We all know the patent system is broken.
But most people believe that the biggest problem with it is abusive litigants who extort so-called “license fees” from small businesses unable to pay the cost of standing up to them in court. Their activities, of course, have no more in common with real patent licensing than a mob protection racket has with the sale of genuine “liability insurance.”
The unspoken reality is that the U.S. patent system faces an even bigger problem: a market so constricted by high transaction costs and legal risks that it excludes the vast majority of small and mid-sized businesses and prevents literally 95 percent of all patented discoveries from ever being put to use to create new products and services, new jobs, and new economic growth.
Even the most dramatic estimates of the social cost of abusive patent litigation range in the low tens of billions of dollars. But according to a new study by the distinguished economists Robert Litan of the Brookings Institution and Hal Singer of the Progressive Policy Institute—a study I helped to fund—liberating patent licensing from its litigation-focused costs and risks would enable tens of thousands of currently-dormant inventions to be commercialized and conservatively add up to $200 billion a year in increased output to the U.S. economy. That’s at least ten times bigger than the litigation problem, and directly impacts job creation.
What Is Broken and How to Fix It
Here’s the challenge in a nutshell: innovation drives the economy, but much of the new technical knowledge required for such innovation is contained only in patents. The U.S. patent database is the world’s largest encyclopedia of technology improvements and technology experts in the world. Some of that database is directly relevant to the new products and services that any individual company is working on improving or creating. But the database is too hard to access.
Accessing the knowledge and expertise contained in the patent data-base is not a problem for large Fortune 500 companies. Giant companies have long recognized the value of the patent database and spend millions, and in some instances billions, on dedicated teams and expensive tools to mine the patent database for competitive advantage and effective legal risk management. But for the vast majority of smaller and mid-sized businesses that are responsible for the bulk of U.S. job creation, patents represent not a treasure trove of new technical knowledge but a growing multi-trillion-dollar database filled with infringement risk.
As a result, most small and mid-sized firms instruct their employees not to read patents that might help improve their products and services. This deprives those firms from being able to build on the knowledge these patents contain and, in turn, help other companies improve their products and so on. This kind of behavior, though legally prudent, defeats the patent system’s whole purpose of technological disclosure and commercialization.
The problem is not just who is excluded from the opportunity to commercialize patented inventions—i.e., the overwhelming majority of sub-Fortune 500 firms who are the backbone of the U.S. economy. The system also makes it all but impossible to commercialize any but the biggest blockbuster inventions, including the more incremental advances that are usually the most useful in solving the pressing problems of daily existence.
In their study, Dr. Litan and Dr. Singer offered a sports analogy to illustrate how such a constricted patent licensing system harms the economy:
“It is as if the economy were playing a game of baseball in which the only hits that counted were home runs by just those players on very well-financed teams,” they wrote. “In such an economy, vast numbers of other valuable or ‘run-producing’ innovations—triples, doubles, [or] singles—generated by many other firms, universities or individual inventors cannot be economically licensed given the potential risks or costs of litigation.”
In short, confining the commercialization of invention to the risky and hugely expensive machinery of our court-centered licensing system is severely retarding innovation, not promoting it. And in the process, the patent system itself is losing much of its original democratic character and popular support.
Patents Were Created to Level the Playing Field
Remember, America’s Founders quite consciously created the first patent system in the world aimed at the common man, in contrast to the feudal and elitist patent systems prevailing in Britain and Europe at the time. The first patent law passed in April of 1790 set patent fees to a level any ordinary citizen could afford — less than 5 percent of the rate in Britain. It encouraged large numbers of people, the vast majority of whom lacked the wealth to build factories and manufacture products from their patents (now called “non-practicing entities”), to participate in inventive activity. And in a huge break from European patent systems of the day, it facilitated the licensing and sale of patent rights, thereby creating the world’s first market for new technology.
The low patent fees and ability to license patent rights turned invention into a new income-earning career path for thousands of poor but technically creative citizens. And as a result, within 50 years the U.S. per capita patenting rate reached three times the rate in Britain. U.S. inventors were also far more prolific than their British counterparts, creating five times as many patented inventions as Britain did each year, even though our populations were then roughly equal in size. By 1885, the U.S. per capita patenting rate was quadruple that of Britain.
This democratized patent system thus directly stimulated America’s growth from an economic backwater wholly dependent on imports into the unrivaled leader of the worldwide Industrial Revolution. In the words of historians Naomi Lamoreaux of Yale and the late Kenneth Sokoloff of UCLA: “Observers attributed much of the country’s rapid technological progress to its distinctive patent system. Quite revolutionary in design at inception, the U.S. patent system came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies. These features attracted the technologically creative, even those who lacked the capital to directly exploit their inventions.”
If we’re honest with ourselves, we must admit that the patent system today has lost much of its original democratic character. Sure, anyone with a good inventive idea (and at least $20,000 for legal and other fees) can get a patent. But what can you do with that patent? More than likely, you won’t be able to put it to good use unless you have the multi-million-dollar resources required to launch a startup, secure a licensing deal with a big corporation or, if necessary, litigate to stop an infringer. Those are all unlikely pathways.