Why Isn't the Patent System Nurturing More Innovation?

For many entrepreneurs, their greatest asset when starting a business is their intellectual property. But protecting that intellectual property, to allow it to develop and grow into a viable business asset, can be a challenge. That protection also requires large efforts of skill, hard work, and luck from dedicated owners to extract value. Because the road is so arduous, companies are not getting the most out of the process of protecting and nurturing intellectual property, specifically through the patent system.

When any business gets formal intellectual property protection through the U.S. government, they are given exclusive rights to deny others from creating or selling the product, in exchange for a public disclosure of the idea. Originally, this was done as a prompt to inventors to stay innovative and keep ideas public by ensuring a period of time where they could make supernormal profits. The publishing of these ideas also gave others the chance to discover new technologies and create productive follow-on innovations. However, in the current environment of innovation and invention, businesses are not receiving the full benefit of the patent system.  Generally, the monopoly power granted to individuals or companies provides tremendous leverage. Yet observers have consistently crowed about the inadequacies of the American patent system.

So what are some of the reasons the U.S. patent system is failing to live up to its potential?

Patent Trolls are Dampening the Rewards for Successful, Commercialized Patents

Patent trolls, also known as non-practicing entities, create an environment where innovative companies lose out. Patent trolls sue companies for patent infringement, even though they themselves aren’t using or planning to use the technology within the patent.

Research has shown that as much as half a trillion dollars in wealth was lost as a result of these types of lawsuits between 1990 and 2010. These lawsuits aren’t just aimed at the mega-corporations like Apple and Samsung. Sixty-six percent of defendants in patent troll lawsuits from 2006 to 2014 had revenues below $100M and 55 percent had revenues below $10M. When so much value is lost in lawsuits like these, the incentives for companies to innovate are diminished.

Congress is aware of the concerns patent trolls prompt and various proposals have been introduced to try to solve inefficiencies that exist in the patent system. It remains to be seen what impact these provisions would have, but the fact that policymakers demonstrated concern about the ineffectiveness of this part of the intellectual property protection system, in my view, is a good sign.

Overly Broad Patents are Squeezing Follow-On Innovation

When patents are granted by the United States Patent and Trademark Office (USPTO) that are broad in scope, inventors risk litigation. Inventors who wish to build on the work of the past are more likely to be sued for patent infringement from the original patent holder. This concept is known as the tragedy of the anti-commons. It explains that when there is too much ownership through broadly developed patent claims it discourages successive innovation. It is a converse of the more popular tragedy of the commons, where overuse of a free resource occurs. In the case of the tragedy of the anti-commons, here, an outsized amount of private ownership leads to less productive uses of that intellectual property.

Not only are broad patents problematic, but when the bar for patenting is low, firms will develop a number of sequenced patents to eliminate any space to innovate around these inventions. These so-called patent thickets discourage the type of follow-on invention that can add significant value to original creations.

Patent Protection is a Hefty Price to Pay

More simply, the cost of acquiring a patent for one’s intellectual property is beyond the reach of many young businesses, which opt to keep their technology protected as a trade secret. This is a more vulnerable form of intellectual property protection that may or may not be appropriate for the new business owner’s intellectual property.

 

The intricate way the patent system affects business and entrepreneurship is not just limited to the barriers listed above. Other sources of complexity, such as globalization and ever-advancing technologies, may not fit into a static intellectual property system. While the barriers to success are high, when intellectual property is properly valued, there are mutual benefits that flow to inventors, entrepreneurs, government, and the general population.

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chris jackson

Chris Jackson

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.