Innovators have flooded the patent system with applications.

Previous articles at Patexia have focused heavily on problems related to this sharp increase in patent applications over the past twenty years. Though the reasons for these filings are numerous and complicated, the benefits that they provide businesses should be concrete and straightforward. This is increasingly not the case.

The patent system rewards innovators for sharing information by granting a monopoly on their idea. We wrote an article last year exploring the complexities of individual patent valuation, showing how patent value is intimately tied to a company’s ability to exercise that patent and protect their monopoly. When we look at the numbers, though, we find a curious discrepancy. Apple, whose patent numbers are small amongst large technology companies, received 1239 patents in the past three years alone. Thomson Reuters, in a recent evaluation of Apple’s portfolio, found a total of only 1,298 relevant mobile patents in their entire portfolio. Last year’s Google acquisition of Motorola raises a similar eyebrow. Why are 12,500 patents worth more than $12 billion to Google when it seems implausible that Google has any portion of that number of inventions protected by these patents?

Fig. 1: A dramatic rise in patent grants over the past decade indicates an increased focus on IP.

Recent corporate patent strategies leave companies with far more patents than they have a clear use for. I will call the remainder of these patents “dormant,” indicating that they are no longer actively used and therefore are not (at least not in a straightforward way) valuable to the companies to which they are assigned. On one hand, dormant patents represent missed opportunity and lost value for these companies, and place unnecessary bureaucratic and legal pressures on the system. On the other, an increasingly litigious IP landscape means that bloated patent portfolios have value outside their intended purpose, making these large, wasteful collections the norm. Either way, the existence of dormant patents indicates the need for system reform that will promote more effective information sharing.

Dormant patents

In the early stages of product development, aggressive patenting is a common and successful strategy. Particularly in fast-moving industries, a company wants to be ahead of its competitors in terms of technological development, but this lead is meaningless without legal documentation in the form of patents to protect their innovation. The result is many patent applications filed in the early stages that may be either superfluous or irrelevant to the final product. Still, this is a sensible strategy for companies that want to ensure an enforceable priority date to either protect or license their invention.

Once that company develops their product further and files patents more relevant to their product, or drops a product or invention entirely, these early patents are forgotten. In a fundamental sense this goes against the patent system’s original goal to promote and share innovation. Instead these early patents are seldom given a second look (by anyone). Their cost (which can easily become very high for simply filing) becomes wasted value for the company. The time and effort invested by the USPTO is also wasted. For these reasons, dormant patents ultimately comprise a tax on innovation.

The value of a portfolio

A 2005 study in the University of Pennsylvania Law Review sought to address a related problem commonly referred to as the “patent paradox.” Because of the sharp rise in patenting in recent years, the number of patents obtained per research dollar spent has also increased. This happens even though the average expected value of individual patents has diminished. The paradox arises from the seemingly nonsensical decision to strive for high-volume patent portfolios without evaluating their actual worth.

The study concludes the paradox by analysing and recognizing the value of the patent portfolio. Starting from the strength that patent rights have been given by the Federal Circuit in patent infringement precedent, the study says, "the acquisition of patents is something of an arms race, whereby competing firms use patents as bargaining chips to negotiate with competitors and to secure certain niches in the marketplace."

The study found that a large number of related patents provides a very strong apparent defense against infringement litigation, and a strong position in licensing right negotiations. As a result, the whole of these patent portfolios is greater than the sum of its parts. Acquiring lots and lots of patents isn’t just a good strategy--it’s par for the course.

Fig. 2: With a sharp increase in patent-related litigation, patent defense is on everyone's mind.

A return to information sharing

Unfortunately, this reality of the system comes from a place of obfuscation and defense. These bulks of dormant patents do nothing but serve as shells and shields in increasingly complex and costly legal battles. The 2005 study paints a rather grim picture of a system that is only making matters worse.

Reform will be slow, and will require new solutions to problems we only begin to understand. Fundamentally, though, for America's innovation to move forward as it has in the past the patents system will need to return to promoting innovation rather than hindering it. This will no doubt come in the form of reduced emphasis on litigation, but we should also rethink the way we use patents to share information.