A Patent Is Worth Having, Right? Well, Maybe Not
By MICHAEL FITZGERALD
PATENTS are supposed to give inventors an incentive to create things that spur economic growth. For some companies, especially in the pharmaceutical business, patents do just that by allowing them to pull in billions in profits from brand-name, blockbuster drugs. But for most public companies, patents don’t pay off, say a couple of researchers who have crunched the numbers.
“Today, over all, patents don’t work; for the information technology industry especially, they don’t work,” said James Bessen, who became a lecturer at Boston University’s law school after a career in business. In 1983, he created the first computer publishing software with Wysiwyg (an acronym for “what you see is what you get”) printing abilities. He also founded a desktop publishing company, Bestinfo, later acquired by Intergraph.
Neither Mr. Bessen nor his company patented anything, in part because his lawyers told him that software couldn’t be patented at the time. He ultimately became interested in whether patents spurred innovation, since the software industry for years innovated steadily without using many patents. He and a colleague, Michael J. Meurer, are readying a book on the topic, “Do Patents Work?,” due in 2008. (A synopsis and sample chapters are at researchoninnovation.org/dopatentswork/.)
The two researchers have analyzed data from 1976 to 1999, the most recent year with complete data. They found that starting in the late 1990s, publicly traded companies saw patent litigation costs outstrip patent profits. Specifically, they estimate that about $8.4 billion in global profits came directly from patents held by publicly traded United States companies in 1997, rising to about $9.3 billion in 1999, with two-thirds of the profits going to chemical and pharmaceutical companies. Domestic litigation costs alone, meanwhile, soared to $16 billion in 1999 from $8 billion in 1997.
Things have probably become worse since then. For instance, patent litigation is up: there were 2,318 patent-related suits in 1999, and 2,830 in fiscal 2006 (though that’s down from the peak year, 2004, when 3,075 were filed). Mr. Bessen said awards in patent cases also seemed to be up, though he was less confident in that data. Worse, he says, companies doing the most research and development are sued the most.
Mr. Bessen’s critique of the patent system does not go so far as that of economists like Michele Boldrin and David K. Levine, who argue that the patent system should be abolished ( http://www.dklevine.com/general/intellectual/againstnew.htm). Mr. Bessen said that besides girding the pharmaceutical industry, the system did seem to work reasonably well for small companies and individual inventors. Still, he said that “our finding is that the risk of patent litigation is creating a disincentive for R&D,” especially for information technology companies, and that the system urgently needs change.
Mr. Bessen’s data is controversial. John F. Duffy, a law professor at George Washington University, thinks that Mr. Bessen and Mr. Meurer have undervalued the profits made from patented items, though he acknowledged that a vast majority of patents are worthless.
Mr. Duffy, who thinks that the patent system remains a powerful innovation engine for the economy, also noted that the data covers only the private value of patents — it does not try to measure the social value of patents, that is, the impact an invention has for society at large. How, for example, might one measure the value of the stability of an airplane, which can be traced to an invention patented by the Wright Brothers?
Still, Mr. Duffy does not discount the research. In fact, he has invited Mr. Meurer to present it at a conference later this summer. “The numbers are serious, and they are provocative,” Mr. Duffy said.
The data don’t seem out of line to R. Polk Wagner, a law professor at the University of Pennsylvania. He said that other research has established that patents typically are worth less than $10,000. “It’s not any secret that on a cash basis, it doesn’t make sense to file patents, and yet companies do it,” Mr. Wagner said.
Some companies are still spending billions on research programs despite the increase in litigation costs. “Whether or not the R&D efforts you make invite litigation in no way relates to whether you do them,” said Bernard S. Meyerson, an I.B.M. fellow who is named on more than 40 patents and is currently chief technologist at its systems and technology group. I.B.M. has one of the corporate world’s largest research budgets, spending some $6 billion a year. And it does make money from its patents, at least on a licensing basis.
Of course, I.B.M. also employs 370 corporate patent lawyers who Mr. Meyerson said work “hand in hand” with the company’s inventors, trying to make sure that the company is aware of patent pitfalls that might affect its work.
I.B.M. and many other large high-tech companies have hefty patent portfolios, which Mr. Meyerson said deters the companies from suing one another. He said the industry operates under a large intellectual-property umbrella: “you are licensed under mine, I’m licensed under yours, and by declaring peace as opposed to war, you have freedom of action,” Mr. Meyerson said.
Even so, he said I.B.M. is concerned that innovation could be choked by patent litigation and would like to see the system reformed.
Congress could step in, and there are patent reform bills in the House and the Senate, with many of the provisions aimed at reining in litigation and damage awards. But this marks the third consecutive year that Congress has considered patent reform, and there is enough opposition from large companies to suggest that it will again have to wait until next year.
There are other paths to change: the United States Patent and Trademark Office could open patent applications to public comment, which could help patent examiners find applicable previous inventions. The office in June began a yearlong experiment allowing open comment on 250 patent applications (www.uspto.gov/web/offices/com/speeches/07-21.htm). The Web is already ahead of the patent office: a site called wikipatents (www.wikipatents.com) has created an open comment process for several years’ worth of patent applications.
ANOTHER might be to increase the number of appeals courts that handle patent cases. Right now, there is only one, the United States Court of Appeals for the Federal Circuit. The Supreme Court, meanwhile, may have helped the system immensely with a ruling in June that should stiffen the standard of “obviousness,” the key criterion in granting a patent. Tougher standards may weed out many bad patents and reduce litigation.
But technological inventions are often not obvious, especially when it comes to the esoteric world of software, where it can be unclear even to the inventor what the patent will be good for.
Mr. Bessen, for one, is not optimistic. “Things are going to get a lot worse before they get better for the technology industry,” he said. If he’s correct, it will become harder to question his economic analysis of the current patent system.
Michael Fitzgerald is a Boston-area writer on business, technology and culture. E-mail: email@example.com.