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Sunday, September 11, 2011

Patent Reform and Job Creation

I admit I haven't really followed the patent reform job creation argument very closely.  But I'm pretty sure it's based on some serious fallacies.  I've now seen two different, conflicting arguments about why patent reform is good for jobs.  Some say that every patent that issues creates three jobs, although this seems to be based ona  Berkeley study that merely "showed" that each patent granted to a startup "created" three to five jobs, and the authors of that study say there's no basis for extrapolating that number.  Others say that reform will prevent bad patents and will do away with costly "interferences," and this will also help jobs (by addressing these innovation-stifling problems).  In other words, the notion is that issuing "high quality" patents quickly will create jobs.

Unfortunately, it's almost certainly not going to play out that way.  Most patents that are issued today are for inventions that were about to be invented by someone else.  In other words, patents rarely represent a great advance; they are usually just a new wrinkle.  Most patent litigation today does not involve "theft" of the invention; rather, the defendant has typically made the same "advance" independently.  That's not to say that these are "poor quality" patents; the standard for granting patents is just not all that high. 

Take the recently-touted eight millionth patent.  It involves a great innovation for helping blind people see.  But the company had already received a patent for that basic innovation; number eight million was just an extra wrinkle that will help that company defend its monopoly from competitors.  And of course, it was not happenstance that the eight millionth patent happened to involve a useful and interesting technology.  The patent office almost certainly selected this from a large pool of potential "number eight millions," most of which would have caused the public to wonder what the point of the patent system is.

While it is true that companies with patents have a built-in advantage over their competitors and that employees at these companies will have potentially more stable jobs, that hardly means that patents create jobs.  In fact, they can pose barriers to entry to the competitors who would also provide jobs.  It's simply impossible to quantify how many jobs are "suppressed" in this way by patents.

But here's the bigger problem.  By harmonizing the US patent system with that of other countries, the patent reform will make it easier for foreign companies to get patents in the US.  Already, they are getting a sizable share: 

In 2009, Japan got nearly 40,000 US patents, Germany and South Korea each got about 10,000, Taiwan got nearly 8,000, and China got about 2000.  The US issued about 190,000 patents in 2009.  So that's 70,000 out of U.S. 190,000 patent already going to these "competitors" of ours.  How many U.S. jobs does a German-owned U.S. patent create?

And the percentage of foreign-owned patents is only going to grow.   I don't even have to look up the statistics to know that each of the listed countries provides better education -- in particular science education -- to its people.  Ok, I checked the statistics: .  I see we are better at reading than Germany, but worse at science and math.  Other than that, I think we're worse at everything than all the other listed countries.  And China is way better than us across the board.

And of course, the current listing of 2000 US patents to China is a fraction of what we are going to see.  China had over a million domestic patent applications in 2010 (about 800,000 of these were for design or utility model patents, and thus cannot be compared to US utility patents.  But the remaining 200K can).  And China has announced plans to multiply its patent filings both domestically and abroad.

So over time, patent reform will only accelerate the trend of US patents being owned by foreign interests.  That can't be good for U.S. jobs, can it?

So what would real reform have consisted of?  The innovation-stifling impact of patents is that they last so darn long.  20 years from date of application (which typically means about 17 years from issuance).  This is designed to give the inventor a "reward" for disclosing the invention to the public.  But the result of that is unbelievable inefficiency in markets.  The most competent companies cannot practice the latest technology, because some other company (or even a so-called patent troll -- a company that simply owns patents and makes nothing) owns the patents.  The only way to break out of this is to litigate, but patent litigation costs millions of dollars.  Yes, patent reform includes provisions for challenging patents in the patent office, but these procedures will cost hundreds of thousands of dollars. 

A solution would be to make patents valid for only five years, across the board, everywhere in the world.  That way, the owner would get a 5 year monopoly, which, with today's global markets, ought to be plenty.  And competitors would not have to fight to break the patent -- they could simply wait it out.  And then let the market work.

Where did the 20 year term come from?  Well, the term was originally 14 years from issuance, and then it went up to 17 years from issuance.  Then in 1995, in order to "harmonize" with other countries, it became 20 years from application.  But if it's just designed to provide a reward to inventors, why has it stayed essentially the same (and even increased) over two centuries?  Shouldn't the award be commensurate to the contribution?  And if the award in the 1800s -- where markets were local, patents were difficult to enforce, etc., -- was sufficient, why have we permitted it to grow so much?  AFter all, we -- the consumers of patented goods -- pay for the invention through suppressed competition and the attendant increased prices.

It would be nice for someone to do a study on that.  I.e. what was a patent "worth," in real dollars, in 1800, 1850, 1900, 1950, 2000, and 2010.  In other words, what are we giving the inventor for his innovation?  In 1850, it wasn't much.  But today, it's quite a lot.

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