Patent Law

When failure = success? Patents stimulate new ventures.

By Gary Odom and Jordan Kuhn

"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.

Full post as published by The Patent Prospector on March 18, 2008 (boomark / email).