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March 18, 2008

When failure = success? Patents stimulate new ventures.

"If I had a world of my own, everything would be nonsense. Nothing would be what it is because everything would be what it isn't. And contrary-wise; what it is it wouldn't be, and what it wouldn't be, it would. You see?" - Alice in Wonderland

The PatentlyO posts from Bessen and Meurer are taking a trip to crazy-town. Their post today on "patent failure" focuses on the impact that the patent system has had on publicly traded companies.

The authors conclude the post with the following remark:

"Third, we find that small publicly traded firms get small positive R&D incentives from patents. This is also very likely to be true for small, non-publicly traded firms and non-profit inventors."

Yet the point of their post is that the patent system has failed to promote R&D. Since when are large publicly-traded companies the source of innovation in our economy? I fail to see reasoning to support their conclusion that the patent system fails because (net) it imposes a "tax" on large publicly traded companies. If I understand them correctly, it seems that their facts and the inferences they themselves draw from those facts and inferences suggest that the patent system is a success.

If a patent "tax" that requires manufacturers to pay inventors for R&D work ends up creating more social value than the tax plus the transactions and administrative costs of maintaining it, then it's what most economists would call a success. Bessen and Meurer observe that publicly-traded companies are net payers of this tax, while smaller, private companies are net receivers. Without knowing the magnitude of the payments and receipts on both ends, we can't definitively say that the system is creating social benefits. But it seems that even Bessen and Meurer are conceding that the system works in the pharmaceutical arena. What evidence do we have that the same might not be true in the other industries they have studied -- and at a growing rate as transactions and administrative costs decline?

As a society, we should not be concerned that big companies are paying small companies for new technology so long as they're paying a fair price. And without patents, how would smaller companies convince larger companies to pay for valuable technology that cannot be protected with trade secrets? Would it be better for the economy if more publicly traded companies simply bought-out smaller R&D-focused companies and then fired the employees who don't have valuable know-how? Because of the benefits of divisions of labor (and very possibly antitrust issues), I think not.

Specifically, R&D often requires a very different environment from the one that most publicly-traded companies can provide, both socially and financially. First, almost by definition most publicly-traded companies have a vested interest in an older technology that provides their revenue stream. Think of Micrsoft and its OS and productivity software. They were and are at a disadvantage to Google (which has no legacy products or services) in moving into the online services business. Second, private companies have the ability to attract young, top-quality engineers and scientists through options compensation, which publicly-traded companies have trouble competing with. Google has been having this problem in Silicon Valley over the past few years as top-quality engineers are passing on Google for new ventures like VMware.

Posted by Michael Martin at March 18, 2008 10:42 AM | The Patent System


"non-profit inventors" ?????????????????

Never seen such an animal on this planet

What the heck are they talking about ?

God, save this country from idiots !

Posted by: angry dude at March 18, 2008 12:00 PM

@angry dude:

Actually, I don't think there's anything strange about the "non-profit inventor" category. What are university researchers who apply for patents?

Posted by: Michael Martin at March 18, 2008 12:36 PM

@Mr. Martin:

You don't think universities (or their licensing arms) make profits on patents? That's one of the big ways they can sustain research (and private universities are not necessarily NPOs).


And the inventors aren't profitless either:

From MIT TLO's FAQs:

"Inventors share one-third of royalties after deduction of a 15% administration fee and any unreimbursed patent expenses. Over 7.8 million dollars were distributed to inventors."

Posted by: NIPRA anonymous at March 18, 2008 12:55 PM

"Actually, I don't think there's anything strange about the "non-profit inventor" category. What are university researchers who apply for patents?"

Hm, you mean an EMPLOYED inventor ?

US university researchers are actually in a much better position as far as sharing patent royalties goes...
It is US corporate researchers who are usually paid like 1000 bucks for each patent app filed and a nice pat on the back...
This would be more close to the definition of "non-profit" :-)

That's why I stayed far far away from those R&D corporate departments
Why make some a$$**** CEO even richer ?

Posted by: angry dude at March 18, 2008 1:13 PM

@NIPRA anonymous

I DO know universities profit from patents. I was just responding to angry dude, who seemed surprised at "non-profit inventors" being included in the study.

Posted by: Michael Martin at March 18, 2008 1:42 PM

Hah, trip down crazy lane, you mean to say that you're drawing on straws to justify the huge system that's just draining resources away from anything actually productive being achieved and instead being dumped into nigh on meaningless disputes about who owns an idea that in many cases isn't even one of the two arguing parties invention anyway.

I see both their point and your point, but your point falls far short of the mark before legitimizing your "crazy town" remark. In any event, it would be very helpful for you to remember that those "taxes" on the bigcorp are coming straight from the people buying their products and you know it, thus the "tax" is just on the public using products, just as in any monopoly. And let me be clear, all the lawyer/court fees are just money down a toilet. You guys should be doing more important work like, IDK, keeping states from enacting laws that are unconstitutional or something or other, heck, maybe even making products! I know most of you are smart enough to be able to if you were so inclined.

Posted by: E6k at March 20, 2008 6:07 PM


I agree that consumers end up paying the tax. That follows logically when demand for a patented product is relatively inelastic, as it will be when there are no good non-infringing alternatives. But the patent "tax" is unlike government levied taxes in that it is paid voluntarily. Moreover, the dead-weight-loss of supra-competitive pricing can be alleviated through price discrimination. So the social costs can be limited to the transactions and administrative costs in principle.

I agree that most money spent today on lawyers and litigation is wasted. But let's not lose sight of the fact that things have gotten much more efficient on the procurement side over the past twenty-years. In real terms, it's cheaper than ever to prepare and prosecute a patent application. On the enforcement side, costs may also have decreased even though litigation costs have increased because many licenses are never litigated. The fact that there's more litigation suggests that more people are realizing more value from patents. If the costs of litigation are increasing, perhaps that's because the supply of litigation services hasn't kept pace with the growing demand, and not because of any systemic failure in how we handle patent disputes in our society.

Posted by: Michael Martin at March 21, 2008 8:42 AM