The latest charge from critics in Silicon Valley and Washington is that patents and patent lawsuits are stifling startups and technology innovation. It’s an important issue, to be sure. Technology entrepreneurs and garage-shop inventors have been crucial to economic growth throughout American history. And it is true that patent litigation has increased over the past several decades. Is this draining dynamism and competition?
Unfortunately for the infringers’ lobby, the evidence doesn’t support the charge. The United States has granted more patents since 1980 than it has in all the previous years since its founding. Technological innovation hasn’t withered but instead has advanced at a blistering pace – including in areas with huge patent fights such as software and smartphones. In fact, more than half of new venture capital dollars these days go towards software startups.
A raft of studies also shows that patents are still closely correlated with vibrant growth and entrepreneurship.
For example, researchers at the Brookings Institute looked at metropolitan areas in the United States with high and low levels of patenting, and found that the GDP per worker was $16,000 higher in areas with high patent rates.
“Patenting is associated with higher productivity growth, lower unemployment rates, and the creation of more publicly-traded companies,” the Brookings team concluded. “The effect of patents on growth is roughly equal to that of having a highly educated workforce.”
While it is true that patent litigation has increased, that’s because the pace of innovation and the value of proprietary technology have increased rapidly. With fierce competition and huge markets at stake, it’s inevitable that a period of rapid innovation produces epic fights over ownership rights. This isn’t a sign of trouble. It’s a byproduct of dynamism. Companies are pouring more dollars than ever into R&D, yielding more inventions and more patents.
PricewaterhouseCooper (PwC) has been tracking patent data over this time, and it agreed that patent litigation is in line with historical trends. From 1991 through 2011, PwC reported the number of U.S. patents climbed by about 4.5 percent a year and the volume of lawsuits rose by 4.9 percent a year.
This isn’t a new phenomenon. Many experts and historians – see here, here and here – have pointed out that almost every previous wave of technological innovation, from telephony and airplanes to biotechnology, has produced a surge in patent litigation. There’s even research about the sewing machine “patent war” of the 1850s.
“In each case, critics warned that these new kinds of patents would be harmful to scientific discovery and innovation,” remarked David Kline, a patent expert and author of Rembrandts in the Attic, in an interview back in 1999. “And yet in each case, innovation and discovery actually intensified.”
Some charge that entrepreneurs are being stifled in particular by lawsuits from “non-practicing entities” — companies that own patents but don’t produce anything themselves.
A new paper by Colleen Chien, a professor at the Santa Clara University School of Law, and a critic of alleged trolls, surveyed several hundred venture capitalists and VC-funded startups. Perhaps not surprisingly, most of the VCs complained that non-practicing entities were hurting startups and innovation.
But as Chien carefully notes, there is more to the story. More than 70 percent of the VCs also “agreed” or “strongly agreed” that patents were vital to their industry. In other words, perceptions about the value of patent rights often depend on which side of the table you’re on. (Patents are terrible when you don’t own them, it seems… )
And while 20 percent of the startups in Chien’s survey said they had received demands from non-practicing entities, 5 percent said they had benefitted by selling patents to such companies. For some startups, the alleged “trolls” provided life-saving infusions of cash. “The company would have died without it – instead we grew,” one entrepreneur told Chien.
Intellectual Ventures is a non-practicing entity, but we have never filed a patent lawsuit against a small company. In fact, just yesterday, we announced our newest customer is one of Silicon Valley’s favorite startups, Nest. In this patent licensing and sale agreement, Nest is actually using their growing patent portfolio, including the patents they bought from us, to defend their products in the market.
Just as important, we provide a huge amount of capital to startups and small companies. Since our founding in 2000, Intellectual Ventures has paid $510 million to individual inventors and another $720 million to startups and small companies (firms with less than $50 million in revenue and with fewer than 100 employees). On top of that, we have paid out almost $1 billion to large and medium-sized companies and $110 million to universities and governments.
Put simply, historically, we have poured a lot of money into startups and have rewarded them for their invention – not stifled them.
These payments are part of a thriving new secondary market for intellectual property, a market that we pioneered. Far from stifling inventors and high-tech startups, this new market provides them with a major source of new capital. We think this is just the start.
Patents and Policy
This post is part of a larger series on patents and legislative reform. To read the other posts in this series, see below: