Reforming the Patent System to Support Innovation
The Challenge: Stagnating Productivity Growth
In recent decades, economic growth has slowed in the United States, largely due to a slowdown in total factor productivity growth—the portion of growth not explained by the traditional inputs of capital and labor.1 Even before the coronavirus pandemic, the Congressional Budget Office projected this trend to continue in the coming years. Economists generally agree that the only way to secure long-run productivity growth in the United States is through innovation. Hence, a key challenge facing policymakers is how best to design policies to accelerate innovation.
The patent system is one policy lever designed to do this. Its basic logic is simple. By allowing inventors to capture a higher share of the social value of their inventions than they would in a competitive market, the system aims to encourage the development and disclosure of new ideas. But these benefits come with costs: the patent system has been criticized for imposing not only higher prices on patented goods purchased by consumers, but also for potentially discouraging subsequent inventors.
In the past several decades, there has been growing concern about the costs imposed by patents, especially those stemming from frivolous litigation. Unfortunately, there is little credible evidence of whether such costs are outweighed by the benefits of the patent system. Consequently, debates on reform tend to be based on ideologies and theories rather than data and evidence. However, despite this lack of evidence, the design of the patent system can be improved. Two proposed reforms could create a more favorable framework for innovation even without resolving broader questions about the costs and benefits of patent protection. They are clearer labeling of prophetic examples and increased transparency in patent ownership.
The Solution: Innovation-Friendly Reforms to the Patent System
Labeling Prophetic Examples
The first proposed reform focuses on the common practice of patent applicants including hypothetical experimental methods and results—known as prophetic examples—in their patent applications. A key goal of the patent system is for accurate information about new inventions to be disclosed to the public. Patent-induced disclosures are intended to serve a teaching function, facilitating spillovers of the technical knowledge embodied in patents to others. Specifically, the Patent Act requires that patent applicants describe their invention at a sufficient level of detail that an individual skilled in the relevant technological area could make and use the invention (“enablement”), and could recognize that the inventor possessed the invention (“written description”). To satisfy these disclosure requirements, inventors often include working examples summarizing data and previously conducted experiments. Although not widely known—even among individuals who closely study the patent system—patent applications also often include prophetic examples. Unlike working examples, prophetic examples report experiments, procedures, and protocols that have not actually been conducted. Instead, inventors predict or “prophesize” the results of an experiment. Although perhaps surprising, both the U.S. Patent and Trademark Office (USPTO) and federal courts agree that prophetic examples satisfy all disclosure requirements of the Patent Act.
In theory, prophetic and working examples can be distinguished by reading the verb tense: working examples are presented in the past tense, whereas examples in the present or future tense are likely prophetic. However, this rule is not well understood by many market participants.2 Recent research documents two key pieces of evidence that together suggest that prophetic examples are a problem in practice.3 First, prophetic examples are common: 17 percent of examples in a recent set of U.S. biology and chemistry patents are prophetic, and of the patents with examples in that sample at least 24 percent contain some prophetic examples. Second, the potential costs of prophetic examples appear to be large: of 100 randomly selected patents that use only prophetic examples and are cited in a scientific publication for a specific proposition, 99 are cited in a way that—incorrectly—treats the prophetic example as a real example, such as by saying that an experiment “had been carried out” by authors of the cited patent.
There is a straightforward case for requiring that prophetic examples be more clearly labeled. The only cost would be lost benefits to patentees that are generated by creating misunderstandings among market participants, which is not a net social benefit. In terms of regulatory burden, patent applicants are already asked to distinguish between prophetic and working examples in their written tenses, so adding a clear label is not a heavy burden. This reform is firmly within the USPTO’s authority to implement, or the change could also be made at the direction of Congress.
Increasing Transparency in Patent Ownership
The second proposed reform addresses the failure of the system to provide accurate notification about who owns patents. Currently, the first page of a patent lists the assignee as reported by the applicant at the time the application is granted. Any subsequent changes in assignment can be voluntarily recorded with the USPTO, but there is no legal requirement for patentees to publicly record changes in ownership.4 On a more practical level, there is no standardized process for recording the names of patent owners, implying that any given owner is often referred to by different names in different patents. A more complicated issue is that so-called hidden owners—such as ultimate parent entities or owners who use shell companies to shield their identities—are not listed in current records (which include only titleholders). These problems likely increase transaction costs throughout the patent system. The USPTO attempted to address these problems in 2014 but the proposed regulation was abandoned primarily because its focus on hidden owners led to concerns from patent holders about increased regulatory costs. A more tailored set of reforms would avoid such controversy. First, for all patents, linking patent records to unique IDs and requiring titleholders to update ownership records regularly would reduce the administrative and transaction costs of the system with relatively little burden for patentees. Second, for patents asserted in litigation, requiring disclosure of hidden owners would facilitate settlement and limit litigation abuse.
A robust patent system is a key component of any innovative economy and improving that system can support innovators across sectors. In contrast with traditional patent-reform debates, which can be easily derailed by ideological issues, the two more tailored reforms proposed here are easier to justify based on existing theory and evidence. These reforms should be enacted so as to spur innovation and help counteract declining productivity growth in the United States.
Photo Credit: Mark Van Scyoc / Shutterstock
Lisa Larrimore Ouellette is a professor of law and Justin M. Roach, Jr. Faculty Scholar at Stanford Law School.
Heidi Williams is the Charles R. Schwab Professor of Economics at Stanford University, a senior fellow at the Stanford Institute for Economic Policy Research, and a research associate at the National Bureau of Economic Research.
1 This brief draws from Lisa Larrimore Ouellette and Heidi Williams, “Reforming the Patent System,” Hamilton Project Policy Proposal 2020- 12, June 2020.
2 Janet Freilich and Lisa Larrimore Ouellette, “Science Fiction: Fictitious Experiments in Patents,” Science 364:6445, June 14, 2019.
3 Janet Freilich, “Prophetic Patents,” U.C. Davis Law Review, 2019.
4 U.S. Patent and Trademark Office (USPTO),“Changes to Require Identification of Attributable Owner,” Federal Register 79 (16), January 24, 2014.