Weaken the US Patent System to Encourage Innovation

As the United States continues its recovery from the Great Recession, policymakers are facing increasing pressures to enact reforms that will strengthen competitive advantages and solidify the nation’s footing in the global economy. In a deviation away from more widely covered proposals such as tax and immigration reform, two Research Fellows from the Federal Reserve Bank of St. Louis are proposing significant changes to the current US patent system.

In a recent Journal of Economic Perspectives article titled The Case Against Patents, Michele Boldrin and David Levin address the disconnect between patent growth and total factor productivity, a measure of total economic output not attributable to inputs. This disconnect, referred to as the “patent puzzle,” underscores the lack of empirical evidence linking greater patent activity to increased levels of innovation and technological progress.

The rate of US patent issues has been accelerating over the last 30 years. In 1983, the United States issued 59,715 patents. By 2003, 189,597 patents were approved, and by 2010, the number of approved patents totaled 244,341. As the number of patents approved per year quadrupled over the 30 year period, annual total factor productivity in the US grew at a clip of around one percent and research and development spending hovered at around 2.5 percent of GDP. Additionally, in new industries such as biotechnology and software, areas of expanding innovation, patent introductions have not been proven to hold any significant positive impact on innovation.

Boldrin and Levin propose weakening the current US patent system to reduce the negative effect that a strong system is having on social welfare and US competitiveness. They provide an example to support their recommendation by highlighting Google’s recent acquisition of Motorola Mobility in May 2012. Google purchased Motorola Mobility to acquire the ownership of their patent portfolio and use it as a weapon in an arms race against Google’s two main smartphone competitors, Microsoft and Apple. Google’s lack of a defensive portfolio was severely limiting their ability to commercialize their technology as they were being aggressively attacked with patent litigations, creating hundreds of millions of dollars in wasteful legal costs. The authors argue that these actions reach beyond the scope of the litigating parties and point to flaws in the patent environment that is stifling competitors from entering the market and limiting innovation.

This type of defensive behavior is not unique to the mobile phone industry. In another example, the authors discuss the pharmaceutical industry and its drug patenting practices. The historical argument by pharmaceuticals has been that without substantial patent protection for drug creation, it is economically infeasible to invest in research and development for new drugs, as it currently takes approximately $1 billion to develop and market a new drug. With an investment that significant, companies expect legal protection for their patents, and market their drug at high multiples of its cost to maximize their monopoly rent.

However, the recent innovation drought in the pharmaceutical industry has led large firms to shift their priorities to protecting and extending their existing patents and focusing their research and development efforts on making slight enhancements to current drug products, rather than developing new drugs. This behavior, according to the authors, is not leading to substantial improvements in social welfare and is shifting resources away from more significant research opportunities.

Boldrin and Levin assert that the current strong patent system is being misused and overprotecting maturing businesses that are hitting the upper bounds of their research and development capabilities.

Unfortunately, the current patent system is being reinforced through lobbying by the very industries that are benefiting from it. Often throughout the article, Boldrin and Levin argue patent laws are being designed by interest groups that have an incentive to increase their own monopoly rents over maximizing aggregate welfare. They note a growing consensus among scholars and practitioners that the current system is out of balance and can be substantially improved.

Boldrin and Levine make several key recommendations to improve the current patent system. First, they recommend tailoring the length and breadth of patents based on sectoral needs. This could encourage greater levels of innovation while still maintaining the legal foundation that protects firms. Second, antitrust and competition policies should be placing greater limitation on patents issued in high-tech sectors such as computing and bioengineering. Third, the authors argue that patents should not be granted simply on the basis of technological innovation. Rather, certain economic factors should be considered in the patent-issuance process, such as an analysis of fixed costs and barriers to entry into the market.

The US patent system provides opportunities for companies to improve the country’s current competitive advantage in global innovation. However, as patent litigation continues to crowd out research in US companies and as monopolistic and protectionist behavior by industry leaders further inhibits competition, threats to innovation will remain a significant concern.

Feature Photo: cc/Superamit