While more innovation is the main theoretical benefit of patent protection, some have argued an increasingly swamped U.S. Patent Office has granted many patents with negligible innovation value. I test this argument and determine the characteristics of patents that lack innovation value by analyzing 980 litigated patents that were subject to anticipation or obviousness decisions during the last decade. Using a selection corrected probit model, I obtain unconditional estimates of the likelihood that patents with given characteristics would be found to lack innovation value. I estimate a surprising 27 percent of all patents would be found at least partially invalid if subject to an anticipation or obviousness decision. Types of patents that have been particularly criticized, including those covering software and business methods and those owned by licensing firms, possess significantly higher innovation-based invalidity rates.

While each patent dispute is unique, most fit the profile of one of a limited number of patent litigation stories. A dispute between an independent inventor and a large company, for instance, is often cast in "David v. Goliath" terms. When two large companies fight over patents, in contrast, they are said to be playing the "sport of kings." Some corporations engage in "defensive patenting" in order to deter others from suing them. Patent licensing and enforcement entities who sue have been labeled "trolls". Finally, observers of the patent system call the use of patent litigation to impose or exploit financial distress "patent predation." These stories, routinely invoked by the press, advocates, and academics, shape public understanding of the patent system. In this Article, I describe, then match, these stories to data on patent litigations to determine which types of suits are most prevalent. I focus exclusively on the litigation of high-tech patents, covering hardware, software, and financial inventions, using data from the Stanford Intellectual Property Clearinghouse for cases initiated in U.S. District Courts from January 2000 through March 2008. The data shows that the reality is more complicated than the rhetoric regarding patent litigation. For instance, many blame nonpracticing entities (“NPEs”) for a majority of the problems with the patent system. But they bring only a minority of patent suits: 17% of high-tech patent suits in the last eight years. However, NPEs often name multiple defendants and sometimes, rather than sue, are sued, for declaratory judgment (DJ). Counting suits based on the number of defendants and including DJ cases, the NPE share rises to 28% of all high-tech patent suits. This average reflects an increase in NPE suits as a proportion of all suits over an eight-year period, from 22% in 2000-2001 to 36% from 2006 to March 2008, counting defendants, or from 10% to 20%, counting cases. I also report the variation by industry based on the absolute number of suits - the share of financial patent NPE suits (26%) was nearly triple that of hardware patent NPE suits (9%). These numbers provide a richer context for understanding the NPE phenomenon. Another perception of the patent system is that large companies are reluctant litigants, carefully constructing portfolios of patents to avoid going to court. The practice of "defensive patenting" has been well-documented and theorized. Yet, I found that public and large private companies initiated 42% of all lawsuits studied, 28% of the time against other large companies - the largest single category. They also defend against many other suits, brought by NPEs, small inventors, and individuals. These data suggest that defensive patenting, which is supposed to keep large firms out of court, is at least an incomplete - and perhaps a failing - strategy for many companies. This Article also reports on the other major narratives of patent litigation. 4% of the suits were initiated by individual inventors (David v. Goliath), 18% of the suits were brought by small private companies against public or large private ones (small v. large), 16% pit one small- or medium-sized company against another (limited stakes), and in 8% a large firm sued a small one (predation profile). These and other findings provide a snapshot of patent litigation that should both inform current efforts to reform the patent system and serve as a basis for further investigation into its functioning.

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial. (JEL D82, K11, L24, O34 )

We replicate and extend the results of Regibeau and Rockett (2010) on a new data set. We confirm that importance of a patent and the delay in approval at the patent office are negatively related. This relation survives even if we do not control for learning effects and so suggests that carefully defining the technology is sufficient to recover the negative relation. We use new measures to test for the existence of patent "thickets", thereby ruling out some strategic considerations in delay behaviour. It appears that delay is attributable to patent office, not filer, behaviour in our sample. A more careful analysis of the possible effect of examiner workload finds that larger workloads per examiner are associated with shorter approval time, lending credence to Lemley and Shapiro's concern that heavy workloads force examiners to devote too little time to each patent review.

We present a selective survey of the economic theory of intellectual property rights. After a brief description of the institutional framework, we discuss policy objectives and some basic welfare tradeoffs in intellectual property design. We consider the extent to which social objectives can be attained without intellectual property protection before passing on to intellectual property right design. We derive conclusions in the simplest, one-time innovation, case then investigate how these conclusions change when innovations build on each other or fit together as complements. Modifications of existing protection and optimal procurement of innovation are considered. Finally, we sketch enforcement and competition policy issues.

We investigate whether patents on human genes have affected follow-on scientific research and product development. Using administrative data on successful and unsuccessful patent applications submitted to the US Patent and Trademark Office, we link the exact gene sequences claimed in each application with data measuring follow-on scientific research and commercial investments. Using these data, we document novel evidence of selection into patenting: patented genes appear more valuable--prior to being patented--than non-patented genes. This evidence of selection motivates two quasi-experimental approaches, both of which suggest that on average gene patents have had no quantitatively important effect on follow-on innovation.

We investigate incidence and evolution of patent thickets. Our empirical analysis is based on a theoretical model of patenting in complex and discrete technologies. The model captures how competition for patent portfolios and complementarity of patents affect patenting incentives. We show that lower technological opportunities increase patenting incentives in complex technologies while they decrease incentives in discrete technologies. Also, more competitors increase patenting incentives in complex technologies and reduce them in discrete technologies. To test these predictions a new measure of the density of patent thickets is introduced. European patent citations are used to construct measures of fragmentation and technological opportunity. Our empirical analysis is based on a panel capturing patenting behavior of 2074 firms in 30 technology areas over 15 years. GMM estimation results confirm the predictions of our theoretical model. The results show that patent thickets exist in 9 out of 30 technology areas. We find that decreased technological opportunities are a surprisingly strong driver of patent thicket growth.

We explore how examiner behavior is altered by the time allocated for reviewing patent applications. Insufficient examination time may hamper examiner search and rejection efforts, leaving examiners more inclined to grant invalid applications. To test this prediction, we use application-level data to trace the behavior of individual examiners over the course of a series of promotions that carry with them reductions in examination time allocations. We find evidence demonstrating that such promotions are associated with reductions in examination scrutiny and increases in granting tendencies, as well as evidence that those additional patents being issued on the margin are of below-average quality.

We develop an integrated framework to study how governments can improve the quality of patent screening. We focus on four key policy instruments: patent office examination, pre- and post-grant fees, and challenges in the courts. We show that there are important complementarities among these instruments, and identify conditions under which they can be used to achieve either partial or complete screening. We simulate the model to study the welfare effects of different policy reforms. We show that intensifying patent office examination, frontloading patent fees and capping litigation costs all generate welfare gains, while replacing examination with a pure registration system reduces welfare.

We analyze the duration and outcomes of patent examination at the European Patent Office utilizing an unusually rich data set covering a random sample of 215,265 applications filed between 1982 and 1998. In our empirical analysis, we distinguish between three groups of determinants: applicant characteristics, indicators of patent quality and value, and determinants that affect the complexity of the examination task. The results from an accelerated failure time model indicate that more controversial claims lead to slower grants but faster withdrawals, whereas well-documented applications are approved faster and withdrawn more slowly. We find strong evidence that applicants accelerate grant proceedings for their most valuable patents, but that they also prolong the battle for such patents if a withdrawal or refusal is imminent. This paper develops implications of these results for managerial decision making in research and development and innovation management.

WIPO’s World Intellectual Property Report 2011 focuses on the Changing Face of Innovation. It describes key trends in the innovation landscape – including the increasingly open, international and collaborative character of the innovation process; the causes of the increased demand for IP rights; and the rising importance of technology markets.

Under current patent practice, a single examiner, often overworked and with limited resources, must review an invention for patentability, investigate prior art references, and pass judgment on its novelty and nonobviousness in a very compressed timeframe. As a result of these pressures, "bad" patents are being issued with increasing frequency, especially in emerging technology fields such as software and biotech where the USPTO lacks a sufficient number of competent examiners for the workload. In particular, many of these examiners are simply unable to conduct a thorough prior art search within the timeframes given, and this problem is only exasperated with increased complexity of the inventions. In response to this problem, Beth Noveck has proposed the Community Patent Project, where third parties will be able to suggest prior art references, review those submitted by others, and ultimately produce a document that examiners can use to supplement their own prior art searches. Following a model popularized by open source programming and community-driven networks such as Wikipedia, this Project will help to assuage some of the pressures felt by the examiner, while improving the quality of the searches performed and, hopefully, produce more complete and valid patents. While this Project will be beneficial as a "proof of concept", this Comment questions whether the Project will ever be viable on a larger scale. It then suggests that with a few tweaks, such as a more robust treatment of foreign languages and an improved incentive system, the Project could truly realize its goal of "globalizing" the patent examination process.

Two court decisions in the 1990s are widely viewed as having opened the door to a flood of business method and financial patents at the US Patent and Trademark Office, and to have also impacted other patent offices around the world. A number of scholars, both legal and economic, have critiqued both the quality of these patents and the decisions themselves. This paper reviews the history of business method and financial patents briefly and then explores what economists know about the relationship between the patent system and innovation, in order to draw some tentative conclusions about their likely impact. It concludes by finding some consensus in the literature about the problems associated with this particular expansion of patentable subject matter, highlighting the remaining areas of disagreement, and reviewing the various policy recommendations.

Trolls are a significant feature of the patent system. They account for a large number of suits, now a majority of all patent assertions in the country and an even higher percentage in the information technology (IT) industries. They win both larger judgments and larger settlements than do “practicing entities” (“PEs”) -- those that practice patents and are not principally in the business of collecting money from others that practice them. And they do so despite complaints that trolls assert weak patents and some evidence that troll patents are more likely to lose in court.Nonetheless, we think the focus on patent trolls obscures a more complex set of challenges confronting the patent system. In this paper, we make three points. First, patent trolls are not a unitary phenomenon. We see at least three different troll business models developing, and those models have different effects on the patent system. Second, patent assertions by practicing entities can create just as many problems as assertions by patent trolls. The nature of many industries obscures some of the costs of those assertions, but that does not mean they are cost-free. In addition, practicing entities are increasingly engaging in “patent privateering,” in which product-producing companies take on many of the attributes of trolls. Put differently, while trolls exploit problems with the patent system, they are not the only ones that do so. Third, many of the problems associated with trolls are in fact problems that stem from the disaggregation of complementary patents into too many different hands. That in turn suggests that groups like Intellectual Ventures might be reducing, not worsening, these problems (though, as we will see, the overall effects are ambiguous), while “patent privateers” that spin off patents in order for others to assert them might make things worse. For this reason, patent reformers and antitrust authorities should worry less about aggregation of patent rights and more about disaggregation of those rights, sometimes accomplished by spinning them out to others.Understanding the economics of patent assertions by both trolls and practicing entities allows us to move beyond labels and the search for “bad actors,” focusing instead on aspects of the patent system itself that give rise to the problems and on specific, objectionable conduct in which both trolls and practicing entities sometimes engage. Patent trolls alone are not the problem; they are a symptom of larger problems with the patent system. Treating the symptom will not solve the problems. In a very real sense, critics have been missing the forest for the trolls. Exposing the larger problems allows us to contemplate changes in patent law that will actually tackle the underlying pathologies of the patent system and the abusive conduct they enable.

To determine patentability, inventions are evaluated in light of existing prior art. Innovators have a duty to disclose any prior art that they are aware of, but have no obligation to search. We study innovators' incentives to search for prior art, their search intensities and the timing. We distinguish between early state of the art search - conducted before R&D investment, and novelty search - conducted right before applying for a patent. We identify conditions in which innovators have no incentive to search for prior art. Search intensity increases with R&D cost, the examiners' expected search effort, and with patenting fees. We also find that innovators prefer to correlate their search technology with that of the patent office. In light of our model, we discuss the implications of some proposed policy reforms.

This paper was prepared as a companion to the Mattioli Lectures delivered by Hal R. Varian, “Economics of Information Technology,” available at: http://www.sims.berkeley.edu/~hal/Papers/mattioli/mattioli.pdf. Professor Varian’s overview analyzes a variety of competitive strategies used by high-tech companies. These strategies—such as personalized pricing, lock-in, and the adoption of uniform compatibility standards to fuel bandwagon effects—often rely on intellectual property, typically copyrights or patents. Since Professor Varian does not explore this issue at length, we complement his work by focusing on it.

This paper reviews the economic literature on the role of fees in patent systems. Two main research questions are usually addressed: the impact of patent fees on the behavior of applicants and the question of optimal fees. Studies in the former group confirm that a range of fees affect the behavior of applicants and suggest that a patent is an inelastic good. Studies in the latter group provide grounds for both low and high application (or pre-grant) fees and renewal (or post-grant) fees, depending on the structural context and on the policy objectives. The paper also presents new stylized facts on patent fees of thirty patent offices worldwide. It is shown that application fees are generally lower than renewal fees, and renewal fees increase more than proportionally with patent age (to the notable exception of Switzerland and the U.S.).

This paper puts forward a new methodology to characterize and compare the examination practice of most patent offices. The methodology codifies public information into a typology of chronological key examiner actions. This approach translates into a quantitative characterization of search completeness (i.e. classification and citation practices), certainty, speed, and stringency, or grant rate. The methodology is tested on a sample of 100 random families of a non-controversial field, comprising EPO, JPO and USPTO members. The results show profound differences across offices in respect to search completeness, certainty, and speed and indicate heterogeneous levels of stringency.

This paper presents a quality index for patent systems. The index is composed of nine operational design components that help shape the transparency of patent systems and affect the extent to which they comply with patentability conditions. Seven factors are related to rules and regulations (e.g. grace period, opposition process and continuation-inparts), while two factors measure patent offices’ resource allocation (i.e. workload per examiner and incentives). The index is computed for 32 national patent systems, it displays a high heterogeneity across countries. Cross-sectional quantitative analyses suggest that the demand for patent rights -or the propensity to patent- is lower in patent systems with a higher quality index, controlling for research efforts, patent fees and the “strength” of enforcement mechanisms.

This paper is the first part of a wide-ranging study of the role of intellectual property in the software industry. The project focuses on the software industry because of the importance of that industry to the modern economy, because of the importance of innovation to that industry, and because of the well-known difficulties of accommodating traditional intellectual-property regimes (patent, copyright, and trade secret) to innovation in the industry. This paper focuses on innovation in the hundreds of small venture-backed firms that form the bulk of the population of the industry. After a brief description of the history of the industry in Part II, Part III discusses the evidence on which the paper relies: a set of about 50 interviews of industry executives – diversified geographically, by size of company, and by role in the industry (software developers, venture capitalists, lenders, etc.). Relying on those interviews, the paper provides a detailed explication of the role that intellectual property plays in the industry. Parts IV through VI of the paper organize the information from the interviews and situate it in the extensive literatures on venture capital investing, the economics of innovation, and patents. The first substantive topic of the paper (Part IV) is the features of startup firms that attract investment by venture capitalists – generally something about the startup that suggests a “sustainable differentiation” of the firm from its competitors. The differentiation could come from any number of advantages the firm has – a first-mover advantage, special skill of its employees, a unique approach to solving a difficult problem, or, in some cases, intellectualproperty protection. http://law.bepress.com/alea/14th/art44 Software IP April 30, 2004 Draft iii iii The second substantive part of the paper (Part V) discusses the role of copyright. The major point of this part is that copyright protection is of little value to startup firms. Copyright protection is designed to protect expression, and not functionality. Thus, it provides little of the protection for which venture investors are looking. The basic problem is that it does not offend copyright law if a competitor observes a software product and designs a new product that includes precisely the same functionality, so long as the competitor uses none of the “expression” from the first product. Because the competitor’s customers are for the most part interested in the functionality, not the expression, this is not an important constraint. On the other hand, copyright protection does provide important protections in other areas, most obviously in protecting the later-stage firm’s products from piracy. Generally, this part of the paper tells a story of unsuccessful efforts to stretch the copyright regime to do something it never was intended to do. The final substantive part of the paper (Part VI) discusses the role of patents. Because patents do protect functionality, they have at least the theoretical potential to provide the sustainable differentiation for which investors are looking. The problem, however, is that in many sectors of the software industry innovation is not of a character that a typical patent can protect a firm from competitors: often competitors would be able to design a competing product that works around a firm’s patent. Thus, despite significant increases in patenting in the industry, about 80% of venture-backed software firms do not obtain patents during the early years of their existence. The question, then, is what benefits patents do provide to those firms. This part explores several benefits, including the classic benefit of excluding competitors. In this industry at least, that benefit accrues primarily to small firms, protecting them from the competitive depredations of incumbents. Incumbents, by contrast, rarely use patents to exclude smaller firms from the industry. The part also discusses a series of less conventional benefits small firms gain from software patents: as barter in cross-licensing arrangements, in signaling their technical competence to third parties, in converting tacit knowledge into a verifiable and transferable form, and in making the firm attractive to potential acquirers. The paper closes by discussing the implications of the patent analysis for recent debates about the value of patents in the software industry. The paper starts with a discussion of theoretical literature suggesting that free availability of patented technology is important because of the software industry’s reliance on cumulative patterns of innovation. It then presents evidence about existing practices in the industry suggests that technology in fact is readily available, rebutting the prominent claims of a patent “thicket” that is supposedly stifling innovation in the industry. On the contrary, I argue, to the extent patents have an important effect in the industry, it is an effect that inures primarily to the benefit of the smaller firms trying to find a foothold from which they can compete. Hosted by The Berkeley Electronic Press THE MYTH OF THE SOFTWARE PATENT THICKET: AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP BETWEEN INTELLECTUAL PROPERTY AND INNOVATION IN SOFTWARE FIRMS