The Economics of Patents Corinne Langinier Institute for Public Economics University of Alberta, Edmonton
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Introduction Surveys
Langinier and Moschini (2002) – “The Economics of Patents: An Overview,” in “Intellectual Property Rights and Patenting in Animal Breeding and Genetics,” edited by Scott Newman and Max Rothschild. Hall and Harho¤ (2012) – “Recent Research on the Economics of Patents,” Annual Review of Economics, 4:541–65. Eckert and Langinier (2014) – “A Survey of the Economics of Patent Systems and Procedures,” Journal of Economic Surveys, Vol 28, 5, 996-1015.
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Introduction Characteristics of Research and Development (R&D) randomness of the return from the investment public good aspect of patentable innovations
Innovation can be assimilated to a public good, no …rm wants to bear the R&D cost alone Firms need incentives to undertake R&D projects Patent system – one system of encouraging R&D “If one wants to induce …rms to undertake R&D one must accept the creation of monopolies as a necessary evil” (Schumpeter, 1943)
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Introduction Innovative activity is a fundamental component of the growth of the economy It is important to understand the patent system and the economics of patents Over the last decades, increase in patenting activity in many countries Grants and Applications Growing concerns about the issuance of many questionable patents The functioning of the patent system has been questioned Failures in the functioning of the patent system are widely acknowledged Langinier (2016)
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Introduction
"The United States Patent and Trademark O¢ ce (USPTO) is an agency in crisis facing signi…cant challenges."
January 2009 U.S. Chamber of Commerce
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Introduction “Today’s patent regime operates in the name of progress. Instead, it sets innovation back. Time to …x it.” Aug 8th 2015, Time to …x patents “... a top-to-bottom re-examination of whether patents and other forms of intellectual-property protection actually do their job, and even whether they deserve to exist, is long overdue.” Aug 8th 2015, A question of utility
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Introduction Need to understand the impact of patents on innovation the functioning of the patent system and patent o¢ ces
Examiners play a key role in the patenting process they grant patents to innovators they allow …rms temporary monopoly power
The deliverance of too many questionable patents negatively impacts the economy and society Poor examination quality lowers competition (imposes costs on society) leads to high legal costs in cases of litigation (that may reduce innovation) Langinier (2016)
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Introduction Traditional economic patent literature had addressed the following questions Role of patents in encouraging invention and the disclosure of technology Does the patent system lead to more invention? Does it stimulate invention?
Optimal design of patent rights – optimal scope of patent protection
More recent literature is concerned with the internal organization of patent systems Governance problems and management practices What are the incentive problems faced by patent o¢ ces? What is the impact on the behavior of applicants and examiners? Langinier (2016)
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Introduction Outline
The Basics of Patents and Patent System Procedures Patent System Procedures Patent Statistics (U.S. and Canada)
Economic Literature on Patents, Patent Prosecution, Organization and Incentives within Patent O¢ ces Traditional Theoretical Patent literature Surveys about Innovation and Patents Empirical Literature More Recent Patent Literature on Incentives within Patent O¢ ces
Conclusion and Policy Implications
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The Basics of Patents and Patent System Procedures Patents
To be patentable, an innovation must be new: not in the public domain non obvious to a person with ordinary skill in the particular …eld useful: to have at least one application
Patent: a document granting the right to exclude anyone else from the production of a new product temporarily (20 years from the date of …ling) Patents Patents must be renewed 3 times in the U.S. every year in Canada and in Europe
A patent can be licensed or sold Langinier (2016)
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The Basics of Patents and Patent System Procedures Patent System Procedures
Patent rules and procedures are broadly consistent across countries An innovator …les for a patent application at the national level (or EPO) or under Patent Cooperation Treaty (PCT) Patent prosecution process (NAPA, 2005) search – read application, prior art (existing set of related inventions) search, analysis of claims examination – compare prior art with innovation, prepare and submit …rst action letter amendment review – if it exists, additional search and second action letter
Patent applicants must pay fees (…ling, examination, granting and maintenance fees) First-to-…le rule Langinier (2016)
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The Basics of Patents and Patent System Procedures Patent System Procedures – Di¤erences
Application and examination In the U.S. – an application enters the queue for examination as soon as it has been …led and fees paid In Europe, Japan, Canada – separate request for examination Europe – within 6 months Japan – within 3 years Canada – within 5 years
Requests
Role of third parties European post-grant opposition system – third parties can oppose within 9 months of granting U.S. enforcement occurs mainly through the court system
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The Basics of Patents and Patent System Procedures The Economics of Patents
Advantages promote new discovery help dissemination of knowledge encourage technological transfer and commercialization may facilitate entry of small …rms
Disadvantages a monopoly is socially ine¢ cient duplication of spending (patent races) increase transaction costs that may delay innovation monitoring to detect infringement must be done by the patentholder: imperfect protection
“Unless one is willing to sue on it, a patent is virtually useless, just a fancy piece of paper with a gold seal that looks good on the wall” (H.L. Speight, National Law Journal June, 22 1998) Langinier (2016)
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The Basics of Patents and Patent System Procedures The Economics of Patents
Costs R&D costs (e.g., Polaroid paid US$600 million for its instant photography project between 1962 to 1975) Patenting costs registration costs (about US$ 5,000) renewal costs (US$ 12,600)
Monitoring costs (????) Litigation costs (Kodak paid about US$900 million to Polaroid in 1990.... RIM paid $612 million to NTP in 2006) Langinier (2016)
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The Basics of Patents and Patent System Procedures U.S. and Canada Patent Systems
Basic trends in patenting activity across countries Workforce is di¤erent across countries
Patents and Applications
Workforce
Practices are di¤erent across countries Canada: PCT (Patent Cooperation Treaty) applications
PCT
Comparison of certain measures across countries are di¢ cult grant rates backlogs Pending pendency times
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Pendency
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Economic Patent Literature
Books Scotchmer (2004) - Innovation and Incentives Bessen and Meurer (2008) - Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk Boldrin and Levine (2008) – Against Intellectual Monopoly Burk and Lemley (2010) – The Patent Crisis and How the Courts Can Solve It Handbook of Innovation (2010) Volumes 1 and 2, Ed. by B. Hall and N. Rosenberg
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Traditional Economic Patent literature Research questions
General research questions (Mazzoleni and Nelson, 1998; Gallini, 2002...) Does the patent system stimulate invention? Does it encourage more disclosure of new technology? Does it facilitate technology transfer and the creation for a market for technology? Does it contribute to achieve the ultimate goal of stimulating innovation and di¤usion of new knowledge? What is the optimal design of patent rights?
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Traditional Economic Patent literature The Economics of Patents – Economic rationale for patents
Trade-o¤ between limiting the monopoly power giving enough incentive to do R&D
Economic patent jargon length: patent duration breadth: set of protected products
The length: duration of the monopoly power The breadth: intensity of monopoly power
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Traditional Economic Patent literature Research questions – Theory …ndings
Early theoretical investigations – patent duration (length) patent duration must be …nite (Nordhaus, 1969, Scherer, 1972)
More recent patent literature – optimal patent breadth and length Narrow and long patents (Gilbert and Shapiro, 1990; Klemperer 1990) Broad and short patents (Klemperer, 1990; Gallini, 1992) It depends on the industrial sector and on the type of innovation (Denicolò, 1999)
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Traditional Economic Patent literature Research questions – Theory …ndings
Cumulative innovation – research tool can be used in the R&D process for further innovations (Scotchmer and Green, 1990) Optimal patent policy – provide appropriate incentives for the development of initial innovation and follow-up innovations Too strong patent policy might not provide enough incentive for R&D (O’Donoghue, 1998; Chang, 1995; Denicolò, 2000) Patents do not boost invention in a sequential framework (Bessen and Maskin, 2009)
Complex new products – too many patents are required to develop a subsequent innovation – hold-up problem (Heller and Eisenberg, 1998; Shapiro, 2001) Langinier (2016)
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Traditional Economic Patent literature Research questions – Theory …ndings
What do we learn from theoretical contributions? Does the patent system lead to more invention and stimulate invention? In the case of a single innovation – the patent system will encourage innovation BUT the reality is more complex.... In the case of cumulative and complex technologies – not clear
What is the optimal design of patent rights? It will depend on the innovation type, the industry, the model....
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Traditional Economic Patent literature Research questions – Theory …ndings
Critics of the theoretical literature the concepts of patent breadth or scope are too abstract and di¢ cult to relate to the real job of patent examiners they do have limited concrete policy implications the literature does not provide clear guidance as to how stringent patentable requirement should be
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Traditional Economic Patent literature Surveys about Innovation and Patents
3 major surveys in the U.S. at the …rm’s level Yale survey 1987 – Levin et al. (1987) The e¤ectiveness of patents was rated between 3.3 and 4.3 out of 7 Carnegie Mellon Survey 2002 – Cohen et al. (2002) U.S. …rms tend to use patents more for exclusion 2008 Berkeley Patent Survey – Graham, Merges et al. (2009) Executives at entrepreneurial …rms surveyed report that patents provide weak incentives to innovate
In Canada Canadian Surveys of Innovation (Statistics Canada, 2012) Survey of Intellectual Property Management (SIPM), 2012 Langinier (2016)
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Traditional Economic Patent literature Surveys about Innovation and Patents
Patents – relatively ine¤ective compared to secrecy in protecting both process and product innovations (Cohen et al., 2001) Patenting an innovation in most industrial sectors would not be pro…table for inventors due to costs of patent protection (Arora et al., 2003) Overall, according to these surveys, patents are not a useful way to protect innovations. . . . Why do …rms patent?
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Traditional Economic Patent literature Surveys about Innovation and Patents
Reasons for Patenting (Graham, Merges et al., 2010) Competitive advantage Securing …nancing Preventing technology copying Enhancing reputation
Strategic motives (Blind et al., 2006) To block competitors o¤ensively and defensively Licensing agreement New innovation management practices and patenting strategies in some sectors – electrical and computing technology (Kortum and Lerner, 1999; Hall and Ziedonis, 2001)
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Traditional Economic Patent literature Patent Data
Data from USPTO, EPO, CIPO Hall, Ja¤e, and Trajtenberg (2001) The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools updated in 2009 with patents from 1976 to 2006 – about 5 million patents
PATSTAT
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Traditional Economic Patent literature Empirical Contributions
Measure the value of patents (Trajtenberg et al., 1997; Lanjouw and Schankerman, 2004) Patent citation Forward citations – good indicator of the technological importance of the innovation and the originality of the innovation (Trajtenberg, 1990) Backward citations – positive impact of backward citations to quality of innovation (Trajtenberg, 1990; Ja¤e and al., 1993)
Patent breadth Backward citations Total number of claims – scope of patent or also indicator of the complexity of an innovation (Harho¤ and Reitzig, 2004; Lanjouw and Schankerman, 2004) Total number of patent classes to which the patent belongs (Lerner, 1994) Langinier (2016)
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Traditional Economic Patent literature Empirical Contributions
First use of patent data – patent counts per industry or …rm as an indicator of innovative output (Scherer, 1982; Griliches, 1984) European patent renewal data – to analyze the value of patents (Schankerman and Pakes, 1986) Patent citations appeared to be correlated with the value of innovation (Trajtenberg, 1990) have been used as an indicator of spillovers (Ja¤e, and al., 1993)
Weighted patent counts – to analyze the impact of innovation and patents on …rm value or performance (Hall et al., 2005; Trajtenberg, 1990; Lanjouw and Schankerman, 1998; 2001; 2004...) Langinier (2016)
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Traditional Economic Patent literature Empirical Contributions – Main …ndings
Severe skewness in patent value distribution – only a few patents have a high value whereas a majority of patents have no or very little value Strong patent systems (meaning more domains are patentable – business methods, software. . . ) have at most an ambiguous relationship with the rate of innovation but they facilitate technological transfer
Patent systems provide incentives for innovation in only a few sectors (pharmaceutical, biotechnology...)
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Traditional Economic Patent literature Empirical Contributions
Technical problems in the use of patent data (Lerner and Seru, 2015) lack of unique identi…cation numbers for applicants; di¤erent name for the same applicant di¢ cult to link the patent to a technological …eld (patent o¢ ces constantly update their classi…cation system) Until recently, available information only on granted patents (not on patent applications) Before 2000, it was impossible to identify whether it was the applicant or the examiner who added the citations in a patent
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Recent Patent Literature Incentives within Patent O¢ ces
Organization and incentives within patent o¢ ces and their e¤ect on patent systems Surveys at the Patent O¢ ce’s level USPTO – Cockburn, Kortum, & Stern (2002); Popp, Juhl and Johnson (2004) EPO – Friebel, Koch, Prady and Seabright (2006)
Main …ndings Signi…cant heterogeneity in examiners and examination process In examination process: di¤erent technological …elds exhibit di¤erences in organizational structure “As many patent o¢ ces as patent examiners” (Cockburn, Kortum, & Stern, 2002) Langinier (2016)
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Recent Patent Literature Empirical Contributions
There exist di¤erences across patent examiners in their experience and in their prior art search (Lemley and Sampat, 2009) Strong evidence that examiners are less informed than applicants (Sampat, 2009) On average, two third of all citations are added by examiners (Alcacer and Gittelman, 2006) Empirical evidence that applicants conceal information about prior art (Lampe, 2012) Experienced applicants behave di¤erently than non-experienced ones (Schneider, 2007) Determinants of examiners’mobility at the USPTO – heterogeneity can be explained by examiners’considerations for promotions and leaving (Langinier and Lluis, 2016) Langinier (2016)
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Recent Patent Literature Incentives within Patent O¢ ces
Process by which patents are granted Di¤erent types of agents Patent applicant Patent examiner Third party
Agents have di¤erent objectives, and do not possess the same information Asymmetric information leads to strategic behavior
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Recent Patent Literature Incentives within Patent O¢ ces
Patent applicants decide whether to apply when to apply whether to have the patent examined whether to withdraw what information to include in the application
Patent examiners decide whether to search for more information whether to grant a patent
Third parties decide whether to provide more information Langinier (2016)
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Recent Patent Literature – Theoretical Contributions Patent Applicant’s Behavior
Some bad applications are inevitable (because of overload problem) Vicious circle – more bad applications lower the examiner’s e¤ort per application, it becomes easier to get a patent, which attracts more applications and worsens patent quality (Ja¤e and Lerner, 2004)
Strategic behavior of patent applicant they have an incentive to conceal prior art information, and examiners should commit to search e¤orts that are independent of the amount of prior art revealed by applicants (Langinier and Marcoul, 2016) Innovators may have no incentive to search for prior art (ex ante and ex post), search intensity increases with R&D cost, the examiners’ expected search e¤ort, and with patenting fees (Atal and Bar, 2010) Langinier (2016)
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Recent Patent Literature – Theoretical Contributions Patent Examiner’s Behavior
How dependent is the outcome of the patent process on the skills and talent of examiners? To what extend are examiners in‡uenced by the incentives developed by the patent o¢ ce? from outside of the patent o¢ ce?
How e¤ective are policies designed to encourage examination quality and/or quantity?
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Recent Patent Literature – Theoretical Contributions Patent Examiner’s Behavior
Quality of granted patents depends on the examination e¤ort Patent examination quality is the lowest when the patent o¢ ce maximizes number of granted patents (Picard and van Pottelsberghe, 2013)
Trade-o¤ between examination quality and quantity An examiner who devotes more e¤ort into searching for invalidating information (increase quality) will process fewer applications
Quantity is easily contractible (e.g., U.S. quota system) Measuring and verifying quality is di¢ cult. Quality is di¢ cult to write into a contract – it relies on a subjective assessment of a superior Langinier (2016)
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Recent Patent Literature – Theoretical Contributions Patent Examiner’s Behavior
Implicit contract PTO promises a reward to examiners when they reach a quality goal, without any formal written contract
Explicit contract Instead of implicit contracts, the PTO could use proxies for quality (e.g., number of citations), which will allow explicit contracts to be written (Langinier and Marcoul, 2015)
Findings: in new …elds, implicit contracts should be o¤ered whereas in more mature …elds, explicit contracts based on a proxy should be o¤ered Langinier (2016)
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Recent Patent Literature – Theoretical Contributions Patent Examiner’s Behavior
Career concerns – incentives coming from outside of the patent o¢ ce High attrition rate of examiners at the USPTO It has lowered overall level of patent examiner experience (van Pottelspberghe, 2010)
Examiners might behave strategically in order to enhance their ability to move to the private sector This is not necessarily detrimental to the patenting process (Langinier and Marcoul, 2014)
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Recent Patent Literature Third Party’s Behavior
Not only patent applicant and patent examiner search for invalidating information, so does a potential competitor A post-grant review mechanism can provide incentives to third parties to provide valuable information (Hall and Harho¤, 2004; Graham and Harho¤, 2006) Bene…ts of an opposition system less uncertainty reduces litigation costs
Opponents it will increase transaction cost free-riding problem: incentive of each third party to challenge the patent is weak
Overall, e¤ect of opposition system is not clear Langinier (2016)
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Conclusion and Policy Implications
Goals of policy maker improve patent quality reduce backlog reduce pendency time
Proposed policies Post-grant opposition system Gold-plate patent reform Second Pair of Eyes Review (SPER)
PCT and PPH (Patent Prosecution Highway) and PCT-PPH Harmonization problems
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Conclusion
Many open questions Why so many questionable patents? How to improve the patent system? Comparison of di¤erent policies How to provide incentives to patent examiners?
There is a need for a better understanding of the examiner’s behavior the applicant’s behavior
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