Category: Economic Study

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Economic Study Patents

Empirical Study Confirms Positive Relationship Among Patents, Technological Progress, and Societal Benefit

dictionary entry for the word "innovate"We “stand on the shoulder of giants,” goes the famous adage. In a groundbreaking new law review article, Does Patented Information Promote the Progress of Technology?, Cardozo Law’s Jonathan H. Ashtor examines the relationship among patents, information theory, and their corresponding benefits to society and technology. His study applies economic theory to empirical patent data, concluding that a patent’s disclosure, and hence its informational content, has a positive technological impact on society beyond any limited private monopoly bestowed on the inventor. The paper was supported with a research grant from CPIP’s Leonardo da Vinci Fellowship Research Program.

Today’s populist, conventional wisdom is that patents are monopolies that block public benefits and restrict innovative behavior. Ashtor’s research reveals the opposite. He explains that “this study finds that the greater the information content of a patent’s disclosure, the higher the probability it will be held valid, and in turn, the larger its expected positive impact on the development of future technologies.” Combining an in-depth review of the underlying economic theories around the role of the patent system’s information dissemination function with a rigorous empirical study methodology, Ashtor confirms that valid patents have a greater positive impact on future technologies.

Economic Theory Validates Patent System’s Ultimate Societal Benefits

Academics often cite a variety of theories underlying the fundamental benefits of the patent system. But, at its core, the patent system is a quid pro quo between the private benefit of the grant of a limited monopoly in exchange for the public dissemination of the knowledge of a discovery, in turn, allowing others to build upon this information. While the U.S. Constitution enshrines this concept for promoting the “useful Arts,” (Art. 1, sec. 8, cl. 8), the theory around this bargain dates back thousands of years.

Modern economic patent theories are rooted in classics such as Aristotle’s Politics, in which the ancient Greeks advocated for recognition, awards, and honors for the achievements of discoverers. The “storehouse of knowledge” theory states that patent activity contributes to expanding public storehouse of knowledge. Relatedly, the “prospect theory” advances an understanding that the opportunity to obtain a patent monopoly creates the incentive for investment in research for new inventions. Finally, the “innovation theory” infers that patents are necessary to induce people to put existing inventions to practical use. Together, these theories speak to how patents on discoveries ultimately contribute to the public’s benefit.

Moving beyond these traditional concepts, Ashtor’s paper explores the economic “tradeoff theory” of patents. First appearing in Nobel Laureate William Nordhaus’ famous 1969 article regarding the technological development process, tradeoff theory states that when the patent disclosure function works properly, patents tend to promote technological progress notwithstanding the exclusive monopoly rights. Ashtor explains that tradeoff theory supports the idea that more robust patents have the greatest positive impact on technological development. He observes that “[p]atent law provides a convenient lens through which to observe the impact of a patent on future technology.” Conversely, invalid patents, such as those lacking novelty, are found to have the weakest impact on future technologies. (Ashtor notes that even an invalidated patent is useful; it is prior art and can also guide future technological development.) While this causal relationship may be intuitive for some, Ashtor uses empirical evidence to back it up.

Empirical Analysis Verifies Positive Impact of Patents

Employing a solid empirical research methodology, the study examines patents and data obtained from federal court patent litigation records, along with input from the USPTO’s Office of Economic Analysis. In essence, the study charts the impact of future patented technological progress as a product of the resulting new patents filed (noted through the use of forward citations). Forward citations are widely used as a measure of innovation, particularly when comparing patented technology in a broad range of fields. Ashtor’s study relies on a dataset of approximately 1,000 U.S. patents. A multitude of variables are considered in determining whether the patents are demonstrating this positive effect, including the number patent claims, the length of the respective patent claims, the size of the patent family, the number of inventors, the written description’s length, the vintage of the patents, and the adjudicated validity or invalidity.

The study incorporates data modeling and log-linear regression analysis. It then measures future technological innovation through indicia such as future additional patents or other cumulative innovation. For example, by counting the number of additional citations each patent generates, one can assess the impact, including the follow-on technological advancement regardless whether they are subsequently validated or invalidated patents. Ashtor’s models are designed to consider, and overcome, various systemic challenges, such as biases in the dataset or other idiosyncrasies.

Information Theory Supports the Value of Patents

At the heart of Ashtor’s paper is a discussion about how the information contained in a patent disclosure has real value not only for the inventor, but also for the public at large. The debate around intellectual property often conjures fear that it “locks up” public knowledge or somehow “holds up” progress. But Professor Nordhaus’ tradeoff theory demonstrates that “patents do not provide permanent or very powerful exclusive rights over information.” In fact, the very dissemination of information arising from the patent system leads to real public benefits. It’s critical to understand that a patent protects the disclosed inventions, not the underlying ideas. Ashtor demonstrates that the patent system is critical to the dissemination of knowledge.

Ashtor’s study validates the tradeoff theory of patents. Namely, the tradeoff arising from the societal benefit of a valid patent’s information disclosure is generally greater than the restrictions from the private right of exclusivity due to any patent monopoly. Hence, valid patents promote more technological progress than invalid patents. The way in which patents are invalidated corresponds to varying impacts on technology, and Ashtor’s empirical data demonstrates a direct relationship between a patent’s technological impact and certain intrinsic characteristics of its disclosure. Generally, valid patents tend to have greater information content than invalid ones.

Human Genome Project Provides Perspective

The importance of Ashtor’s research is highlighted through the additional context of a case study. He considers how patent activity impacts cutting-edge fields like health care and molecular biology. While prior studies have looked at gene patenting activity surrounding the Human Genome Project (HGP), they’ve largely been limited to examinations of follow-on activity arising from both the publicly available patented information and the gene patenting activity by private firms. Ashtor is quick to note that past studies around the Human Genome Project do not “directly address cumulative innovation of patented technologies,” the focus of his exploration. Ashtor argues that all of the gene-related patents flowing from the HGP illustrate the positive impact of future patented technological progress. He concludes that his case study hence shows that the resulting gene patenting activity from the HGP supports the tradeoff theory of patents.

Ashtor’s study is groundbreaking, empirically rigorous, and provides much for future researchers to consider. As skeptics of intellectual property continue to voice their doubts, it’s critical to understand the societal benefits that patents confer. Ashtor’s work takes a step in the right direction, and we can expect other researchers will stand on his shoulders as they build upon his work.

Ashtor’s article was recently published in the Northwestern University Law Review, and the full text can be downloaded here: https://scholarlycommons.law.northwestern.edu/nulr/vol113/iss5/2/

Categories
Economic Study Innovation

Creative Upstarts and Startups: How IP Creates Opportunities and Opens Doors

the word "inspiration" typed on a typewriterThis is the first in a series of posts summarizing CPIP’s 2016 Fall Conference, “Intellectual Property & Global Prosperity.“ The conference was held at Antonin Scalia Law School, George Mason University on October 6-7, 2016. Videos of the conference panels and keynote address, as well as other materials, are available on the conference website.

The opening panel of CPIP’s 2016 Fall Conference examined how intellectual property (IP) creates opportunities for startups and creative upstarts. Unfortunately, IP policy debates often refer to a misguided notion that intellectual property hinders innovation and creativity, especially among smaller businesses. The panelists, Prof. Deepak Hegde (NYU Stern School of Business), Brian Detwiler (Cobro Ventures, Inc.), Prof. Jerry Liu (University of San Francisco School of Law), and Antigone Peyton (Cloudigy Law, PLLC), illustrated how this notion ignores the fact that intellectual property provides incentives and security for startups and small businesses entering the market and enables returns on investments.

Prof. Deepak Hegde discussed a study he undertook to measure the extent that patents benefit startups. Patents provide incentives for innovation by affording the right to exclude others from making, selling, or otherwise using the patented invention. This incentive is ensured by increasing the cost of imitations, while facilitating licensing and access to venture capital by innovators. At the same time, there is a concern that patents are not as effective for smaller entrepreneurs because patents take too long to issue (three years on average), they are costly to obtain ($20,000 in patent application costs on average), and are expensive to enforce once infringed. The study, however, shows that timely patents do substantially benefit startups.

Hegde noted that measuring the causal effect of patent rights on startups is often an empirically challenging task due to the lack of complete data on issues like rejected patent applications, firm outcomes, and correlations between patenting and startup success. However, Hegde was able to show a positive causal relationship between approval of the first patent application and various measures of startup success such as persistent employment growth and higher sales.

For instance, Hegde found that approval of the first patent application by a medium-sized firm with eight employees leads to three more employees (on average) hired within the five years following approval. Likewise, a medium-sized firm with $4.3M in revenue has $2.3M higher sales over the five years following approval of its first patent. Moreover, approval of the first patent application leads to a 66.4% increase in the number of subsequent applications, a 48.4% growth in the number of approved patents, and a 68.5% increase in the number of total citations.

On the other hand, Hegde discovered that delays in the patent approval process reduce sales growth, with each year of delay reducing growth by 28.4% over the five years following approval. Delays also reduce the quality and quantity of subsequent innovations, with a 14% decrease in number of subsequent applications and a 8% reduction in number of total citations. Even more so, a five-year approval delay is comparable in effect to not granting a patent at all. Finally, Hegde showed that patent approvals causally increase the probability of venture capital funding by 57%, and thus, help to set startups on a growth path.

Brian Detwiler discussed the challenges startups face from a more practical point of view. Specifically, Detwiler focused on two startups that Cobro Ventures is currently managing. Measures of success differ among the two. For a health & fitness center, the issue is profitability, and for a tech startup, the concern is typically acquisition or an initial public offering. Because Cobro Ventures is a self-funded company, it does not encounter some of the funding challenges as other startups. It does, however, face the same intellectual property issues as others in the industry.

The critical issue for a startup in the fitness industry, Detwiler noted, is building a strong brand identity to distinguish itself from other companies in the crowded marketplace. CrossFit is one good example of how a strong brand makes a business successful: CrossFit generates its revenues solely from licensing its brand out to gyms and fitness centers, without operating any of its own.

Tech startups, continued Detwiler, are more invested in the value of their patents because patent due diligence is a major component of any tech acquisition. Bundles of patents and open continuations are what acquirers value the most. The former allows acquisition of all patents associated with a particular technology; the latter provides opportunities to expand claims to pending patents down the road. A patent by itself does not necessarily guarantee the merit of a particular technology, but it certainly shows that at least the Patent Office believes that the particular technology was unique in the marketplace at the time of issuance. Patents can also be used as weapons in protecting a company’s interests and as a bargaining chip in negotiations.

Detwiler stated that trademark registration is equally accessible to startups and big corporations because it is inexpensive (the filing fee is about $300 per class of goods/services), easy to file (only 10 minutes), and fast (around 3-4 months). With patents, the biggest challenge is getting a notice of allowance. There is a common misconception that all patent applications have the same value. This may be true for big corporations that file thousands of patent applications each year. But for startups, which usually have only two or three applications that they depend on, each such application is incredibly important, and if rejected, causes a lot of frustration.

Even though startups have more executive involvement in the patent approval process and are more willing to accept reasonably narrow claims at the outset, Detwiler said the patent examination process is still too lengthy. To get the best of it, he suggested that applicants explain in plain terms what they want to protect, examiners explain in plain terms what they found in their prior art searches, and both sides explore how to capture the claimed invention.

Prof. Jerry Liu talked about the study he undertook on market incentives and intrinsic motivations in the creative industries, particularly in the Chinese music industry. He focused his study on how online piracy affects the music industry and how real-world artists respond to copyright incentives. According to Liu, the Chinese music industry is significantly underdeveloped as compared to the United States. While the overall Chinese economy is fast approaching the size of the U.S. economy, the Chinese music industry represents only 1.5 % of the U.S. music industry.

Liu found that this outcome has little to do with the overall economic environment in China. Even though the music industry experienced a substantial decline since 2005, the economy as a whole enjoyed about 10% of annual growth. Nor is this a consequence of the infamous censorship system in China. Unlike the music industry, the book industry in China has demonstrated growth by 129% for the last decade. The likely reason for this difference is that the piracy rate in the music market is much higher than it is in the book market.

Empirical data collected by Liu establishes the correlation between online piracy and the Chinese music industry downturn. Online piracy surged in 2005, the very same year when music production started to decline significantly. As a result of such widespread piracy, music products have become undervalued among consumers. Only 25.4% of Chinese consumers are willing to pay for music, and only 5.9% actually pay for music. Online piracy has also caused a significant imbalance in the development of the digital music market. Notably, the Chinese government itself recently recognized that uncontrolled piracy has devastated the digital music marketplace.

In China, Liu said that online music services, including downloads and streaming, account only for 1% of the total digital market, while mobile sales (e.g., ringtones) hold 99% market share. But only 32.6% of music consumers are accessing music on their mobile devices, while 96.8% of users access music online. This shows that Chinese consumers pay the least for the most popular channel of music consumption. Additionally, online piracy affects business models in the music industry. For instance, record labels have moved away from their traditional role as investors. They are now working with new artists either on a self-funded basis (labels only provide services and artists bear all the risks of investment) or under so-called “360-degree deals” (labels sign artists for long-term contracts and retain more control over their careers and even their personal lives).

Finally, Liu highlighted the paradox of intrinsic motivations: 92% of the surveyed artists named emotional benefits as their incentive to create, and 97% of those artists also recognized the importance of economic benefits for creation. Importantly, many artists started their career in music not because of the money, but many of them also gave it up because of the money. In this way, copyright protection may provide a powerful incentive for artists to create in that it preserves their artistic freedom while ensuring a decent level of living and a fair return of production costs.

Antigone Peyton talked about strategies for tech companies to protect their assets. In this regard, she noted the importance of contracts at the early stages of the product development cycle. From the copyright prospective, contracts help to establish whether hired developers are employees or independent contractors and to ensure that their rights are assigned to the company. Without a written, explicit assignment of a copyright, a company may get in trouble down the road. For instance, when registering its work with the Copyright Office, enforcing its rights, or selling its assets to a third party.

Peyton stressed that companies working with the government need to understand what intellectual property rights they are giving away and to avoid assigning away all of their rights. Government contracts often include IP provisions that provide the government with a fully-paid license and allow it to bring in another contractor to continue the job. Another important aspect involves privacy policies, especially in the cyber security area. Companies that innovate in this sector usually bring people and know-how to the table, but not necessarily anything that is patentable. To protect its know-how, such a company should consider signing non-compete agreements with the people working with the company.

The barriers to entry for starting up a company in the software industry are small, said Peyton. But that means there are a lot of such companies out there trying to compete with each other for market space. To this end, companies need to think carefully about brand development and brand recognition, as well as how to protect their markets from competitors.

Peyton noted that if a company believes it has patentable subject matter, it should consider filing a patent application early on. However, patenting is the most expensive IP regime and usually requires the help of a patent professional (even with provisional applications). Patents are particularly critical in the biotech, chemical, and pharma industries that are money-intensive endeavors, which largely depend on attracting venture capital investment as early as possible. Generally, tech companies do not need to choose between copyrights and patents, and they may pursue both options to protect their software. But investing in copyrights and brand development is a relatively inexpensive way to start out and build an IP portfolio. Depending on the technology used, trade secret protection may also be an option for tech startups.

Together, the four panelists highlighted how intellectual property has a critical value for startups and small companies in the creative and innovative industries. Not only does IP ignite their businesses, but it also brings opportunities for future growth through sales, licensing, or acquisition. A strong IP portfolio is an invaluable asset, and building it early allows companies to open more doors.

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Biotech Economic Study Patent Licensing Uncategorized

UNITAID’s Request for Suggestions on Breaking Down IP Barriers Ignores Harmful Patent Delay

dictionary entry for the word "innovate"Last month, global health initiative UNITAID launched an appeal for suggestions on breaking down barriers that frustrate the progress of public health. UNITAID is a multilateral partnership hosted by the World Health Organization whose mission is to develop systematic approaches to identifying challenges in the treatment of devastating diseases such as HIV, TB, and malaria. The call for suggestions comes as UNITAID launches a renewed effort to improve access to health products for “the needy and vulnerable.”

Unfortunately, UNITAID’s request takes a narrow view of the obstacles to a better public health system, choosing to blame intellectual property and patents for blocking access to life-saving medicines. The call for suggestions posits that while patents reward innovation, they also hamper access to drugs by limiting competition. After promoting several controversial mechanisms that would strip patent owners of their intellectual property rights, UNITAID urges responders to submit ideas that would further weaken patent systems around the world.

In response to UNITAID’s request, CPIP’s Mark Schultz and Kevin Madigan submitted comments that call attention to a serious and underappreciated problem detailed in the forthcoming white paper, The Long Wait for Innovation: The Global Patent Pendency Problem. Excessive patent application processing delays and inefficient patent systems are obstructing the distribution of ground-breaking new drugs by deterring both home-grown startups and foreign companies from investing in innovation. The following comments stress that effective property rights are critical to delivering health products to patients and that without a competent patent system, the market for medical innovations cannot function.

High-Level Suggestions to UNITAID on Intellectual Property Rights
Mark Schultz & Kevin Madigan[1]
September 15, 2016

We submit these comments in response to UNITAID’s call for high-level suggestions on intellectual property rights (IPRs). UNITAID’s request for suggestions observes that IPRs can pose a barrier to health products reaching “the needy and vulnerable.” However, the suggestions received will be incomplete if they fail to account for how effective IPRs are critical to delivering health products to patients.

An effective IPR system is essential to a well-functioning market in health products. It’s not just that patents secure investment in inventing a new cure; they also secure the investment made to bring that cure to patients in each market. A country’s ineffective IPR system can deter companies from making the substantial investments necessary to build a market in that country—these investments can include regulatory compliance, securing and negotiating reimbursement, building a distribution system, and educating health care providers about the benefits and administration of the drug. In fact, recent studies have shown a link between weak patent protection and delayed availability of drugs.[2]

In a forthcoming white paper for the Center for the Protection of Intellectual Property at Antonin Scalia Law School, The Long Wait for Innovation: The Global Patent Pendency Problem, we illuminate an under-appreciated obstacle to bringing new drugs to patients. (The paper will be available soon at http://cip2.gmu.edu.) While debates and headlines focus on issues of patentable subject matter and exclusive property rights, the problem of patent pendency has been largely overlooked and under-examined. The reality is that in many countries, it simply takes too long to get a patent, thus deterring both home-grown startups and foreign companies from creating or even distributing ground-breaking new drugs.

Graph: Figure 1: Average Granted Pharmaceutical Application Age for Selected Countries 2011-2015 (in years). Argentina, 3.04. China, 3.1. USA, 3.8. Australia, 3.97. Korea, 4.37. Japan, 6.33. EPO, 6.51. India, 6.73. Egypt, 8.14. Brazil, 13.01. Thailand, 14.91.

As Figure 1 shows, our study found that in 2011-2015, average time from application to grant for pharmaceutical patents ranged from Argentina, at 3.04 years, to Thailand at 14.91 years. The averages mask even worse problems—in 2015, Thailand issued 10 pharmaceutical patents with less than a year of term left. Five of them had 3 months or less of term left.

A long patent pendency period can deter a drug-maker from entering a market. Until a patent grant confirms that it can protect its investment in building a market, it is less likely to enter the market. If a company takes a wait-and-see approach, then consumers are in for a very long wait in countries such as Thailand and Brazil.

Causes of patent delay include a number of factors, many of which simply call for good governance. They include a simple lack of patent examiners and duplication of work already done by other capable patent offices. Our study suggests accelerated examination procedures, hiring more and better-qualified examiners, and work-sharing and recognition programs.

UNITAID is to be lauded for its innovative, market-based solutions, but well-functioning markets are founded on effective property rights. Without a competent patent system, the market for medical innovations cannot function. There should be a functioning market before one seeks to identify and correct market failures.

[1] Mark Schultz is Co-Founder and Senior Scholar at the Center for the Protection of Intellectual Property (CPIP) at Antonin Scalia Law School at George Mason University. Kevin Madigan is Legal Fellow at CPIP. The views of the authors are their own and not those of CPIP or GMU.

[2] Iain M. Cockburn, Jean O. Lanjouw, & Mark Schankerman, Patents and the Global Diffusion of New Drugs, NBER Working Paper 20492, http://www.nber.org/papers/w20492 (2014); Ernst R. Berndt & Iain M. Cockburn, The Hidden Cost of Low Prices: Limited Access to New Drugs in India, 33 Health Affairs 1567 (2014); Joan-Ramon Borrell, Patents and the Faster Introduction of New Drugs in Developing Countries, 12 Applied Econ. Letters 379 (2005).

 

Categories
Economic Study Innovation Inventors Patent Law Patent Licensing Uncategorized

How Strong Patents Make Wealthy Nations

By Devlin Hartline & Kevin Madigan

dictionary entry for the word "innovate"How did the world’s wealthiest nations grow rich? The answer, according to Professor Stephen Haber of Stanford University, is that “they had well-developed systems of private property.” In Patents and the Wealth of Nations, recently published in the CPIP Conference issue of the George Mason Law Review, Haber explains the connection: Property rights beget trade, trade begets specialization, specialization begets productivity, and productivity begets wealth. Without a foundation of strong property rights, economic development suffers. But does the same hold true for intellectual property, particularly patents? Referencing economic history and econometric analysis, Haber shows that strong patents do indeed make wealthy nations.

Before diving into the history and analysis, Haber tackles the common misconception that patents are different than other types of property because they are monopolies: “It is not, as some IP critics maintain, a grant of monopoly. Rather, it is a temporary property right to something that did not exist before that can be sold, licensed, or traded.” The simple reason for this, Haber notes, is that a patent grants a monopoly only if there are truly no substitutes, but this is almost never the case. Usually, there are many substitutes and the patent owner has no market power. And the “fact that patents are property rights means that they can serve as the basis for the web of contracts that permits individuals and firms to specialize in what they do best.”

Turning back to his claim that strong patents make wealthy nations, Haber presents data showing the relationship between the strength of enforceable patent rights and the level of economic development across several different countries. The results are remarkably clear: “there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights.” The following figure shows how GDP per capita increases as patent rights get stronger:

Haber - Figure 1: The Relationship Between Enforcable Patent Rights and GDP/c in 2010 (Excludes Oil-Based Economies, 2005 PPP$). X-axis: Strength of Enforceable Patent Rights in 2010 (from 0 to 45). Y-axis: GDP Per Capita in 2010, PPP$ from PWT 8.1 (from $0 to $60,000).

Of course, while it’s clear that patent strength and GDP per capita are related, it’s possible that the causality runs the other way. That is, how do we know that an increase in GDP per capita doesn’t foster an environment where patents tend to be stronger? This is where the evidence from economic historians and econometric analysts comes into play. Exploring what economic history has to tell us about the impact of patent laws on innovation, Haber asks whether the Industrial Revolution was bolstered by the British patent system and whether the United States emerged as a high-income industrial economy because of the U.S. patent system.

To the first question, Haber notes that the consensus among historians is that “from at least the latter half of the eighteenth century, the patent system promoted the inventive activity associated with the Industrial Revolution.” He then cites the recent book by Sean Bottomley that carefully shows how “many of the changes to Britain’s patent laws and their enforcement—the requirement for detailed specifications, patents conceived as property rights, the emergence of patent agents—all preceded, rather than followed, the onset of industrialization.” Haber also cites a research paper by Petra Moser, which finds that countries in the nineteenth century with weak patent systems trailed both Britain and the United States in technological development.

Moving to the United States, Haber notes that three generations of economic historians have agreed that just after it gained independence, the country’s strong patent system played a pivotal role in fomenting the remarkable industrial developments that soon followed. After pointing out that the United States was the first country to call for a patent system in its Constitution, Haber compares the GDP per capita for the United States, Britain, and Brazil from 1700 to 1913. The following figure shows just how quickly the agrarian American colonies caught up with, and ultimately surpassed, Britain in GDP per capita, while the GDP per capita of Brazil, a country that became independent at about the same time but had no patent system, stagnated:

Haber - Figure 2: GDP per capita, 1700-1913 (in Real 1990 Dollars). UK, USA, and Brazil. X-axis: 1700, 1820, 1930, 1840, 1850, 1860, 1870, 1880, 1890,1900, 1913. Y-axis: $0 to $5,500 by $500 increments.

As the figure shows, the GDP per capita in the United States and Brazil were less than half that of Britain in 1700, and by 1913, the United States had overtaken Britain as both countries left Brazil far behind. Noting that “there is uniformity of views among economic historians that the U.S. patent system played a large role” in this success, Haber provides specifics examples of improvements upon the British patent system that contributed to it, including broad access to property rights in technology through low fees and a routine and impersonal application process under the Patent Act of 1790. He goes on to highlight the importance of major reforms to the U.S. patent system introduced in the Patent Act of 1836, including the examination process that “reduced concerns third parties might have had about a patent’s novelty, thereby facilitating the evolution of a market for patented technologies.”

The second half of the nineteenth century saw the development of an active market for inventions in the United States, leading to the emergence of a class of specialized and independent inventors as well as patent brokers, patent agents, and patent attorneys, who would connect the inventors with manufacturers looking to buy or license new technologies. While some of these intermediaries were derided, much like the “patent trolls” of the twenty-first century, as “patent sharks,” Haber contends that this market for inventions played a critical role in the emergence of new industrial technologies and centers: “[O]ne would be hard pressed to make the case that patents in the nineteenth century, or the intermediaries who represented their inventors, did anything but facilitate the rapid development of American manufacturing.”

Haber then shifts his focus to econometric analysis, examining the different ways that economic scholars research the relationship between patent rights and economic progress in different countries over a period of time. He stresses that accurate econometric estimation of causal relationships is a relatively young area of inquiry requiring considerable care. He uses the example of a widely-cited study by Josh Lerner, which looks at “whether the strengthening of patents affects the rate of change of innovation in an economy within a two-year window after a patent reform.” Haber points out that many changes neither begin nor end so quickly. With laser technology, for example, “follow-on innovations” have developed “over decades, not two-year windows,” and Lerner’s study thus discounts much innovation.

Looking at studies that utilize a “very long time dimension,” Haber cites one finding that “there is a significant positive effect of patent laws on innovation rates” and another finding that “patent intensive industries in countries that improve the strength of patents experience faster growth in value added than less patent-intensive industries in those same countries.” Haber praises a recent study by Jihong Zhang, Ding Du, and Walter G. Park, who “not only find that there is a positive relationship between the strength of enforceable patent rights and innovation in developed economies, but that that relationship holds for underdeveloped economies as well.”

In sum, Haber states that “there is a critical mass of multi-country studies” that leads to two conclusions:

First, there is a causal relationship between the strength of patent rights and innovation. Second, this relationship is non-linear: there are threshold effects such that stronger patent rights positively impact innovation once a society has already reached some critical level of economic development. The reason for the non-linearity probably resides in the fact that innovation is not just a product of the strength of patent rights, but of other features of societies, which are necessary complements, that tend to be absent at low levels of economic development.

Finally, Haber looks at whether the innovation landscape of the twenty-first century is somehow so different that the lessons from economic history and econometric analysis no longer apply. In particular, he questions whether the emergence of patent licensing firms, sometimes called “patent assertion entities” or “PAEs,” and the alleged strategic behavior of “patent holdup” with standard-essential patents (SEPs) are really new features of the U.S. patent system that might hinder innovation. Haber concludes that the evidence shows that neither PAEs nor patent holdup is hindering innovation. In fact, there’s little reason to think that patent holdup even exists.

Haber takes on the recent study by James Bessen and Michael Meurer, which claims that PAEs are a new phenomenon that “constitute a direct tax on innovation” to the tune of “$29 billion per year.” This claim has been rebutted, Haber notes, by scholars such as B. Zorina Khan, whose recent study shows that many great inventors of the nineteenth century were themselves PAEs. Haber further cites the recent paper by David L. Schwartz and Jay P. Kesan that carefully demonstrates fundamental problems with Bessen and Meurer’s methodology, including selection bias, the conflation of “costs” with “transfers,” the lack of a benchmark for comparison, and the failure to even consider the benefits of PAE activity.

Turning to patent holdup, Haber points out that products have long been comprised of numerous patented innovations, and he cites a recent paper by Adam Mossoff showing that there’s nothing “new about firms whose sole source of revenue comes from the licensing of essential patents.” As to evidence that innovation is hindered by patent holdup, Haber notes that the “theoretical literature” says it’s possible, but the “evidence in support of this theory, however, is largely anecdotal.” Haber then cites his recent study with Alexander Galetovic and Ross Levine, which looks at the “extensive economics literature on the measurement of productivity growth” and shows that “SEP holders” are not able “to negotiate excessive royalty payments” as predicted by the patent holdup theory.

In conclusion, Haber acknowledges that while “no single piece of evidence” should “be viewed as dispositive,” it’s certainly quite “telling that the weight of evidence from two very different bodies of scholarship, employing very different approaches to evidence—one based on mastering the facts of history, the other based on statistical modeling—yield the same answer: there is a causal relationship between strong patents and innovation.” Haber then challenges the naysayers to make their case: “Evidence and reason therefore suggest that the burden of proof falls on those who claim that patents frustrate innovation.” Given the copious evidence showing that strong patents make wealthy nations, the IP critics have their work cut out for them.

For a PDF version of this post, please click here.

Categories
Administrative Agency Economic Study FTC Innovation Inventors Law and Economics Legislation Uncategorized

Acknowledging the Limitations of the FTC’s PAE Study

dictionary entry for the word "innovate"The FTC’s long-awaited case study of patent assertion entities (PAEs) is expected to be released this spring. Using its subpoena power under Section 6(b) to gather information from a handful of firms, the study promises us a glimpse at their inner workings. But while the results may be interesting, they’ll also be too narrow to support any informed policy changes. And you don’t have to take my word for it—the FTC admits as much. In one submission to the Office of Management and Budget (OMB), which ultimately decided whether the study should move forward, the FTC acknowledges that its findings “will not be generalizable to the universe of all PAE activity.” In another submission to the OMB, the FTC recognizes that “the case study should be viewed as descriptive and probative for future studies seeking to explore the relationships between organizational form and assertion behavior.”

However, this doesn’t mean that no one will use the study to advocate for drastic changes to the patent system. Even before the study’s release, many people—including some FTC Commissioners themselves—have already jumped to conclusions when it comes to PAEs, arguing that they are a drag on innovation and competition. Yet these same people say that we need this study because there’s no good empirical data analyzing the systemic costs and benefits of PAEs. They can’t have it both ways. The uproar about PAEs is emblematic of the broader movement that advocates for the next big change to the patent system before we’ve even seen how the last one panned out. In this environment, it’s unlikely that the FTC and other critics will responsibly acknowledge that the study simply cannot give us an accurate assessment of the bigger picture.

Limitations of the FTC Study

Many scholars have written about the study’s fundamental limitations. As statistician Fritz Scheuren points out, there are two kinds of studies: exploratory and confirmatory. An exploratory study is a starting point that asks general questions in order to generate testable hypotheses, while a confirmatory study is then used to test the validity of those hypotheses. The FTC study, with its open-ended questions to a handful of firms, is a classic exploratory study. At best, the study will generate answers that could help researchers begin to form theories and design another round of questions for further research. Scheuren notes that while the “FTC study may well be useful at generating exploratory data with respect to PAE activity,” it “is not designed to confirm supportable subject matter conclusions.”

One significant constraint with the FTC study is that the sample size is small—only twenty-five PAEs—and the control group is even smaller—a mixture of fifteen manufacturers and non-practicing entities (NPEs) in the wireless chipset industry. Scheuren reasons that there “is also the risk of non-representative sampling and potential selection bias due to the fact that the universe of PAEs is largely unknown and likely quite diverse.” And the fact that the control group comes from one narrow industry further prevents any generalization of the results. Scheuren concludes that the FTC study “may result in potentially valuable information worthy of further study,” but that it is “not designed in a way as to support public policy decisions.”

Professor Michael Risch questions the FTC’s entire approach: “If the FTC is going to the trouble of doing a study, why not get it done right the first time and a) sample a larger number of manufacturers, in b) a more diverse area of manufacturing, and c) get identical information?” He points out that the FTC won’t be well-positioned to draw conclusions because the control group is not even being asked the same questions as the PAEs. Risch concludes that “any report risks looking like so many others: a static look at an industry with no benchmark to compare it to.” Professor Kristen Osenga echoes these same sentiments and notes that “the study has been shaped in a way that will simply add fuel to the anti–‘patent troll’ fire without providing any data that would explain the best way to fix the real problems in the patent field today.”

Osenga further argues that the study is flawed since the FTC’s definition of PAEs perpetuates the myth that patent licensing firms are all the same. The reality is that many different types of businesses fall under the “PAE” umbrella, and it makes no sense to impute the actions of a small subset to the entire group when making policy recommendations. Moreover, Osenga questions the FTC’s “shortsighted viewpoint” of the potential benefits of PAEs, and she doubts how the “impact on innovation and competition” will be ascertainable given the questions being asked. Anne Layne-Farrar expresses similar doubts about the conclusions that can be drawn from the FTC study since only licensors are being surveyed. She posits that it “cannot generate a full dataset for understanding the conduct of the parties in patent license negotiation or the reasons for the failure of negotiations.”

Layne-Farrar concludes that the FTC study “can point us in fruitful directions for further inquiry and may offer context for interpreting quantitative studies of PAE litigation, but should not be used to justify any policy changes.” Consistent with the FTC’s own admissions of the study’s limitations, this is the real bottom line of what we should expect. The study will have no predictive power because it only looks at how a small sample of firms affect a few other players within the patent ecosystem. It does not quantify how that activity ultimately affects innovation and competition—the very information needed to support policy recommendations. The FTC study is not intended to produce the sort of compelling statistical data that can be extrapolated to the larger universe of firms.

FTC Commissioners Put Cart Before Horse

The FTC has a history of bias against PAEs, as demonstrated in its 2011 report that skeptically questioned the “uncertain benefits” of PAEs while assuming their “detrimental effects” in undermining innovation. That report recommended special remedy rules for PAEs, even as the FTC acknowledged the lack of objective evidence of systemic failure and the difficulty of distinguishing “patent transactions that harm innovation from those that promote it.” With its new study, the FTC concedes to the OMB that much is still not known about PAEs and that the findings will be preliminary and non-generalizable. However, this hasn’t prevented some Commissioners from putting the cart before the horse with PAEs.

In fact, the very call for the FTC to institute the PAE study started with its conclusion. In her 2013 speech suggesting the study, FTC Chairwoman Edith Ramirez recognized that “we still have only snapshots of the costs and benefits of PAE activity” and that “we will need to learn a lot more” in order “to see the full competitive picture.” While acknowledging the vast potential benefits of PAEs in rewarding invention, benefiting competition and consumers, reducing enforcement hurdles, increasing liquidity, encouraging venture capital investment, and funding R&D, she nevertheless concluded that “PAEs exploit underlying problems in the patent system to the detriment of innovation and consumers.” And despite the admitted lack of data, Ramirez stressed “the critical importance of continuing the effort on patent reform to limit the costs associated with some types of PAE activity.”

This position is duplicitous: If the costs and benefits of PAEs are still unknown, what justifies Ramirez’s rushed call for immediate action? While benefits have to be weighed against costs, it’s clear that she’s already jumped to the conclusion that the costs outweigh the benefits. In another speech a few months later, Ramirez noted that the “troubling stories” about PAEs “don’t tell us much about the competitive costs and benefits of PAE activity.” Despite this admission, Ramirez called for “a much broader response to flaws in the patent system that fuel inefficient behavior by PAEs.” And while Ramirez said that understanding “the PAE business model will inform the policy dialogue,” she stated that “it will not change the pressing need for additional progress on patent reform.”

Likewise, in an early 2014 speech, Commissioner Julie Brill ignored the study’s inherent limitations and exploratory nature. She predicted that the study “will provide a fuller and more accurate picture of PAE activity” that “will be put to good use by Congress and others who examine closely the activities of PAEs.” Remarkably, Brill stated that “the FTC and other law enforcement agencies” should not “wait on the results of the 6(b) study before undertaking enforcement actions against PAE activity that crosses the line.” Even without the study’s results, she thought that “reforms to the patent system are clearly warranted.” In Brill’s view, the study would only be useful for determining whether “additional reforms are warranted” to curb the activities of PAEs.

It appears that these Commissioners have already decided—in the absence of any reliable data on the systemic effects of PAE activity—that drastic changes to the patent system are necessary. Given their clear bias in this area, there is little hope that they will acknowledge the deep limitations of the study once it is released.

Commentators Jump the Gun

Unsurprisingly, many supporters of the study have filed comments with the FTC arguing that the study is needed to fill the huge void in empirical data on the costs and benefits associated with PAEs. Some even simultaneously argue that the costs of PAEs far outweigh the benefits, suggesting that they have already jumped to their conclusion and just want the data to back it up. Despite the study’s serious limitations, these commentators appear primed to use it to justify their foregone policy recommendations.

For example, the Consumer Electronics Association applauded “the FTC’s efforts to assess the anticompetitive harms that PAEs cause on our economy as a whole,” and it argued that the study “will illuminate the many dimensions of PAEs’ conduct in a way that no other entity is capable.” At the same time, it stated that “completion of this FTC study should not stay or halt other actions by the administrative, legislative or judicial branches to address this serious issue.” The Internet Commerce Coalition stressed the importance of the study of “PAE activity in order to shed light on its effects on competition and innovation,” and it admitted that without the information, “the debate in this area cannot be empirically based.” Nonetheless, it presupposed that the study will uncover “hidden conduct of and abuses by PAEs” and that “it will still be important to reform the law in this area.”

Engine Advocacy admitted that “there is very little broad empirical data about the structure and conduct of patent assertion entities, and their effect on the economy.” It then argued that PAE activity “harms innovators, consumers, startups and the broader economy.” The Coalition for Patent Fairness called on the study “to contribute to the understanding of policymakers and the public” concerning PAEs, which it claimed “impose enormous costs on U.S. innovators, manufacturers, service providers, and, increasingly, consumers and end-users.” And to those suggesting “the potentially beneficial role of PAEs in the patent market,” it stressed that “reform be guided by the principle that the patent system is intended to incentivize and reward innovation,” not “rent-seeking” PAEs that are “exploiting problems.”

The joint comments of Public Knowledge, Electronic Frontier Foundation, & Engine Advocacy emphasized the fact that information about PAEs “currently remains limited” and that what is “publicly known largely consists of lawsuits filed in court and anecdotal information.” Despite admitting that “broad empirical data often remains lacking,” the groups also suggested that the study “does not mean that legislative efforts should be stalled” since “the harms of PAE activity are well known and already amenable to legislative reform.” In fact, they contended not only that “a problem exists,” but that there’s even “reason to believe the scope is even larger than what has already been reported.”

Given this pervasive and unfounded bias against PAEs, there’s little hope that these and other critics will acknowledge the study’s serious limitations. Instead, it’s far more likely that they will point to the study as concrete evidence that even more sweeping changes to the patent system are in order.

Conclusion

While the FTC study may generate interesting information about a handful of firms, it won’t tell us much about how PAEs affect competition and innovation in general. The study is simply not designed to do this. It instead is a fact-finding mission, the results of which could guide future missions. Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected. And it’s crucial not to draw policy conclusions from it. Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.

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How Patents Help Startups Grow, Innovate, and Succeed

Many academic studies of the patent system focus on the negative, extrapolating from anecdotes about a few bad actors to make the case that our patent system is broken and to bolster cries for legislation weakening patent rights. Precious few studies focus on the countless honest and hardworking patent owners whose inventive labors benefit us all. But understanding how patents support inventive enterprises is a crucial part of the equation, especially at a time when Congress is considering legislation that would make it extremely difficult for startups and individual inventors to enforce their patent rights.

In a newly-published working paper, The Bright Side of Patents, CPIP Edison Fellow Deepak Hegde, along with co-authors Joan Farre-Mensa and Alexander Ljungqvist, take a look how patents help startups grow. They show that, contrary to the claims made by several academics and activists, startups are not victims of the patent system. On the contrary, patents help startups become more successful and innovative.

The study finds that “patent approvals help startups create jobs, grow their sales, innovate, and eventually succeed.” When a startup’s first patent application is approved, its employment growth increases by 36% and its sales growth increases by 51% on average over the next five years. First-patent approval also has a strong causal effect on a startup’s continued ability to innovate, increasing the number of subsequent patent grants by 49% and increasing the quality of those patents by 27%. In fact, a startup with first-patent approval is twice as likely to end up listed on a stock exchange—a common indication of success for a startup.

Negatively affecting startups are delays in the patent application process and ultimate application rejections. For every year an ultimately-approved patent application is delayed, the startup’s employment growth decreases by 21% and its sales growth decreases by 28% on average over the following five years. Furthermore, each year a patent application is delayed, the average number of subsequent patents granted decreases by 14% while the quality of those patents decreases by 7%. And for each year of delay, the probability that a startup will go public is cut in half.

One big reason why patents help startups is that they make it easier to access capital from external investors. The authors find that patents serve to mitigate frictions in information between potential investors and startups. Patents play an important role by alleviating startups’ concerns about having their inventions misappropriated by investors and by alleviating investors’ concerns about the credibility, quality, and monetary future of the startups. Having access to capital in turn sets startups on a path of growth where they can turn ideas into products and services, generate jobs, increase revenue, and undertake further innovation.

What makes this study unique is its unprecedented access to the USPTO’s internal databases, which allowed the authors to evaluate detailed review histories of both approved and rejected patent applications. Prior studies only focused on approved applications, thus making it impossible to accurately separate out the economic and innovative effects. The authors here are able to demonstrate the direct benefits of patent protection with causal evidence from a large-sized sample—45,819 first-time patent applications filed by startups.

There is a surprising amount of criticism of the patent system today. Some claim that patents are a waste of time and resources for startups, useful only for defensive purposes. Others claim that patents actually harm startups. The authors here show that startups that secure patent protection are in fact more likely to succeed. As Congress considers yet another round of large-scale patent legislation, lawmakers need to understand the role that enforceable patent rights play in enabling startups to grow and succeed. This study is a great step in adding some much needed clarity to the ongoing patent policy debates.

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How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms

We’ve all heard the narrative about patent licensing firms, often referred to pejoratively as “patent trolls.” These patent owners, who choose to license their innovations rather than build them, are the supposed poster-children of a “broken” patent system. It’s as if commercializing one’s property, just like a landlord leases his land for another to use, is suddenly a bad thing. Nevertheless, the power of this “troll” rhetoric cannot be denied. Many provisions in 2011’s Leahy-Smith America Invents Act were aimed at starving out these “trolls,” and no less than five bills currently under consideration in the House and Senate seek to further deflate their sails.

Another example of the powerful appeal of the “patent troll” rhetoric is that the agencies charged with enforcing antitrust law have also been convinced that there is something amiss with the commercial licensing of patented innovation in the marketplace. This has been a key feature of the deployment of patented inventions in America’s innovation economy since the early nineteenth century, as scholars have shown. Last year, the Federal Trade Commission (FTC) instigated its own investigative study of what it calls “patent assertion entities” (PAEs), which is merely a more formal and neutral-sounding synonym for the popularized “patent troll” epithet.

In a new paper published in the George Mason Law Review, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, CPIP Senior Scholar Kristen Osenga takes a closer look at the FTC’s ongoing study of PAEs and finds that it is destined to fail for two simple, yet inescapably obvious, reasons.

The first is the basic definitional problem of the FTC’s characterization of PAEs, which puts all patent licensing firms in the same boat. Failing to take a more nuanced approach, Osenga warns, “fires up the rhetoric but obscures thoughtful discussion and debate about the issue.” Building upon her previous work, she explains:

[T]he real problem is that patent licensing firms are treated as a homogenous category, with no attention paid to the wide range of business models that exist under the patent licensing firm umbrella. The categorical determination of patent licensing firms as “problems” imputes to a large, diverse group of firms the negative actions and qualities of a small number of bad actors.

Since not all “trolls” are alike, Osenga cautions, it’s “naïve and inaccurate” to lump them all together. And when the FTC makes this mistake, it leads to a situation “where words actually can hurt, much more so than sticks and stones.” The FTC’s study is explicitly “premised on a one-size-fits-all conception of patent licensing firms.” Rather than shedding much-needed light on the complex innovation ecosystem, the study promises to squander the opportunity by failing to recognize that not all “trolls” are the same.

Osenga notes that the FTC is uniquely situated to obtain nonpublic information about how these patent licensing firms operate using its investigative power under Section 6(b) of the FTC Act. Unfortunately, however, the study is premised on the faulty notion that the only upside of patenting licensing firms is to “compensate inventors.” But this focus on patents-as-incentives misses the forest for the trees, Osenga urges, as it fails to account for the larger patent-commercialization network:

[T]here are many steps between invention and the introduction of an actual product to the market and consumers. These steps include transforming an idea in to a marketable embodiment, developing facilities to produce the marketable embodiment, creating distribution channels to bring the embodiment to the consumer, and making the consumer aware of the new product. Each of these steps requires its own additional resources in the form of both capital and labor.

The FTC study, like many patent skeptics, fails to consider the benefits of the division of labor that patent licensing firms represent. Not every inventor is willing or able to bring an invention to the marketplace. Osenga’s point is that patent licensing does more than simply compensate inventors for their troubles; it creates liquid markets and solves problems of asymmetrical actors and information. These exchanges increase innovation and competition by playing the role of match-maker and market-maker, and they place valuable patents into the hands of those who are better positioned to exploit their worth.

Osenga points out that there are indeed possible negative effects with patent licensing firms. For example, they sometimes engage in ex post licensing, waiting to offer licenses until after the would-be licensee has already adopted the technology. These firms can be better positioned litigation-wise since their potential exposure is typically less than that of the infringers they sue. Finally, patent aggregators tend to have greater market power, and it can be difficult to judge the quality of any given patent that’s asserted when they offer to license their entire portfolio.

As with all things, Osenga stresses, there’s both good and bad. The problem is figuring out which is greater. The FTC could conduct a study that reveals a “detailed understanding of the complex world of patent licensing firms,” she laments, but that’s not what the FTC is doing:

[T]he configuration of the study is slanted in such a way that only part of the story will be uncovered. Worse still, the study has been shaped in a way that will simply add fuel to the anti-“patent troll” fire without providing any data that would explain the best way to fix the real problems in the patent field today.

This leads to the second problem with the FTC study, which follows as a necessary, logical consequence from the first definitional problem: There are serious methodological problems with the study that will undermine any possible empirical conclusions that the FTC may wish to draw.

Osenga says that the FTC’s study is simply not asking the right questions. Painting a complete picture of complex licensing schemes requires more than just counting the number of patents a firm has and adding up the attempts to negotiate license deals. To really get to the bottom of things, she contends, the FTC should be asking why patentees sell their patents to licensing firms and why licensing firms buy them from patentees. Better still, ask them why they decided to become patent licensing firms in the first place.

This insight is powerful stuff. It’s not enough to simply ask these firms what they’re doing; to really understand them, the FTC must ask them why they’re doing it. And the results are likely to be varied:

Some, of course, begin with this business model in mind. Others invent new technology but are unable to successfully commercialize it themselves, despite making efforts to do so. Still others exist as practicing entities for years or decades before something changes—supply change issues, rampant infringement by competitors, and regulatory initiatives—and they are no longer able to exist as a viable practicing entity.

Similarly, the FTC could ask them what kind of firms they are, and these answers are also likely to be diverse. Osenga’s point is that the FTC’s questions aren’t designed to showcase the vast differences between the various types of patent licensing firms. If the FTC wants to get to the bottom of how these firms affect innovation and competition, the first step should be to realize that they’re not all the same. The FTC’s study is as clumsy as those who refer to all such firms as “patent trolls,” and the lack of nuance going in will unfortunately produce a study that lacks nuance coming out.

In the end, Osenga agrees that deterring abusive behavior is a good thing, and she worries about innovation and competition. However, unlike many in patent policy debates, she is also concerned that the rhetoric is having an undue influence on policymakers. Throwing all patent licensing firms under the “patent troll” bus will not get us the narrowly-tailored reforms that we need. Sadly, the FTC’s approach with its ongoing study appears to have swallowed this rhetoric wholesale, and it seems unlikely that the results will be anything but more fuel for the “patent troll” pyre.

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Cohen et al. “Patent Trolls” Study Uses Incomplete Data, Performs Flawed Empirical Tests, and Makes Unsupportable Findings

PDF summary available here

I.   Introduction

A recent draft study about patent licensing companies entitled “Patent Trolls: Evidence from Targeted Firms” is making the rounds on Capitol Hill and receiving press coverage. This attention is unfortunate, because the study is deeply flawed and its conclusions cannot and should not be relied upon. If the draft paper is ever published in a peer reviewed journal, it will certainly need to be greatly revised first, with its most notable results likely changing or disappearing.  In sum, the study should receive no credit in policy debates.

The study, by Lauren Cohen, Umit G. Gurun, and Scott Duke Kominers, finds that non-practicing entities (NPEs) are “opportunistic” because they target defendants that (1) are cash-rich (particularly compared to practicing entity patentees), (2) operate in industries that “have nothing to do with the patent” in suit, (3) are staffed by small legal teams, and (4) are busy with numerous non-IP cases. Additionally, the authors conclude that defendants that lose in patent litigation with NPEs on average have marked declines in subsequent R&D expenditures, on the order of $200 million per year. On this basis, the authors suggest “the marginal policy response should be to more carefully limit the power of NPEs.” One of the authors has been circulating this unpublished study to congressional staffers to make the case that NPEs have a large negative effect on US innovation.

II.   Critique of the Study

Professor Ted Sichelman, University of San Diego School of Law, and an expert in empirical studies of patent litigation, critiques the most recent, publicly available version of the Cohen et al. study in detail in his response paper, “Are Patent Trolls ‘Opportunistic?”.[1] He finds that the study’s dataset is incomplete and unrepresentative, its theoretical model is flawed, and its empirical models are unsound. Professor Sichelman concludes that neither their findings nor policy prescriptions are justified. Major weaknesses in the study are as follows:

  • The study’s public firm defendant dataset in current version of paper is incomplete and unrepresentative
  • The study relies on proprietary, unverified coding from PatentFreedom that groups together numerous NPE types (including individuals, R&D shops, and IP holding companies of operating companies), but in making its policy recommendations, the study assumes all NPEs are patent aggregators
  • The study’s finding that NPEs sue cash-rich defendants may simply be driven by the fact that NPEs tend to target software, Internet, and finance-related companies for reasons unrelated to cash holdings, but these companies simply happen to have larger cash-holdings than the average publicly traded company
  • When comparing NPE behavior to that of operating companies, the study improperly includes operating company suits in which the patentees primarily seek injunctions, which are not cash-driven suits
    • Our belief is that NPEs and operating companies alike that primarily seek royalties are likely to seek defendants with enough cash to pay likely damage awards and—like a seller of goods ensuring that a buyer has sufficient cash to pay for those goods—there is nothing “opportunistic” in this behavior
  • NPEs asserting patented technology that is different from the primary industry of the accused infringer are typically not going “after profits unrelated to the patents”
    • For instance, the use of patented computer hardware, software, or technical equipment may occur in any industry and provide a competitive advantage relative to others using non-patented technology
  • The study’s datasets and variables to determine the size of law firm and the number of pending cases are incomplete and flawed
  • The authors’ finding that R&D of accused infringers is differentially affected by a “loss” is based on a very small dataset of “wins” (n=35)

In sum, there is no support for the study’s policy recommendation “to more carefully limit the power of NPEs.” In this regard, we reiterate our view that any plaintiff targeting defendants with enough cash to satisfy a damages judgment is simply ordinary litigation behavior. According to Professor Sichelman, there is “massive risk aversion by many small NPEs” and “large uncertainty in [patent] cases” that may cause any patentee primarily seeking money damages to assert its patents against defendants who can pay their bills.

Finally, in making their policy proposals to restrict NPEs, Cohen et al. rely on the discredited study of Bessen and Meurer (2014) to argue that NPEs do not channel a large percentage of funds received back to inventors. As Schwartz and Kesan (2014) have shown, Bessen and Meurer’s study is inapplicable to most NPEs, because only 12 publicly traded aggregators were examined, and even for those 12 aggregators, Schwartz and Kesan persuasively argue that Bessen and Meurer’s findings are wrong. Indeed, there is ample evidence that many patent aggregators return 50% of net recoveries in litigation or licensing (i.e., after paying for attorneys’ fees and related costs) and that many NPEs are individuals, R&D shops, and other entities that effectively keep 100% of the net returns from recoveries.

As such, the Cohen et al. (2014) study should receive no credit in congressional policy debates. Indeed, another leading academic at a recent conference expressed surprise and dismay that this early-stage study was being circulated by its authors throughout Congress.

Notes:

[1] The authors presented new material in response to Sichelman’s critique at a recent conference, but as far as we know, they have not made any of it available to the general public. As such, we focus on Sichelman’s critique of the most recent, publicly available version of the study.

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Intellectual Property Unites Creators and Innovators

This is the first in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014. Videos of the conference panels and remarks, as well as panel summaries, will be available soon.

Introduction by Professors Adam Mossoff and Mark Schultz

Common Ground: How Intellectual Property Unites Creators and Innovators

The creative industries and innovation industries have much in common, but too often this is overlooked. Both industries engage in brilliant intellectual work to bring new products and services into the world, both take great risks to commercialize this work, and both depend on intellectual property – copyrights (for the creative industries) and patents (for the innovation industries). Unfortunately, most accounts of these two industries emphasize their differences and frequently portray them in conflict.

This conference will explore the common ground shared by these two dynamic industries, focusing on the similar values secured by their patents and copyrights and thus their common policy goals and commercial developments.

It should be unsurprising that these two industries share much in common. The work of inventors and artists is much the same. We see hints of this in their respective aspirations. Engineers, for example, often talk of seeking “elegant” or “beautiful” solutions to the technological problems they face. Artists also strive to innovate technically in how they create their works, as demonstrated with much panache in the recent documentary, Tim’s Vermeer. Many creators apply their prodigious talents to both art and invention.

One may think of a Steve Jobs today as exemplifying this truth, but history is replete with examples. Leonardo da Vinci also comes to mind, the quintessential Renaissance Man. In the 19th century, Samuel Morse invented the telegraph, but he was also a successful artist and in fact he developed the telegraph while working as a well-known Professor of Art at New York University.

In modern America, Walt Disney has defined much of our culture not just with his artistic creations, but also with his innovative technological creations in movies, theme parks and products. More recently, filmmakers George Lucas and James Cameron have cast large shadows in popular culture, but their contributions to filmmaking technology may prove even more enduring and pervasive.

These and many other examples are unsurprising when one considers that art and technology both result from the same source: productive intellectual labor.

As the work of artists and inventors is at heart the same, so is the moral and economic case for securing property rights to them. Artists and inventors deserve to own the fruits of their productive labors. In protecting these labors, intellectual property rights secure to them their liberty and their careers. These rights thus fuel the vast economic activity that drives the innovation economy – bringing to market the products and services that ensure full and flourishing lives for them and for the rest of us as well.

Too often, though, the creative and innovation industries are portrayed as being at odds. One popular narrative today – in both scholarly and popular accounts – is that technology disrupts the creative industries, forcing copyright owners to adapt. This is a myopic account of their relationship that ultimately creates a false picture. In truth, creativity and innovation – secured by copyrights and patents – constantly spur each other to greater heights.

The true story of creativity and innovation is more properly viewed as a virtuous circle.

Recording and broadcast technology, for instance, gave musicians and other performers their first worldwide audiences, whose demand for ever-more entertainment and information spurred further improvement and expansion of technology. The invention of the electric guitar, spurred by a series of patented improvements, enabled blues and rock ‘n’ roll, which in turn pushed further developments in music and recording technology.

The Internet certainly created much disruption, but it also has been a fountainhead of creativity. To take just one example, streaming of original, creative content enables television viewers to enjoy storytelling as never before, bringing about what some are now calling a Second Golden Age of Television.

Our technological devices, such as smartphones and iPads, would not be so well loved and so ubiquitous without the games, music, and video content they deliver to hundreds of millions of people the world over.

The common ground and shared aspirations of creators and innovators is clear, but rarely appreciated in the din of today’s policy debates.

Thus, our Annual Conference this year considers afresh the common goals, challenges and needs of the creative and innovation industries. Many distinguished speakers with extensive knowledge and experience in both fields will address how intellectual property rights represent the bedrock of this common ground. We hope that you will enjoy what promises to be enlightening discussion.

**Panel summaries coming soon**

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Patent Policy Debates Characterized by "Intolerably High Ratio of Theory to Evidence"

In an interview with Law360 last week, FTC Commissioner Joshua Wright spoke about the FTC’s upcoming study on PAEs and the state of today’s patent policy debates. The interview is well-worth reading in it’s entirety, and we’ve also highlighted a couple key quotes below.

“One of the most fascinating things about the the policy debates in and around patents and by extension the intersection of patent law and antitrust law, is that most of the debate is chock full of theory and supposition but completely devoid of empirical evidence…It is very difficult to move forward sensibly in debates with those characteristics”

“Wright said that without evidence of ‘pervasive market failure’ in the standard setting space, the FTC and the U.S. Department of Justice should avoid the temptation to serve as ‘management consultant’ to standard setting groups and their members.”