State of Innovation

Patents and Innovation Economics

CATO and Mercatus Center: Another Flawed Study on Patents

The paper, The True Story of How the Patent Bar Captured a Court and Shrank the Intellectual Commons, has a number of errors that show its conclusions are flawed.  The author’s errors in a related article, entitled How Many Jobs Does Intellectual Property Create? were well documented by Adam Mossoff and Mark Schultz in Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong.  This paper’s title purports to show the Court of Appeal for the Federal Circuit has been captured by patent attorneys, but never actually provides any evidence to support this assertion.  Below I will detail a number, but not all the other errors in this paper.

 

1) The article states.  “Just as other property rights internalize the social benefits of improvements to land, automobile maintenance, or business investment, patents incentivize the creation of new inventions, which might otherwise be undersupplied.”

This is the utilitarian model of property rights.  The US was not founded on the Utilitarian model it was founded on natural rights, which are incorporated the Declaration of Independence and into Blackstone’s Commentaries which formed the basis of US common law for the first century of the US. In fact, Blackstone specifically states that patents and copyrights are property rights based on Locke’s formulation.  See The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.

There is no such thing as balancing test for property rights as implied by the author, this is a Utilitarian formulation of property rights.

 

2) The article states.  “A single, politically captured circuit court with exclusive jurisdiction over patent appeals has consistently expanded the scope of patentable subject matter. This expansion has resulted in an explosion of both patents and patent litigation, with destructive consequences.”

The myth of an explosion in patent litigation has been debunked many times.  As pointed out in the article The “Patent Litigation Explosion” Canard,

“First, it’s simply untrue. Award-winning economist, Zorina Khan, reports in her book, The Democratization of Invention, that patent litigation rates from 1790 to 1860 fluctuated a lot, but averaged 1.65%. Today’s patent litigation rates are around 1.5%. As Yoda would say: patent litigation explosion this is not, hmm, no. In fact, for three decades in Khan’s study patent litigation rates were higher than today’s litigation rate. From 1840-1849, for instance, patent litigation rates were 3.6% —more than twice the patent litigation rate today.”

Also see Massive Litigation Spike in Response to America Invents Act and The America Invents Act at Work – The Major Cause for the Recent Rise in Patent Litigation

Second there has not been an explosion in the number of issued patents.  The number of patents issued to US inventors in 1980 were 37,355 and in 2011 there were 108,626 that is a 3.5% increase in the number of patents per year, hardly an explosion in the number of issued patents.

The research and development cost  per patent has increased from around $1.2 Million per patent to around $4 Million per patent from 1955 to 2005 and GDP per patent over the same time period in constant dollars has increased from 60 million per patent to around 170 million per patent.  According to a paper by the Federal Research Bank of San Francisco[1], real industrial R&D has been growing at 3.7% per year between 1953 and 2000, while the number of patents per capita has been growing at 1.7% per year over the same period.  The number of citations per patent increased 3.3% per year over the 25 year period from 1975-1999.

 

3) The article states.  “As early as 1951, Simon Rifkind, a former federal judge in New York City, warned in a prescient essay that then-current proposals to create a specialized patent court would lead to “decadence and decay.”

This was the time period in which a Supreme Court Justice in 1948 would write “the only patent that is valid is one which the Court has not been able to get its hands on.”  Jungerson v. Ostby and Barton Co., 355 US 560.  This was also when the Supreme Court was applying its “flash of genus standard to patents.”  If Rifkind meant that it would result in courts that did not have this utter disdain of patents he was right.  However, this is hardly an objective measure.

 

4) The article states.  “Using a dataset of district and appellate patent decisions for the years 1953–2002, economists Matthew Henry and John Turner find that the Federal Circuit has been significantly more permissive with respect to affirming the validity of patents.”

Well given the Supreme Court’s attitude the only patent that is valid is one which the Court has not been able to get its hands on that is hardly a surprise.  One of the first things that Reagan did upon becoming president, was to create the Court of Appeals for the Federal Circuit.  This court does hear all patent appeals and actually had about half the Justice that were actually trained in patent law.  In order to be legally or factually competent as a patent attorney you have to have a technical background in science or technology, which none of the present Supreme Court justices have.  In addition, patent attorneys have to pass a separate bar exam that has one of the lowest pass rates in the US.  Patent law is a highly technical and specialized area, just like quantum mechanics is highly specialized and technical.  You would not ask an English professor how to solve a problem in quantum mechanics and expect anything sensible.  The same is true for patent law.

 

5) The chart in the article is a lie.  It shows the number of patents linearly, which would show any compound growth as an exponential.  In fact the number of issued patents has grown at a rate 3.5% from 1980 to 2011, hardly an explosion.

 

6) The article states.  “They estimate that patentees are three times more likely to win on appeal after a district court ruling of invalidity in the post-1982 era. In addition, following the precedents set by the Federal Circuit, district courts have been 50 percent less likely to find a patent invalid in the first place, and patentees have become 25 percent more likely to appeal a decision of invalidity.”

The 1970s was a period of time in which several appeals circuits had not upheld the validity of a patent in 25 years.  The FTC had a policy of nine no-nos of what you could not do with your patent without running afoul of the antitrust laws.  It is hardly surprising that Reagan and Congress wanted to strengthen the property rights of inventors.

 

7) The article states.  “The U.S. Supreme Court reversed the Court of Customs and Patent Appeals, holding that mathematical algorithms (and therefore software) were not patentable subject matter.”

Here the Supreme Court showed their complete ignorance of what a computer is and what software does.  Any electrical engineer knows that any device implemented in software can be implemented in hardware.  In fact, software just wires an electronic circuit (computer) to create an application specific device.  Engineers choose between these options based on the need for flexibility and lower cost (software) and speed (hardware) and have several choices in between.

In order to be logically against software patents, one has to be against all patents for electronic circuits.  This is the sort of nonsense you get from a court that does not understand the underlying technology.

 

8 ) The article states.  “State Street Bank v. Signature Financial Group (1998), the Federal Circuit broadened the criteria for patentability of software and business methods substantially, allowing protection as long as the innovation “produces a useful, concrete and tangible result.”

35 USC 101 states “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”  A computer implemented invention is a new and useful machine and useful process.  Seems like the Federal Circuit got it right.

 

9) The article states.  “The GAO estimates that more than half of all patents granted in recent years are software-related.”

The GAO counted any invention that includes some sort of software, firmware, or related.  Let’s see, a procedure to sequence DNA would probably use a machine that had software or firmware and therefor met the GAO’s definition.  A chemical patent that used any computer controlled machinery would count as a software patent under this definition.  Today most transmission systems are computer controlled and therefore meet this definition.  This standard is so loose as to meaningless.

 

10) The article states.  “While more patents have not resulted in faster economic growth, they have resulted in more patent lawsuits.”

This statement will take some unpacking.  First of all the 1980s and 1990s saw significantly faster growth than the 1970s, which had a significantly weaker patent system.  Second of all the patent laws were weakened starting in 2000 with the Patent Act of 2000.  This trend has continued to this day.  In 2002, we passed Sarbanes Oxley which made it almost impossible for startups to go public, which starved startups and VCs of capital.  Economic growth did not start to fall off until around 2000.  So actually the data is consistent.  Weaker patent laws are associated with weaker economic growth.  Third, the patent system cannot function in a socialist system.  The US by CATO’s estimate takes 60% of the GDP today.  What does it mean to own your patent in a world where the EPA can take your land at any time, in which the eminent domain can be used to take your property for a project that promises higher tax revenue, a world in which the government publishes your invention for the whole world to see before they provide you any patent protection, a world in which the government does not accept any limits to tax you or regulate you?  The author is right that a patent system cannot cause economic growth in the USSR, which tried to implement a patent system.  A patent system is based on a system of property rights.  Since 2000 we have created a patent system that supports crony socialism (capitalism), not surprisingly our inventors and entrepreneurs are not creating economic growth.

The macroeconomic evidence is overwhelming for patent systems creating growth.  Those countries with the strongest patent systems are the most inventive and have the greatest technological dispersion and are the wealthiest in the world.  While those with the weakest patent systems do not contribute any inventions and have very poor technological dispersion and are some of the poorest countries in the world.

 

I for one am very disappointed that the CATO Institute would publish such a poorly researched and reasoned article.

 

 

 

[1] Wilson, Daniel, “Are We Running Out of New Ideas” A Look at Patents and R&D”, FRBSF Economic Letter, Number 2003-26, September 12, 2003.

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September 10, 2014 - Posted by | -Law, -Philosophy, News, Patents | ,

1 Comment »

  1. […] software patents.  One solution advocated by Eli Dourado is to eliminate all software patents (See CATO and Mercatus Center: Another Flawed Study on Patents).  The other solution, advocated by John F. Duffy, is a more rigorous application of the […]

    Pingback by Yale Law Professor’s Attack on Patents: A Comedy, Farce and Tragedy All Rolled into One | Blog of Dale B. Halling, LLC - Intellectual Property & Patent Innovation, Attorney - Powered by Clvr.Tv | November 20, 2014 | Reply


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