The cost of substandard patents

I have been meaning to write for some time about a bold and provocative paper by George Ford, Thomas Koutsky, and Lawrence Spivak of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, “Quantifying the Cost of Substandard Patents: Some Preliminary Evidence.”

The authors develop a thumbnail model that weighs the cost of “low quality” patents on innovators: bad patents drive out the good. Because bad patents allow opportunists to hit innovators with licensing fees and litigation, innovators are discouraged, there is less investment in R&D, fewer “good” patents, etc.

The authors then go on to do a rough estimate of the associated social cost by using comparative data on patents from the US, Japan and the EPO, where the other two patent offices are held to have higher standards. Using this, they estimate that bad patents create a $25.5 billion annual loss to society. This is, admittedly, a preliminary estimate, and many will not find the numbers convincing. But the paper makes an important contribution because it frames key questions of economic performance in a provocative way.

Moreover, on at least one point I think this paper may be too conservative: they estimate that the social losses from patent litigation and administrative costs are about $4.5 billion annually. However, in our new book, Patent Failure: How Judges, Bureaucrats and Lawyers Put Innovators at Risk, Mike Meurer and I find private costs of litigation that are much higher. But that is a story for another day…

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