[Ip-health] Do Patents Work?

[Prabhu Ram]

>NYTimes

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A Patent Is Worth Having, Right? Well, Maybe Not

By MICHAEL FITZGERALD

PATENTS are supposed to give inventors an incentive to create things
that spur economic growth. For some companies, especially in the
pharmaceutical business, patents do just that by allowing them to pull
in billions in profits from brand-name, blockbuster drugs. But for
most public companies, patents don't pay off, say a couple of
researchers who have crunched the numbers.

"Today, over all, patents don't work; for the information technology
industry especially, they don't work," said James Bessen, who became a
lecturer at Boston University's law school after a career in business.
In 1983, he created the first computer publishing software with
Wysiwyg (an acronym for "what you see is what you get") printing
abilities. He also founded a desktop publishing company, Bestinfo,
later acquired by Intergraph.

Neither Mr. Bessen nor his company patented anything, in part because
his lawyers told him that software couldn't be patented at the time.
He ultimately became interested in whether patents spurred innovation,
since the software industry for years innovated steadily without using
many patents. He and a colleague, Michael J. Meurer, are readying a
book on the topic, "Do Patents Work?," due in 2008. (A synopsis and
sample chapters are at researchoninnovation.org/dopatentswork/.)

The two researchers have analyzed data from 1976 to 1999, the most
recent year with complete data. They found that starting in the late
1990s, publicly traded companies saw patent litigation costs outstrip
patent profits. Specifically, they estimate that about $8.4 billion in
global profits came directly from patents held by publicly traded
United States companies in 1997, rising to about $9.3 billion in 1999,
with two-thirds of the profits going to chemical and pharmaceutical
companies. Domestic litigation costs alone, meanwhile, soared to $16
billion in 1999 from $8 billion in 1997.

Things have probably become worse since then. For instance, patent
litigation is up: there were 2,318 patent-related suits in 1999, and
2,830 in fiscal 2006 (though that's down from the peak year, 2004,
when 3,075 were filed). Mr. Bessen said awards in patent cases also
seemed to be up, though he was less confident in that data. Worse, he
says, companies doing the most research and development are sued the
most.

Mr. Bessen's critique of the patent system does not go so far as that
of economists like Michele Boldrin and David K. Levine, who argue that
the patent system should be abolished (
http://www.dklevine.com/general/intellectual/againstnew.htm). Mr.
Bessen said that besides girding the pharmaceutical industry, the
system did seem to work reasonably well for small companies and
individual inventors. Still, he said that "our finding is that the
risk of patent litigation is creating a disincentive for R&D,"
especially for information technology companies, and that the system
urgently needs change.

Mr. Bessen's data is controversial. John F. Duffy, a law professor at
George Washington University, thinks that Mr. Bessen and Mr. Meurer
have undervalued the profits made from patented items, though he
acknowledged that a vast majority of patents are worthless.

Mr. Duffy, who thinks that the patent system remains a powerful
innovation engine for the economy, also noted that the data covers
only the private value of patents =97 it does not try to measure the
social value of patents, that is, the impact an invention has for
society at large. How, for example, might one measure the value of the
stability of an airplane, which can be traced to an invention patented
by the Wright Brothers?

Still, Mr. Duffy does not discount the research. In fact, he has
invited Mr. Meurer to present it at a conference later this summer.
"The numbers are serious, and they are provocative," Mr. Duffy said.

The data don't seem out of line to R. Polk Wagner, a law professor at
the University of Pennsylvania. He said that other research has
established that patents typically are worth less than $10,000. "It's
not any secret that on a cash basis, it doesn't make sense to file
patents, and yet companies do it," Mr. Wagner said.

Some companies are still spending billions on research programs
despite the increase in litigation costs. "Whether or not the R&D
efforts you make invite litigation in no way relates to whether you do
them," said Bernard S. Meyerson, an I.B.M. fellow who is named on more
than 40 patents and is currently chief technologist at its systems and
technology group. I.B.M. has one of the corporate world's largest
research budgets, spending some $6 billion a year. And it does make
money from its patents, at least on a licensing basis.

Of course, I.B.M. also employs 370 corporate patent lawyers who Mr.
Meyerson said work "hand in hand" with the company's inventors, trying
to make sure that the company is aware of patent pitfalls that might
affect its work.

I.B.M. and many other large high-tech companies have hefty patent
portfolios, which Mr. Meyerson said deters the companies from suing
one another. He said the industry operates under a large
intellectual-property umbrella: "you are licensed under mine, I'm
licensed under yours, and by declaring peace as opposed to war, you
have freedom of action," Mr. Meyerson said.

Even so, he said I.B.M. is concerned that innovation could be choked
by patent litigation and would like to see the system reformed.

Congress could step in, and there are patent reform bills in the House
and the Senate, with many of the provisions aimed at reining in
litigation and damage awards. But this marks the third consecutive
year that Congress has considered patent reform, and there is enough
opposition from large companies to suggest that it will again have to
wait until next year.

There are other paths to change: the United States Patent and
Trademark Office could open patent applications to public comment,
which could help patent examiners find applicable previous inventions.
The office in June began a yearlong experiment allowing open comment
on 250 patent applications
(www.uspto.gov/web/offices/com/speeches/07-21.htm). The Web is already
ahead of the patent office: a site called wikipatents
(www.wikipatents.com) has created an open comment process for several
years' worth of patent applications.

ANOTHER might be to increase the number of appeals courts that handle
patent cases. Right now, there is only one, the United States Court of
Appeals for the Federal Circuit. The Supreme Court, meanwhile, may
have helped the system immensely with a ruling in June that should
stiffen the standard of "obviousness," the key criterion in granting a
patent. Tougher standards may weed out many bad patents and reduce
litigation.

But technological inventions are often not obvious, especially when it
comes to the esoteric world of software, where it can be unclear even
to the inventor what the patent will be good for.

Mr. Bessen, for one, is not optimistic. "Things are going to get a lot
worse before they get better for the technology industry," he said. If
he's correct, it will become harder to question his economic analysis
of the current patent system.

Michael Fitzgerald is a Boston-area writer on business, technology and
culture. E-mail: mfitz@nytimes.com.