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Patent laws stifle innovation

alex ioana
the peruser
Published in
17 min readOct 23, 2016

A month ago I stumbled upon a spreadsheet with the counts for all patents issued in the US up until 2015. Looking at yearly evolution I found that the numbers were oddly stable: states kept issuing patents at a constant rate, with relatively little fluctuation on a year to year basis.

So that got me thinking about their impact. Since I didn’t (and still don’t, really) know much of anything about the influence of intellectual property on the health of the economy, I decided to look at some measurements and see if I can learn something along the way.

A (very) brief history of patents

Let me start by saying that the genesis of patents is a bit fuzzy, but it looks like intellectual property didn’t (at least at first) put a price on originality: in 1474 people could ask for exclusive rights from the Republic of Venice to either sell something they themselves had invented, or for selling something that they had brought over from their travels overseas.

There’s a very good reason behind this — the leaders of Venice couldn’t care less if someone from a distant corner of the Earth wasn’t cashing in on their innovation, but they did care if people in their own court would; and they even spurred them on by guaranteeing that originality would be protected.

Fast forward to the birth of the United States. In the centuries that passed since Venice came up with the first legal definition of patenting, the concept had trickled down from age to age, eventually finding a place in the minds of the founding fathers of the US. That’s why the first article of US Constitution set out to instruct that Congress was to promote the progress of science and useful arts by securing (for limited times) authors and inventors with the exclusive right to their respective writings and discoveries.

In 1474 people could ask for exclusive rights from the Republic of Venice to either sell something they themselves had invented, or for selling something that they had brought over from their travels overseas.

Fast forward some more and you’ll see that the whole idea behind patents stands as backbone to much of how we nowadays perceive what is and what isn’t acceptable about making money off of new technology — we want some of us to innovate so that those innovations may help the lot of us in the long run, and we’re ready to guarantee these innovators certain perks so that they might be encouraged to do just that. At least in theory.

The scope of intellectual property

While laws differ around the world, the basic concept is this: patents are meant to prevent others from a certain set of commercial actions which include (but aren’t limited to):
– producing
– making use of
– selling
– marketing
– or even importing anything which is presumed to be under an already existing patent which belongs to another party.

So does that empower a patent holder? There’s an ambivalent way to answer such a question. The best way I’ve found (and you can thank my bias for political philosophy for this) to understand what patents are really about is to take from the two concepts of liberty that were coined by Isaiah Berlin: patents give you negative liberty, which is to say that they prevent bad things from happening to you (whereas positive liberties give you the right to do stuff).

While patents empower both kinds of liberties, it’s ultimately that their operation is negative — since they always protect you. And since it’s ultimately up to the patent holder to do something with that specific bit of intellectual property, you can’t say that the positive liberty given by having a patent can override the right to be protected. But I digress.

Patents give you negative liberty, which is to say that they prevent bad things from happening to you.

In other words, in the context of the free market, patents give you a competitive advantage, kind of like saying that since you’re the first to come up with this idea — and took the time, and money out of your pocket, to register the said idea — you should have primacy in making some money out of it.

But the mainstream discussion around patents almost always highlights extremes on the spectrum of intellectual property, either demonizing it or making it an example of how some companies are the true innovators behind the wonders (and luxuries) of modern life.

Having said this, I’d like you to stop and ponder at whether you’d like a world with, or one without patent protection. I ask you to do this because what follows is a breakdown of the pro and contra views on patents.

The good, the bad and the unpractical

The brutal truth of the matter is that in a free market, just about any move you make (either forward or backward) is bound to cost you some money. All companies need funding so as to get their revenue/loss equilibrium, and yet nowhere is this more palpable than in the case of startups.

I say this because the conjecture is that an investing party (so the blood startups need to survive) is much more open to shoving some cash down a startup’s funnel if that certain company has legal backing behind its core ideas and products.

So patent laws really are one of the most important ways of controlling not only the way in which new entrepreneurial endeavors come about on the market but also the success or failure of most of them. This perception has even seeped into economic theory: it holds that business will be sub-optimal if too little intellectual property protection (i.e. laws) exists.

So what implications does this have? Let me break it to you that there’s really no way to give a clear and universal answer to this (since conditions differ from company to company) but an overall perspective on the US might point to some benefits of intellectual property that aren’t measured in dollars.

A study by the Kauffman Foundation that sifted through nearly three decades of data found that between 1977 and 2005, on average, consolidated firms were “job destroyers”, losing roughly 1 million jobs per year — whilst startups were “job creators”, adding an average of 3 million new positions in the market per year. With 81 industries out of the 313 present in the United States judged as intellectual property-intensive, it’s believed that patents, trademarks, and copyrights have accounted in 2014 alone for nearly 28 million jobs.

Similar results came up in the Berkeley Patent Survey of 2008. Researchers found that, relative to the information received from companies which participated in the study, the issuing of a new patent can be associated with 3 to 10 new jobs.

It’s believed that patents, trademarks and copyrights have accounted in 2014 alone for nearly 28 million jobs.

Another result from the Kauffman Foundation was that while job growth patterns for both startups and existing firms were pro-cyclical, during times of economic downturn or recession, job creation at startups remained pretty stable — while job losses at consolidated companies were much more sensitive to the ups and downs of business cycles.

Of course, you can’t say that every instance of intellectual property attainment equates to job creation or even an increase in business for that matter. However, some of them can be worth thousands of jobs.

But not everybody thinks patents are good. In a 2014 Forbes article, Bret Swanson argued that the Patent and Trademark Office of the US has, over time, made a habit of issuing too many patents of “questionable quality” and has permitted patenting in industries where the “very idea of patentability is questionable”, such as software. In this respect, Swanson is by no means a lone voice.

The arguments against patenting usually revolve around a simple set of beliefs: namely, patents don’t really influence the way innovation comes about, and if anything — say orthodox believers in the uselessness of intellectual property — their effect is completely negligible, since it might very well take a lot of time for competing companies to rip off on the developments of innovative companies, and by that time, market forces would have already created something of a brand loyalty for the original innovators.

Intellectual property right such as patents aren’t awarded for an indefinite time so that patent owners don’t hold indefinite monopolies.

While the previous point of view might seem a bit too harsh, there might be some justification in it: since entrepreneurial activity subject to patent laws can sometimes be either deflected or even blocked altogether, it can be said that intellectual property laws which are too strong or ambiguous do more harm than they do good.

Another issue people call out time and again is that patents give a monopoly over to whoever owns them. This argument continues with fears that said monopoly might give way to exploitative prices for consumers. Such fears are by no means modern — they’ve been around since the very birth of patents, and it’s for this reason that intellectual property right such as patents aren’t awarded for an indefinite time.

From Renaissance to prosecution

The reality of today is that sometimes intellectual property does the opposite of what it’s meant to do by design. Given how patents are getting ever more publicity for their enabling warring companies to take their efforts from R&D, and instead invest heavily in their ability to sway courtrooms, it becomes understandable why some of us believe that the scope of patent laws is more of a curse than a blessing.

Three new studies mentioned in a Harvard Business Review article have provided what’s believed as sufficient proof to say that patent litigations are taking a serious hit on the willingness of venture capitalists to invest and on the drive of US startups to continue spending their limited resources in research and development.

So why the recent buzz around suing for patent infringement? While legal wars between tech giants (think Apple and Samsung) are hugely visible, it’s not them that are giving patents a bad name. Non-practicing entities that hold intellectual property do. You might know them as trolls.

Patent trolls (or non-practicing entities, whichever way you prefer) are companies or people that take the time to acquire intellectual property indiscriminately without having product development as a goal. Given the legal contexts, trolls are betting on hefty returns (in the form of damage awards) on the initial investment of obtaining patents. These entities exist mainly to find other entities that infringe on their patents and sue them for the said damages.

And research has found that patent trolls cost defendant firms about 29$ billion yearly in litigation costs and cause for about 60$ billion in wealth drain from American companies each year.

In all fairness, if we’re to preach whether patents are good or bad then this is where the line must ultimately be drawn. Fair intellectual property manifests itself in products, processes or improvements to tech that make it to market, and it’s vital for the economy of the United States. And yet under the same legal jurisdiction, it becomes justifiable that patenting which does not have products, processes or innovation as an end — but rather litigation — becomes a common occurrence.

A PriceWaterhouseCoopers study shows patent suits in the U.S. grew to over 5,000 in 2012 from around 1,200 in 1991. But what’s more, the results highlighted that patent trolls raked in an average of double that which practicing companies did in terms of damage awards in the decade accounted for.

Looking at litigation outcomes, PWC found that both trolls and practicing companies have a success rate of about ⅔ at trial. Highest damages awarded were issued within the telecommunications industry; but biotech / pharma, medical devices and IT also had high median damage awards.

Sure, just because a patent holder isn’t a practicing entity would not make it a troll outright: the highest success rate among non-practicing entities was found to be for university and non-profit companies that held patents.

But there’s a very simple and, ultimately, just consideration behind the idea of patent laws. It takes a lot of time, effort and — of course — cash to get one’s innovation into the market; but once something new is out, it can be relatively cheap to rip off on that specific innovation. Given this, intellectual property laws protect people that take the time to innovate and protect them from copycats.

The market’s take on patents

The Berkeley study I’ve previously mentioned also measured the average amount of money spent to obtain a patent at $38.000 — making cost the biggest deterrent to patent-seeking.

Sure, there are other reasons why companies don’t file for intellectual property on what they do. Some are practical, such as the belief that guarding a secret is better protection than seeking legal cover: the world famous wonder spray WD-40, for instance, was never patented, and the company keeps copycats at bay by keeping its secret formula under lock and key.

San Diego, 31st of July 2013: Garry Ridge, CEO of the ever-popular WD-40 company.
Credit: JOHN GASTALDO/U-T SAN DIEGO/ZUMA PRESS

So how should we look at patent laws — are they a hindrance on new businesses, or a vital bit of law that gives peace of mind (and wallet) to people who plan on innovating? As it so happens, the Berkeley study highlights that the answer varies by industry of activity.

While patents do seem to help startups, it’s a more honest thing to say that patents are a boost to industries where the final product is something that actually has a physical form. Conversely, say the authors, “patents are much less important as a means by which software firms capture competitive advantage”.

Given how software copying requires skills that would qualify the patent infringer to develop a software solution that might be just as good, the presumption is that patenting would be more of a cost than a benefit. And true to this, the majority of software development companies in the US hold no patents.

And yet the wars rage on. A study found that out of a total of 1357 decisions made between the years of 1983 and 2008, 40% resulted in a loss of patent protection. In turn, loss of patent protection was shown to lead to a ½ increase in subsequent citations — meaning that when looking at averages “patents tend to block cumulative innovation”.

So what have I found?

Writing this up has been a bit tough since I’ve had to forgo certain rigidities of mainstream economics — as I’m ultimately trying to find relationships between intellectual property and market forces. Using patents has come up time and time again as a way to gauge the performance of an economy, true; but since more accurate models for measuring financial benefits came about in the 1960s, using intellectual property (while a sort of reliable measure) has all but ceased.

Yet my research has found some very striking determination coefficients between patents issued and the GDP of each US state (which I’ve also referred to as GSP, meaning Gross State Product).

While not statistically significant, I’ve found a few things that are nifty enough for me to want to share:

  • Patents and GSP correlate pretty strongly in the same year; calculating (hypothetical) measurements of determination shows that there might be a link between the two — so either GSP causing patent creation (probable) or patents influencing GSP growth (less probable but just as valid by just looking at the stats).
  • Patents and the GDP of each state in the following year have determination coefficients of almost 100%! Coincidence? Maybe so, but pretty damning and constant coincidences, since all 51 political entities of the US behaved the same way.
  • While coefficients are still huge between patents issued and GSP in following years, it seems to be that the biggest influence (if there even is one) is in the first year which follows the issuing of those patents — so the less likely perspective of the above two, but permit me the luxury of forgetting how this isn’t statistically significant or how it just shows that the data moves up and down on almost overlapping trends. Causation, no; common causation? Maybe.

In my job as a marketer and in previous positions I’ve had the chance to look at numbers quite a bit — and usually when I calculate things like correlation or determination I don’t use the result as definitive proof — I just use it as a way to better eyeball a certain situation. But never ever had I stumbled on such matches — and on so many years. Just to clarify, I’ve found that between 2002 and 2015, patent evolutions for all 50 states and DC almost perfectly match state GDP evolutions.

So that got me thinking about what might be in a common causation link with patents. The literature mentioned jobs, so I looked at unemployment figures. I also took the state GDP figures from before and state GDP per capita figures.

The above map highlights what the numbers added up to: the more powerful the local economy (see the size of the green circles for context) the more patents issued overall for that state (shaded in violet). No surprise there, I’ve already talked about this.

But I hit a few snags along the way — I couldn’t see any clear patterns when it came to unemployment and per capita production. So I took all 51 political entities of the US and split them into three clusters, each of 17, to see if average measurements could highlight something I was missing.

Instead of using volumes, having fiddled with the data on and off over the past few weeks, I decided to take annual growth rates into account and group my clusters by that.

First off, I’ve found that states that have increased their patent numbers the most since 2002 haven’t also seen the biggest leaps in GSP — something which surprised me. While I know that my take on the determinations isn’t statistically significant, I was expecting the overall picture to show the same relationship. But then again, I did find that states where patents were filed more also experienced less increase in unemployment. My results come into accord with previous literature in this respect.

Next, I took state GDP. Looking at the information from this perspective, I did find that when states were clustered by the speed at which they increased their local production, on average, the higher the growth of production, the higher also the growth in the number of patents issued — and that unemployment was also low. This new perspective shouldn’t come to contradict the previous relationship I’ve talked about — it’s just a different perspective since the 50 states and DC were clustered differently.

Then came state GDP per capita — and this is where I got the feeling that I was on the right track. Looking at correlations and determinations (as one does, trying to figure out how to look at such things) I found very poor relationships between GSP per capita figures and unemployment or patents filed. So I wasn’t really expecting to see that states where production per capita was increasing the fastest on average also had the highest growth rates for patents issued, highest overall GSP (so not per capita) — and the lowest growth rates for unemployment!

Lastly, I clustered the US by unemployment figures — and again, came across something unexpected but pretty revealing. In states where unemployment grew the fastest on average between 2002 and 2015, more patents were issued and production counts grew only moderately. Maybe patents don’t help people out that much, or the economy, after all.

Takeaways

It’s an accepted truth of today that in certain situations intellectual property laws do more to fragment ownership than to stabilize it, raising overall costs for companies, constraining liberty of movement, stifling further development and exposing companies to ever more common patent litigations. All of which take a hit on jobs.

And yet it’s also true that intellectual property attainment blocks cumulative innovation only in very specific environments. Findings show that patents can and will promote new discoveries, that they can help the dissemination of knowledge, avoid wasteful innovation efforts, and help commercialization of new technology.

But in this complex reality which is the market, there seems to be no other universal truth than this — the US is in dire need of a reform to its patent laws, one which would stop predatory entities from scraping money off of companies that really want to make use of innovation, one which would differentiate in a more sensible manner the subtleties of each economic sector and how they cope during the economy’s highs and lows, and lastly, one which should take a step back from the status quo and reiterate the basic principle behind patents: they’re meant as a thank you to people who innovate and make our lives better.

Thanks for reading.

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alex ioana
the peruser

Written by alex ioana

310 Followers
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I do some marketing at Booking.com. Former IBM, Oracle.

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