State of Innovation

Patents and Innovation Economics

Intellectual Property Socialism: Part IV USPTO Takes Aim at Inventors

           Not to be outdone, the Patent and Trademark Office launched their own assault on inventors.  The allowance rate for patents has dropped from around 70% in 2000 down to 45% in 2008.  The allowance rate had hovered around 62%-72% for several decades and then started a precipitous drop around 2003.       

090102USPTO_ALLOWANCE_RATE

  

     Apparently, the U.S. Patent and Trademark Office decided that low allowance rates are associated with more thorough examinations of patent applications[1] and that the allowance rates of the U.S. Patent Office were too high.  The author filed a Freedom of Information Action Request (FOIA request) with the Patent Office asking for the basis of this assumption.  The response to the FOIA request was the paper Overview of Recent changes and Comparison of Patent Regimes in the United States, Japan and Europe, in Patents, Innovations and Economic Performance: OECD Conference Proceedings 127, 145 (2004).  There was no explanation why the U.S. Patent Office considered this paper so important.  In addition, no papers were provided of any discussions or policy decisions to implement a policy based on this paper to pursue a lower allowance rate.  Given the dramatic fall in the allowance rate and the size of the U.S. Patent and Trademark Office, you would assume that there had to be some discussion to implement a policy of lower allowance rates. 

            This paper suggested that the US grant rate was significantly higher than the European Patent Office’s grant rate.  Specifically it stated that the grant rate for patent applications originating in the US was significantly higher in the United States Patent and Trademark Office than in the European Patent Office.  In addition the paper stated, the grant rate for patent applications originating at the European Patent Office was somewhat higher in the United States Patent and Trademark Office than in the European Patent Office.  Many factors effect grant rates other than the rigors of the examination process.  Specifically, a patent applicant will consider the cost of obtaining a patent, the size of the market the patent will protect, the cost of maintaining the patent, etc.  The cost of obtaining a patent through the European Patent Office is between 50% and 100% more for a US based patent applicant than obtaining a patent in the United States Patent Office.  Once an applicant obtains allowance for their patent application at the European Patent Office, they have to pay an issue fee in each European country they want patent protection.  They also pay the cost of translation if that country’s language is different.  In addition, the patent maintenance fees or annuities, which have to be paid to keep the patent in force, are significantly higher in European countries than the United States.  As a result, a patent applicant has to spend considerably more money to obtain a patent in European that has anywhere near the same size of market as the United States.  Naturally, many applicants decide that obtaining a patent in the United States is much more important than obtaining a patent in Europe.  If the patent applicant has limited resources, he will drop the European patent application and continue to pursue his U.S. patent application.  The United States provides the best value in patents when you compare the size of the market covered to the cost of obtaining and maintaining a patent.  It is not surprising that the allowance rate is higher in the United States. 

As part of the United States Patent and Trademark Office goal to lower allowance and grant rates for patents they instituted several “quality” metrics.  According to a Commerce Department report[2] on the United States Patent and Trademark Office, two of the key quality metrics the U.S. Patent and Trademark Office uses are the examiner allowance rate and the examiner grant rate.  The report states “. . . the assumption being that the lower the rates, the more rigorous the examination process.”  The only possible reason for tracking individual examiner allowance rates is to evaluate the examiner’s performance.  An examiner with a higher allowance rate than average must be doing poor quality work.  Examiners consider not only the statutory requirements for obtaining a patent when reviewing a patent application, but also their allowance rate.  Similar pressures apply to the supervisory examiners and the Patent Board of Appeals.  The goal of a lower allowance rate inserts an additional substantive rule to obtain a patent.  Because the US Patent and Trademark Office’s goal of lower allowance rates forces examiners to consider non-statutory requirements in determining whether a patent application is allowable, they have instituted an illegal standard of patentability.

            The United States Patent and Trademark Office’s policy to reduce allowance rates for patent applications, which appears to have started around 2003, in conjunction with the publication rule that broke the social contract between the inventor and society is a kiss of death to American innovation.

            Not to be outdone a number of academic articles have attacked the patent system.  Perhaps the most influential was The Tragedy of the Anticommons.[3]  The title of this paper is a play on the classic economics problem where no one owns a resource so that it becomes overused, such as public grazing land.  If a rancher uses grazing lands he does not own, what is his incentive to use the land sparingly?  If the rancher does not use the land extensively, another rancher may.  The anticommons thesis is that if too many people share an ownership right in a resource they will block each other from developing the resource.  The paper applies the concept to many aspects of the economy.  When it is applied to patents, it is generally referred to as a “patent thicket.”  The argument being that too many patent holders will block each others ability to develop an area of technology.  Anticommons proponents suggest that a patent thicket exists with respect to the software and biomedical industry.  If a patent thicket existed in the biotech industry, we would expect a decrease in economic activity in the biotech industry as companies are locked out of the market.  However, a study of the number of start-ups, venture capital funding, number of product introductions in the biotech industry shows the exact opposite situation.[4]  If a study was done of the software industry in the 1980’s and 1990’s it would clearly show a major increase in economic activity in the software industry as evidenced by the number of start-ups, amount of venture capital invested, product introductions and employment.  Therefore, the empirical evidence does not support the patent thicket argument.  Historical evidence of patents clogging up development is also lacking.

            Several papers[5] have pointed out that the anticommons argument for patents is based on flawed analogies.  One common analogy for the anticommons problem is a river in which multiple entities charge toll to pass.  No one entity has an incentive to maximize the revenue from the total tolls collected, so they each attempt to maximize their toll price, which causes underutilization of the river.  This example assumes a single starting point and a single ending point.  However, the “geography” of the technology world is more complex as there are multiple ways to get from point A to point B.  In fact, railroads, highways, and airplanes all represent ways around the toll problem on the river.  As long as government does not put artificial limitations on these competing technologies, they will develop solutions that also encompass many more starting and ending points, which are more convenient for the customer.  Note that one of the goals of patent law is to develop these alternative solutions.  The Tragedy of the Anticommons as applied to patents has no empirical support and is based on analogies that are logically flawed.  

 

Conclusion

            The innovation model that was perfected in the 1990’s was based on three foundations.  One foundation was the ability to obtain title to inventions, i.e. patents.  Since the late 1990’s a number of changes to the patent laws have decreased the value of patents to an inventor and to an investor.  As a result, it is not surprising that inventors and investors have been less likely to invest time and money in developing businesses that require patents to protect their intellectual property.  As a result, we have seen innovation in the United States decline, which has effected our economy and our income. 

 


[1] U.S. Department of Commerce Office of Inspector General, “USPTO Should Reassess How Examiner Goals, Performance Appraisal Plans, and The Award System Stimulate and reward Examiner Production”, Final Inspection report No. IPE-15722/September 2004.

[2] Ibid

[3] Heller, M. A. (1998): “The Tragedy of the Anticommons” Harvard Law Review, January 1998.

[4] Ted Buckley, Ph.D., The Myth of the Anticommons, Bio, http://www.bio.org (2007).

[5] Ibid; Epstien, Richard A., Kuhlik, Bruce N., Is there a Biomedical Anticommons, Regulation, (Summer 2004), pp. 54-58

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May 18, 2009 - Posted by | -Law, -Legal, Innovation, Patents, Uncategorized

5 Comments »

  1. […] Some people might point out that even though the number of patents has not increased, the number of patent applications by U.S. inventors has increased from 2000-2007.  These people would argue that this shows the U.S. is continuing to innovate.  This argument fails for a number of reasons.  First, the number of patents filed by U.S. inventors declined in 2008.  Second, investing in research and development and filing patent applications without ever receiving a patent is like a contractor building a house without receiving title to the house.  The contractor may have created some value, but since he has not profited from his effort he cannot justify continuing this business.  This situation has been exacerbated by the new policy of publishing patent applications in the U.S., even if they never receive patent protection.  Before 2000, an inventor could decide to keep their invention a trade secret if the USPTO denied them a patent and therefore capitalize on their R&D that way.[2]  This avenue is now closed.  Numerous other changes have also weakened our patent system.  For more information see Intellectual Property Socialism. […]

    Pingback by Foreigners Receive More Patents than U.S.! « State of Innovation | October 26, 2009 | Reply

  2. […] In the history of the U.S. in the last one hundred years all three major extended economic downturns are associated with a weakening of our patent system.  During the Great Depression and 1970s, antitrust law was used to marginalize the value of patents.  During the present economic downturn other mechanisms have been used to weaken our patent laws, for more information see Intellectual Property Socialism. […]

    Pingback by Levine & Boldrin Argue the U.S. Should End the Patent System « State of Innovation | December 9, 2009 | Reply

  3. […] Unfortunately, Washington does not seem to be listening. Politicians and many economists are either proposing spending to pursue consumption or strengthening our banking system to spur capital formation. No one is proposing strengthening our patent system which has been severely weakened in the last decade. For more information see Intellectual Property Socialism. […]

    Pingback by Burning the Ships: Intellectual Property and the Transformation of Microsoft « State of Innovation | December 11, 2009 | Reply

  4. […] 7) The patent thicket argument is repeated by Mr. Ridley to suggest that patents inhibit advances in technology.  A number of papers[4] have shown that there is no empirical evidence for the patent thicket argument and that the logical analogies on which it is based are flawed.  For more information see  Intellectual Property Socialism: Part IV USPTO Takes Aim at Inventors. […]

    Pingback by The Rational Optimist: Excellent Book, Disfigured by Open Source Utopianism « State of Innovation | July 22, 2010 | Reply

  5. […] incentives for inventors.  Unfortunately, since 2000 we have weakened our patent system.  See Intellectual Property Socialism. Ronald Reagan proposed National Inventors Day at February 11 in 1983.  February 11 was chosen […]

    Pingback by Reagan’s 100th Birthday « State of Innovation | February 7, 2011 | Reply


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