from Renewing America

We Don’t Know If Our Patent System is Working

March 27, 2014

Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

“Innovation” is a hot buzzword in Washington. In a city gripped by partisanship, being pro-innovation is something everyone can agree on. One of the most direct ways the federal government participates in the innovation economy is through the legal protection of tangible innovations themselves, or patents. Yet incredibly, no one has a good grasp of whether the U.S. patent system is doing what it was intended to do—promote innovation.

The logic behind protecting creator’s rights seems straightforward. There would be less innovating if the costs in time, energy, and resources spent innovating exceeded the rewards. If someone else claimed credit for those innovations in the marketplace, the value to the original innovator declines and there would be less innovation.

But in practice, economists have not yet come to any empirically robust conclusions about whether this theory pans out or how well the U.S. patent system is performing. This assessments comes from Stuart Graham, a professor at Georgia Tech and a former chief economist at the U.S. Patent Office. It is safe to say he knows a lot about patent economics.

Even the most elemental components of patents have no clear economic analysis backing them up, including how long patent rights should last or whether the patent right should be granted to whoever files the application first versus whoever invents it first. The number of patent applications being submitted to the patent office is up, the share of patents being granted is up, and the U.S. per-capita patent rate is high by international standards. But economists aren’t sure this reflects or leads to more innovation.

Economists deserve a bit of a break; innovation is tricky to pin down as a quantifiable metric. It is no easy task isolating the marginal effect of the patent system on trends that are thought to correlate strongly with innovation, like R&D spending or productivity. Nor is there much variation in how the world does patents, preventing economists from being able to tease out how different systems may impact economies.

But other countries are doing a better job of conducting cost-benefit analyses of their patent systems. The European Commission is starting to put smart money into patent policy research. The United Kingdom’s IP office is doing the same, and making sure that research informs policy decisions. In the absence of definitive economic analysis, the trend in U.S. patent reform over the past thirty years has been to strengthen the status quo system, with powerful corporate lobbies driving the policy discussion.

This means that the deal has generally gotten sweeter for patent holders. Congress has extended the lifeterm of patents, and most drastically for copyright, which lasts nearly four times longer today than in 1800. Curiously, whenever Disney’s Mickey Mouse copyright is due to expire, the official copyright lifeterm is lengthened. A new court created in 1982 solely to decide patent cases, called the Court of Appeals for the Federal Circuit, tipped the scales toward patentee rights through the 2000s, though legislation passed in 2011 is intended to tip some weight back. The Supreme Court has extended what can be patented to include “everything under the sun that is made by man.” Patents used to apply to things you could hold in your hand. Now it includes software, business methods, and genetic engineering.

But there is a good argument, even if empirical evidence is lacking, that the current system works less well for more cutting-edge tech innovation. Software is the clearest case. The patent-induced incentive to innovate is weaker since the costs to research are minimal, unlike say for pharmaceutical drug companies. Software is built on so many previous innovations that many companies have to navigate a “patent thicket” to get their products to market. Predatory “patent trolls,” which produce no products but own and enforce patent rights, are a menace mostly within the software industry. Since software patents can lockout innovations, computer coders have developed a workaround in open source code that is freely available online and accumulating innovations by the second. It may come as no surprise that computer geeks are leading the fight to do away with IP-protections altogether.

According to the patent office, IP-intensive industries accounted for 20 percent of all U.S. jobs in 2010 and over 35 percent of U.S. GDP. Is more and stronger IP protections driving these impressive numbers? Economists just don’t know yet, although it is clear that getting the patent system right matters. It is time the country got more serious about generating evidence-based ideas about how to do patents better.