Intellectual Property and Innovative Entrepreneurship

Policy Dialogue on Entrepreneurship, PDE

The creation of new ideas being essential to a growing economy, the U.S. government has continuously reformed rights of Intellectual property (IP) to maintain the most entrepreneurial climate possible. Recognized in the Constitution itself, patents for new inventions and copyrights for new artistic creations provide an incentive for people to both create and publicize their intellectual property. However, rules, protections, and the adjudication process surrounding IP requires constant reforms to keep up with challenges of the digital revolution. Piracy has become much easier, while at the same time patent laws in the U.S. are increasingly cumbersome. In many cases, innovation is being hindered by overly broad and specious court and agency decrees. This brief is on U.S. patents; copyrights will be treated elsewhere.

Why IP Matters

  • The U.S. Patent and Trademark Office reviews nearly half a million applications and issues over 180,000 new patents a year (2007).1 Wait times have increased from 19.5 months in 1993 to more than 31 months in 2007.2 
  • U.S. intellectual property is worth over $5 trillion (compared to annual U.S. GDP of $14 trillion).3 
  • Intellectual property accounts for more than half of all U.S. exports.4
  • Firms with less than 500 employees produce 13 times more patents per employee than larger firms.5 


Strong Patents

Since 1982, courts have allowed for much stronger patents. That year, patent appeals were consolidated in the U.S. Court of Appeals for the Federal Circuit (CAFC). The old courts rejected roughly two thirds of the patents on validity grounds; the new court accepted roughly two thirds.6  Yet, stricter IP does not necessarily produce more innovation;7  it can deter entrepreneurs from entering fields where incumbents have patent protection and deep pockets to pursue litigation for infringement. Many of incumbents’ patents may be of dubious merit8 or may be accumulated to shelter older IP from competition.9


An Overburdened System

  • The patent examiner staff at the U.S. Patent and Trademark Office (USPTO) is overburdened, and is barred from using its positive revenues to pay for enhanced operations.
  • Patent reviewers have little time (averaging less than 20 hours) to make well-informed decisions. A low invention standard in awarding patents is the result.10   
  • Non-deserving applications drive expensive litigation due to the legal presumption of patent validity.11


Pro-Growth Policy Action

Two principles for patent reform should be met: (1) patents should only be provided for truly non-obvious inventions; and (2) consistent with the first objective, the procedures for contesting patents should entail minimum cost. In light of these principles, evaluate the following approaches:12 

  • Implement a two-tiered system of patent review. All applications would receive primary review, but primary patents would not have the presumption of validity. Only if applicants sought and paid for the more intense second-level review could they be awarded pre-adjudication validity.13  This system would enable patent examiners to streamline their initial reviews.
  • Continue giving individual inventors and small firms a discount on patent fees.
  • Develop a more cost-effective post-grant review procedure for patents to help weed out non-deserving patents before they are misused by their applicants.14
  • The USPTO should expand its experiment with online peer review of patent applications in making the novelty determination.

 

1  U.S. Patent and Trademark Office.  U.S. Patent Statistics Chart. Calendar Years 1963 – 2007 . 2007

2  U.S. Patent and Trademark Office.  1993 Annual Reports . 2007.

3  U.S. Chamber of Commerce. " Protecting Intellectual Property ." 2008.

4  Idem.

5  Small Business Administration Office of Advocacy. " Frequently Asked Questions ." 2008
 
6  Jaffe, Adam B. and Josh Lerner.
  Innovation and Its Discontents . Princeton University Press. 2004, and Frederic M. Scherer, " The Political Economy of Patent Policy Reform in the United States ," AEI-Brookings Joint Center on Regulatory Studies. 2006.

7  Heller, Michael. The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives. Basic Books. 2008; Maskus, Keith E. Reforming U.S. Patent Policy-Getting the Incentives Right . Council on Foreign Relations. 2006.

8  The Kauffman Foundation.  On the Road to an Entrepreneurial Economy: A Research and Policy Guide, Version 2.0 . 2007.

9  Rosegger, Gerhard. The Economics of Production and Innovation: An Industrial Perspective. Oxford. 1996; The Kauffman Foundation.  On the Road to an Entrepreneurial Economy: A Research and Policy Guide, Version 2.0 . 2007.

10  U.S. National Research Council.  A Patent System for the 21st Century . National Academies Press. 2004.

11  The Kauffman Foundation.  On the Road to an Entrepreneurial Economy: A Research and Policy Guide, Version 2.0 . 2007.

12  Idem

13  Doug Lichtman, " Aligning Patent Presumptions with the Reality of Patent Review: A Proposal for Patent Reform ." The Brookings Institution. 2006.

14  The Kauffman Foundation.  On the Road to an Entrepreneurial Economy: A Research and Policy Guide, Version 2.0 . 2007.

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