Richard Lloyd

Last week we reported on a new a piece of research titled “The bright side of patents” which revealed the considerable benefits that start-ups can derive from US patent grants. Some of the results were remarkable, including significant advantages in raising VC funding, fuelling employment growth and turbocharging sales. The paper looked at 45,819 first-time patent applications by start-ups from 2001 that received a preliminary decision by 2009 and a final decision by the end of 2013.

Earlier this week I caught up with two of the authors of the paper – Deepak Hegde of New York University’s Leonard N Stern School of Business and Joan Farre-Mensa of Harvard Business School – to talk more about their findings and the context in which they were made.

According to Hegde the research came about in part because of the prevailing narrative around patents in much of the recent academic literature. “There has been a preponderance of studies that patents are causing more damage, especially to small inventors,” he said. “The three of us got together and were surprised that this was the case. Patents should help firms invest in innovation secure in the knowledge that it won’t be easily copied.”

Hegde is currently a visiting scholar at the USPTO and through that link the trio were able to get access to a trove of agency data for both granted applications, but also rejections. It is the latter that most studies don’t have access to.

Across that extensive data set Hegde said that one of the things that really stuck out was the “strong and persistent positive effects” that patents have on most start-ups across a range of areas, including growing revenues and employee numbers. He admitted that he was taken aback by just how strong those effects were and pointed to two other broad findings that caught him by surprise.

One was the very significant impact that delays in the processing of applications can have on start-ups, which the research found mattered as much as whether the patent was granted or not. The other was that the sector that accrued the greatest benefits from patents in terms of access to capital was high-tech.  As Hegde pointed out, that might not have been predicted given that much of the criticism of the patent system stems from the tech community.   

Of course, the tech community is a very broad church so while someone developing software for a smartphone app may not look fondly on the patent system, a start-up in the semiconductor space may place great stock on building a portfolio. Mensa admitted that digging down into their findings to look at the IT sector on a more granular level was on their radar if they could find the appropriate data.

The paper’s findings around the importance of the speed of the application process points to one of the great tensions at the USPTO. “On the one hand it’s a question of absolute resources. More money means more examiners which means that applications can be processed more quickly,” Hegde commented. “On the other hand the PTO is always worried about whether it should increase the speed of the process or allocate more time to ensure an application is scrutinised further.”

That is a particularly hot topic given that reducing the backlog in applications has been one of the great focus areas for the PTO during the Obama Administration and, more recently, the issue of patent quality has been at the top of the agenda. One solution to the problem of delays at the PTO might be to end fee diversion and let the agency use all of the funds that it raises through applications and in other areas. Some legislation in Congress has proposed just this but, despite widespread support among many patent owners, it seems to have little chance of passing into law – perhaps because, despite the rhetoric, US legislators actually rather like the flexibility diversion gives them at budget time. 

The findings of the “The bright side of patents” are worth viewing through the prism of patent reform. The authors make clear that they are not taking an anti-change stance, but they do insist that any legislation should be properly targeted at the most urgent problems, such as delays in the application process.  “We’re not saying that the system shouldn’t be reformed, but you should be careful with any sweeping reforms,” Mensa commented.

Much of the impetus around any new patent law has focused on supposed litigation abuses. That has been fuelled, in part, by the fact that the number of new cases being filed has increased dramatically in the last few years. New joinder rules in the America Invents Act have been the primary driver of that increase, but Hegde also pointed out that the argument that all litigation is bad is far too simplistic. “More litigation does not necessarily mean that the system is not working. It could mean that people value patents a lot more,” he commented. “People are looking at the 2% to 3% of patents that get litigated and saying there’s a problem.”

That kind of argument may fall on deaf ears in some quarters but all should note the concluding comments in the paper.

We find that patents offer a substantial bright side to entrepreneurs and small inventors, especially if processed in a timely manner. In particular, patents appear to play an important role in reducing uncertainty and alleviating information asymmetries in the market for entrepreneurial capital. Reforms of the patent system that do not take this role of patents into account run the risk of negatively impacting the availability of capital for innovative start-ups.   

Should legislation pass without this being taken into account, the US cannot claim it was not warned. The issue is whether people want to listen.