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Archived updates for Wednesday, September 05, 2007

"Substandard" Half of U.S. Patents Cost $26 Billion Per Year?

According to George S. Ford, Thomas, M. Koutsky, and Lawrence J. Spiwak in "Quantifying the Costs of Substandard Patents: Some Preliminary Evidence,"

. . . the economic losses resulting from the grant of substandard patents can reach $21 billion per year by deterring valid research with an additional deadweight loss from litigation and administrative costs of $4.5 billion annually. This brings the total deadweight loss created by our “dented” patent system to be at least $25.5 billion annually. These estimates may be viewed as conservative because they do not take into account other economic costs from our existing patent system, such as the consumer welfare losses from granting monopoly rents to patent holders that have not, in the end, invented a novel product, or the full social value of the innovations lost.

. . . In an effort to approximate the number of lost “valid” or “relatively important” [triadic] patents lost due to the presence of substandard patents, we assume the production of relatively important patents is a linear function of R&D expenditures.

. . . According to OECD data, over the five-year period 1999 through 2003, there were 90,445 triadic patents filed from the United States. From above, we estimated the ratio of valid patents to triadic patents to be 3.0. Applying our λ to the United States, we would expect that there would be approximately 271,335 valid patent applications in the United States over this period. However, there were 594,827 filings by entities at the USPTO in this period, which suggests that approximately half of all U.S. patents filed are substandard.

While this percentage of substandard patents is high, it is consistent with other evidence. For example, Graham and Harhoff (2005) calculate that about 40% of U.S.-granted patents are rejected by the EPO, though the number is found to be much lower (about 4%) in Jensen et al. (2005).63 Not all United States patents are also filed at the EPO (about 60% of United States patents are filed before the EPO), but one would initially think that those filed at the EPO by American entities would be of relatively high quality. Allison and Lemley (1998), in a study of patents litigated over the period 1989 through 1996, reveal that about half of litigated patents are invalidated at trial. Further, Trajtenberg (1990) argues that cited patents, and not simple patent counts, are correlated with patent value. In his data, about half of patents are not cited, again suggesting that about half of patents may be classified as substandard. Finally, Jaffe and Lerner (2004) summarize evidence from the OECD indicating that patents in that the growth rate of USPTO granted patents is twice that of “economically significant” (or triadic) patents.

Assuming 50% of filings are substandard and there are 400,000 filings per year, there are about 200,000 substandard patent filing at the USPTO annually. . . .

. . . These estimates may be viewed as conservative because they do not
take into account other economic costs from our dented patent system, such as
the consumer welfare losses from granting monopoly rents to patent holders that
have not, in the end, invented a novel product, or the loss of social value (in
excess of the private value) of lost innovation.

[However, w]e encourage proper caution in interpreting our findings. The
models we use are simplified in many respects. As a consequence, our cost
estimates should be viewed as preliminary or approximations. Further, we make no
effort to “prove” either theoretically or empirically that the United States
patent system is defective since there appears to be consensus on that point.
Given the recent attention placed upon patent reform, our purpose is to provide
estimates of the costs that the defective system imposes on society. In
that, our preliminary estimates show that these costs are substantial, and the
severity of the problem indicates that additional research and study of this
important public policy topic is warranted.

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