The State of Our Patent System Is Brighter Than You Think


Joseph Schuman
January 22, 2016

It’s not what the Obama administration is saying about patents that counts these days but what it’s not saying.

After a State of the Union address that didn’t include patents – and sure, national security, healthcare and the federal budget interested most of President Obama’s audience more than IP – White House Chief of Staff Dennis McDonough published a blog post touting both the president’s ambitions for his final year in office and the accomplishments of the previous seven. It was only down a list of the latter that patents got a mention:

Obama, McDonough wrote, “signed the America Invents Act into law to reform the nation’s patent laws for the 21st Century, helping companies and inventors avoid costly delays — especially in key industries like telecommunications, IT, advanced manufacturing, and medical devices that depend on a strong and healthy intellectual property system.”

That was it. If the administration has dropped its calls for additional legislation and its support for a major overhaul of the patent system , it should be praised for taking into account evolution of the patent law landscape – as well as noteworthy recognition that major reform had already been set in motion and acknowledgement that resonating court decisions, changes to the judiciary’s rules of procedures and new rules put in place by the U.S. Patent and Trademark Office (USPTO) have addressed perceived litigation problems.

This evolution of the administration’s thinking on patents, in turn, may be the latest sign of a public conversation shifting from an emphasis on the “dark side” to a more realistic and holistic characterization of how patents perform in the innovation ecosystem.

Standing Up to the Power of the ‘Dark Side’

One recent effort to clarify the record is a working paper from the Office of the Chief Economist of the USPTO by Joan Farre-Mensa of Harvard Business School, New York University’s Deepak Hegde, and Alexander Ljungqvist, an economist who leads NYU’s Salomon Center for the Study of Financial Institutions and conducts research for the National Bureau of Economic Research.

The trio of respected academics begin by noting how much some recent academic papers have focused on the “’dark side’ of patents, arguing that patent holders engage in frivolous litigation, demand excessive payments from alleged infringers, and stifle innovation, particularly for small entrepreneurial firms.”

Wary of these arguments, Farre-Mensa, Hegde and Ljungqvist set out “to identify whether patents have a bright side and, if so, shed light on the channels via which this bright side operates.”

“Specifically, we investigate whether patents play a causal role in innovative startups’ growth, follow-on innovation, and economic success,” they write. “We focus on startups both because they are a key source of innovation, economic growth, and job creation, and because the literature on the dark side of patents portrays small inventors as suffering the most from the shortcomings of the patent system: They likely face the greatest resource constraints when applying for patents, enforcing their patent rights, and defending themselves when sued by larger rivals.”

To this end, they examined 45,819 first-time patent applications filed at the USPTO by U.S. startups since 2001 that received a preliminary decision by 2009 and a final decision on the patent by the end of 2013. And they were able to access the USPTO’s internal databases, which include detailed information on the review histories of all patent applications – a first for researchers, who until now could not access data on rejected applications.

What they found is that “patents indeed have a bright side.”

“Our causal estimates suggest that the approval of a startup’s first patent application increases its employment growth over the next five years by 36 percentage points on average. The effect on sales growth (a 51 percentage-point increase) is even larger,” they write. “A first patent grant also has a strong causal effect on a firm’s ability to continue innovating, increasing both the number of subsequent patents the firm is granted (by 49%) and their quality (with the average number of citations per subsequent patent increasing by 27%). In addition, patent grants more than double the probability that a startup is eventually listed on a stock exchange -- a commonly used metric of startup success.”

The Investment Connection

And how does this causal effect work?

The authors found that approval of a patent application increases a startup’s probability of securing funding from venture capitalists or other professional investors over the next three years, and that this effect is strongest for startups that raised little or no VC funding before the USPTO’s decision, were founded by inexperienced entrepreneurs, and operate in the information technology sector. “We interpret these findings as evidence that patents facilitate startups’ access to capital by mitigating information frictions between entrepreneurs and potential investors,” they write. This “alleviates concerns regarding startups’ ability to monetize inventions” and can “help startups signal their quality to investors.”

“Access to capital in turn sets startups on a growth path that transforms ideas into products and services which generate jobs, revenues, and follow-on innovation,” the authors add.

The Waiting Is the Hardest Part

But they did find validation for one big criticism of the current patent system: Inventors have to wait too long for the USPTO to approve or reject patent applications, “thus prolonging uncertainty about property rights and diminishing the value of patents to their owners.”

On average, they say, it takes the USPTO 1.75 years to make a preliminary decision on the patent applications they examined, and a full 3.2 years to make a final decision – “a lifetime for a startup.”

“Each year of delay in reviewing a firm’s first patent application that is eventually approved causally reduces the firm’s employment and sales growth over the five years following approval by 21 and 28 percentage points, respectively,” they found. “Delays also negatively affect subsequent patenting—with each year of delay reducing the number of subsequent patents the firm is granted by 14% and the number of citations-per-patent these patents receive by 7%. Delays even reduce the probability of going public, by as much as a half for each year of delay. Economically, a two-year delay has the same negative impact on a startup’s growth and success as outright rejection of the patent application.”

This last finding does offer a suggestion for additional patent reform.

“The USPTO has historically faced budgetary constraints that limit its ability to allocate more resources to patent review. The constraints force the agency to make choices among various priorities, including speeding up reviews and improving review quality,” the authors write. “Our findings suggest that the benefits of speeding up reviews can be immediate and substantial, particularly for small inventors whom the patent system is intended to protect.”