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Journal of Intellectual Property Law


In their book, Patent Failure: How Judges, Bureaucrats, and Lauyers Put Innovators at Risk, James Bessen and Michael Meurer present an empirical assessment of the costs and benefits of patent protection. Their conclusion is startling. For most industries, the availability of patents discourages innovation.

According to Bessen and Meurer, patents benefit innovators by providing exclusivity and thereby enabling an innovator to capture more rents or profits from their innovation than they could with lead-time or other market mechanisms alone. While innovators can obtain rents from their own Patents, they also face the threat of infringement litigation from Patents held by others whenever they introduce new products. The availability of patents to others means that innovators also face the threat of patent litigation from others whenever they introduce new products or services. According to Bessen and Meurer, the benefits of patents to innovators remained roughly constant or rose only slightly during the 1990s. The costs of the patent system, in contrast, rose sharply. During the 1990s, the number of patent lawsuits filed in district courts tripled, increasing the risk of innovators being sued for patent infringement. When Bessen and Meurer multiplied this increased risk of being sued by the "true" cost of patent litigation, which they estimated using an event study, they found that, aside from the chemical and pharmaceutical industries, the costs of patents to innovators outweigh the benefits of patents.

While I am generally sympathetic to Bessen and Meurer's analysis and their recommended reforms, I am deeply troubled by their use of a stock market event study to establish the true cost of patent litigation. Although others have used a similar technique, this approach suffers from a fatal flaw: It treats a loss in market capitalization-a loss to the firm's shareholders-as if it either is, or measures, a loss to the firm itself. Obviously, a loss in market capitalization, which is what an event study estimates, is not itself a loss to the firm. It is a loss to the firm's shareholders. Moreover, while we can construct a theory of share prices under which a change in market capitalization directly measures a corresponding change in the discounted present value of the firm's expected future earnings, this theory does not survive empirical testing. To the contrary, what empirical testing has repeatedly shown is that the change in market capitalization associated with certain kinds of bad news, such as the filing of a lawsuit, exceeds, often by an order of magnitude, any reasonable estimate of the capitalized loss in the firm's expected future earnings associated with the bad news.

We cannot, therefore, have much confidence in Bessen and Meurer's ultimate conclusion that the patent system has become a net disincentive for innovation. Nonetheless, it is undoubtedly true that the costs of the patent system to innovators rose during the 1990s. More patent lawsuits were filed, and the legal costs of defending against a claim of patent infringement rose. Further, as Bessen and Meurer show, the risk of being sued for patent infringement is not restricted to copyists, cheats, and thieves, but applies generally to anyone who introduces innovative goods. Due to an inability to sufficiently identify relevant patents-a phenomena Bessen and Meurer denote a failure of patent "notice"-even innovative companies may inadvertently find themselves guilty of patent infringement.

This is a compelling story, and Bessen and Meurer offer some plausible solutions for it. Yet, they are trying to offer something more. As the authors explain, they seek to "move[ ] beyond anecdote to provide the first comprehensive empirical evaluation of the patent system's performance."" Unfortunately, without the event study to estimate the costs of the patent system, their attempt to establish empirically the patent system's problems falls apart. What's left is a story-a compelling story from my perspective, to be sure-but just one more story based upon anecdote. As a result, the criticism with which they begin their book applies to their work as well: "It is hard to tell who is right, however, because most evidence offered in support of these positions is anecdote, if not myth . . . .”

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