himself, which while technically true by SOME definitions of innovative, certainly is not true by all definitions and isn’t very fair to the 2nd guy whatsoever. Furthermore, that fairness is important because we are talking about public policy.

    “A great many companies don’t play the patent game at all, rather they base their products on 20-year-old technology, conveniently developed with the aid of expired patents”

    Suddenly I understand why Schlumberger etc. INSIST on using old shtty tech. Though to be honest, they like to hit up the 70′s for theirs. Going to those kind of places is really astounding as to the very little new tech they have in place.

  26. So what this tells me is…

    If the costs of ex ante licensing and litigation were reduced by just more than 1/2, the system would be better than [calculated] break even and then judged as “fair”.

    Questioning the premise…
    Since many industries operate with 2-5 leading players (and many, many others), then the “cost” of innovation is multiples of the “benefit” to the patent owner (= one). Moreover, shouldn’t the writers provide an analysis of the next best alternative (no or very weak patents) from a different IP market like, say, China?

  27. The analysis relates to publicly traded firms only, which leaves out a huge segment of smaller companies that use patents for a variety of reasons relating to the advancement of innovation, including protecting their R&D investments against poaching by the the large firms analyzed here.

    It would be interesting to compare the value of patents as estimated by the authors with the amounts paid by these same publicly traded firms to acquire patents over the same period of time. I suspect that the guys in the trenches buying patents are much more in touch with the value of patents than the ivory tower economists.

  28. “But patents also impose expected costs on -i-n-n-o-v-a-t-o-r-s- _c_o_p_y_i_s_t_s_ as defendants in litigation.”

    There, fixed that for you.

  29. patents and the promise of exclusive manufacturing rights are the basis of the entire economy.Without them the basic incentives of capitalism are destroyed. Even established pharmacuticl companies (who created their original basic wealth through patents)need furthur incentive to develop new products or there is no sence in bothering.Some of these companies are so fat now with profits that they dont care anyways. Only new companies with patent promise incentives hold the potential for advancements.Although we are in a three year invention slumph due to the inventor unfairness nightmare and new legislation nightmare this can be changed with my new plan.One of the biggest problems existing is.infringement lawsuits these can be eliminated by legislation that deals specifically with each situation thereby determining the suits outcome before filing or causing the situations to not even form.Presently patents donot deliver wealth to the innovators in our present system under my new system this all changes actually legal patents for the first time in 218 years will begin to happen.Without new patent financial incentives human advancement Stops with potentially deadly consiquences.When you consider the lives saved to date by invention and the improvements in lifestyle and conparitive ease of strenuious work accomplishments the idea of eliminating them becomes ludacrist.Previous to the eithteenth century life was a comparitive desperate struggle to survive.The ungratefulness to our high federals is morbidly disgusting.

  30. Question for Bessen and Meurer:

    Are the figures adjusted for inflation? Even if they are, the rate of increase in the costs of litigation over that period of time is only a few percent more than inflation. The inelastic supply of legal services and increasing demand for them (because transaction costs of prosecution) declined over the same period probably account for most of this increase.

  31. Is anybody else not totally shocked that publicly traded companies see no benefit from the patent system? It’s the new entrants, if anyone, that need patents to get a foothold into the market.

    Microsoft, Yahoo, Cisco, and yes even Google are NOT cutting-edge tech companies anymore. Some of them (like Microsoft) arguably never were. Why should we care whether the patent system is not good for these companies, which do not contribute substantially to innovation.

    Can we have a post on whether the patent system benefits later-stage startups please?

  32. patents and the promise of exclusive manufacturing rights are the basis of the entire economy.Without them the basic incentives of capitalism are destroyed. Even established pharmacuticl companies (who created their original basic wealth through patents)need furthur incentive to develop new products or there is no sence in bothering.Some of these companies are so fat now with profits that they dont care anyways. Only new companies with patent promise incentives hold the potential for advancements.Although we are in a three year invention slumph due to the inventor unfairness nightmare and new legislation nightmare this can be changed with my new plan.One of the biggest problems existing is.infringement lawsuits these can be eliminated by legislation that deals specifically with each situation thereby determining the suits outcome before filing or causing the situations to not even form.Presently patents donot deliver wealth to the innovators in our present system under my new system this all changes actually legal patents for the first time in 218 years will begin to happen.Without new patent financial incentives human advancement Stops with potentially deadly consiquences.When you consider the lives saved to date by invention and the improvements in lifestyle and conparitive ease of strenuious work accomplishments the idea of eliminating them becomes ludacrist.Previous to the eithteenth century life was a comparitive desperate struggle to survive.The ungratefulness to our high federals is morbidly disgusting.

  33. Initially, I refuse to believe a lack of linkage between patents and asset values or asset returns. With that caveat, I fail to see that the maintenance fee metric has any probative value. There are so many reasons for decisions not to pay maintenance fees. One example, would be a sting of patents for continuous improvements to technology. The first 29 patents (which create a bar to competitor entry) don’t make a dime, but patent number 30 is a huge commercial success. Why pay maintenance fees on the first 29 patents?
    On the 2nd metric, it’d be necessary to see more about the authors use of “standard econometric tools to apportion share value to the different assets,” and the conclusions drawn or interpolated from that. Mine view is more simplistic. Two companies with a healthy catalog of product offerings that provide a strong revenue stream. If the two companies revenues are comparable, but only one company has patents on all its products – which company is worth more, or conversely, worth less?

  34. I was thinking the same thing, bierbelly. Its like saying that the police shouldn’t arrest innocent criminals.

  35. “When an innovator commercializes a new technology there is a risk that a patent owner will assert a patent against the innovator.”

    So, uh, perhaps the “innovator” isn’t so innovative after all? I love the transparent terminologies used by these guys. There’s no doubt that they made up their minds before even starting the study.

  36. It is really almost impossible to read nonsense like this. I think the real question should be why do economist at universities publish nonsense? And the answer is: publish or perish, and the money comes from the large publicly-traded corporations. The authors should have written a book about whether professors that are sucking up to corporations further the intellectural arts or hinder the intellectual arts. I think we all know the answer.

  37. It appears that this evidence suggests that the patent system should remain unchanged for pharmaceutical and chemical inventions as it is providing clearly enormous value to those inventions. But does this evidence suggest that an alternate way of protecting other inventions should be established?

  38. Just to complete my thought above: This giant library of public-domain knowledge in the form of expired patents is what this so-called patent tax pays for. It’s a library funded by those that want to beat the game. There will always be those that try to beat the game, and there will always be those satisfied with 20-year-old technology. Seems like a pretty stable system to promote the progress.

  39. E6K,

    “The Office merely represents the interests of the people, we are beholdin to hear other parties stories on the apps that are deemed important enough to discuss. ”

    Examination is an ex parte process. I think the reason for this is so third parties can’t influence the government’s decision on whether a patent should be granted on a particular set of claims. Reexamination, interference, and litigation are the processes where third parties get their say. Whether this is a good thing or not, that’s something up for debate.

    The Peer-to-Patent Project is an interesting attempt to harness third-party people of ordinary skill of the art for examination. However, the majority of comments I have seen there are along the lines of “I think I’ve seen this before” or “that’s obvious.” Not exactly a 102 or non-hindsight-biased 103 rejection. Does anyone know whether the references located by PPP have been cited against the applications and/or whether such applications have issued as patents?

  40. So what you’re saying is that on average patents are a losing game, but some firms make money from it? Can’t that be said for all business generally? We could write a similar article focused on the doom-and-gloom reality that 4 out of 5 small small businesses fail in the first 3 years, or whatever the stat is. But people still start small businesses because there is incentive: to get rich. Same with patents.

    Overall, I’m impressed with the analysis, but I wonder whether the authors have considered one thing. That is the fact that after 20 years everything in a patent becomes public domain. A great many companies don’t play the patent game at all, rather they base their products on 20-year-old technology, conveniently developed with the aid of expired patents. And this need not be 20 years, if maintenance fees are not paid.

  41. Didn’t Professor Hall at Berkeley address the fundamental flaws in this underlying methodology months ago?

    A link to that video is at the bottom of my post here: link to emgill.blogspot.com

    While discussions like this can be lively and fun, it is surprising that, given these core concerns, this work warrants two article length postings on Patently-O.

    Thanks,
    EMG

  42. “The authors have further failed to offset the losses of the “innovators” with the, quite possibly concurrent, gains of the patentee.”

    Cave you’re usually smarter than this, I suppose it must be late where you are so I’ll let you off with simply: they looked at firms loses and gains, if you’re referring to trolls collecting and thus not being accounted for in the study then you my friend are on to something. Other than that, they looked at the losses AND gains. The point of the study is that litigation costs went up so much that the system doesn’t pay for itself anymore in most industries for the people actually doing the manufacturing etc.

    They end up just saying that public notice has failed so don’t worry so much, they’re not saying DOWN WITH PATENTS! Besides, “public notice” is just one of those things you could give less than 2 shts about amirite?

    Overall, I agree that that is a big spot on the apple of patents, but there’s more that needs to be done than just improving the notice, there needs to be opportunity for the public to react before the patent enjoys the presumption of validity if they should so choose. The Office merely represents the interests of the people, we are beholdin to hear other parties stories on the apps that are deemed important enough to discuss.

  43. The best minds in the business have struggled for years to capture and quantify the oft times elusive and speculative nature of patent rights and lo and behold, the authors – “using standard econometric tools” no less (as Homer Simpson would say “…so you know the results must be ‘standard’ and ‘econometric’, mmmmmmmmmm econometric….”), have magically calculated the value of a firm’s patent portfolio, and from that, the value of the average patent.

    The authors have failed to take into account other market factors affecting share value such as that the “innovated” product was the only one in the pipeline, and that there might have been a strong belief by the market that the “innovators” were on the wrong end of the lawsuit. The authors have further failed to offset the losses of the “innovators” with the, quite possibly concurrent, gains of the patentee.

    Once again, the word propaganda comes to mind. I wonder if the Cisco team helped author this book?

  44. The best minds in the business have struggled for years to capture and quantify the oft times elusive and speculative nature of patent rights and lo and behold, the authors – “using standard econometric tools” no less (as Homer Simpson would say “…so you know the results must be ‘standard’ and ‘econometric’, mmmmmmmmmm econometric….”), have magically calculated the value of a firm’s patent portfolio, and from that, the value of the average patent.

    The authors have failed to take into account other market factors affecting share value such as that the “innovated” product was the only one in the pipeline, and that there might have been a strong belief by the market that the “innovators” were on the wrong end of the lawsuit. The authors have further failed to offset the losses of the “innovators” with the, quite possibly concurrent, gains of the patentee.

    Once again, the word propaganda comes to mind. I wonder if the Cisco team helped author this book?

  45. Perhaps a salutary consequence of this book will be that industries not benefiting from patenting, and thus that support the various schemes for patent “reform” seemingly aimed at limiting or restricting patent rights, will simply abandon patenting. In that case, perhaps industries like pharma, that even these authors admit benefit from “positive incentives” of patenting, will be rid of the current ill-advised attempts at “reform.”

  46. I wonder what the graphs for the same time period for publicly traded firms defending non-patent law suits would look like? Maybe the problem is with our litigation system and not our patent system?

    Also, will patents issuing in this PTO “two pairs of eyes” and post-KSR era present similar problems and costs? I seriously doubt it.

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