U.S. Department of Commerce Issues Report on Role of Patent Reform in Supporting Innovation and Job Creation
The U.S. Department of Commerce released a report indicating that patent reform will accelerate economic growth and job creation and expand America’s ability to
innovate, as reported in a USPTO press release.
In a speech at the National Bureau of Research (NBER) Innovation Policy and Economy conference at the National Press Club in Washington, D.C., Director Kappos
commented that “[w]e stand at the precipice of passing patent-reform legislation in this session of Congress.... By enhancing the ability of America’s innovators to
secure high-quality patents with greater speed and certainty, this legislation will speed the delivery of innovative goods and services to market and fuel economic
growth and job creation.” The full report by the Department of Commerce can be found
The key statistics presented in the report are as follows:
Technological innovation is linked to three-quarters of the nation’s post-WWII growth rate. Two innovation-linked factors – capital investment
and increased efficiency – represent 2.5 percentage points of the 3.4 percent average annual growth rate achieved since the 1940’s.
Innovation produces high-paying jobs. Average compensation per employee in innovation-intensive sectors increased 50 percent between 1990 and 2007 — nearly
two and one-half times the national average.
Highly innovative firms rely heavily on timely patents to attract venture capital — 76 percent of startup managers report that venture capital
investors consider patents when making funding decisions.
Delay in the granting of rights has substantial costs. Recent reports conclude that the U.S. backlog (currently at 750,000 applications) could
ultimately cost the U.S. economy billions of dollars annually in “foregone innovation.”
The fee-setting authority patent reform gives to the USPTO will contribute significantly to the agency’s planned 40 percent reduction in patent
The enhanced post-grant review — the process by which a patent’s validity may be challenged through an administrative appeal in front of the USPTO — offers a cost
effective and speedier alternative to litigation. The cost of such proceedings is expected to be 50-100 times less expensive than litigation and could
deliver $8 to $15 in consumer benefit for every $1 invested.
(See page 1).
The report takes the position that innovation is the leading driver of economic growth. Without technological innovation, “accumulation of
wealth could not be sustained and per capita growth would trend to zero” (see page 2). Factors linked to innovation, capital investment (1.1%) and increased
efficiency (1.3%), are found to account for 2.5% of the 3.4% growth since World War II (see Id.). “With respect to capital investment, innovation helps
decrease the price of many existing products, and it improves their quality” (page 3). The report also finds that innovation produces high paying jobs. While average
real compensation per employee increased by 20.2% between 1990 and 2007, in some of the most “innovative industries, including computers, electronics, and chemicals,
real compensation per employee increased more than 50%” (see Id.). A table of real compensation per employee from 1990 and 2007 in 2007 dollars is found below
(based on the report's appendix).
||Compensation per Employee
|Selected Innovation - Intensive Industries
|Computer and Electronic Products
|Publishing Industries (Including Software)
|Information and Data Processing
|Computer Systems Design and Related Services
|Total Selected Innovation-Intensive Industries
|Source: Bureau of Economic Analysis
The report finds that venture-backed startups disproportionately generate new technological improvements on which growth depends, and many of these startups rely on
patents to attract venture capital (see Id.). The report also notes that the grant of high quality patents is closely correlated with the most valuable
innovations and high quality tends to be a feature of successful, growing companies in industries like pharmaceuticals (see page 4). “Similarly, surveys of CEOs and
R&D managers have shown that patents are among the most important means for securing competitive advantage from pharmaceutical innovations” (Id.).
The report finds that the above factors hinder innovation. “Delay, uncertainty, and poor quality at the front end ultimately make private investments in innovation
less likely and undermine the potential for economic growth and job creation” (Id.). According to the report, the two most notable reforms that will address
these issues are (1) fee-setting authority; and (2) enhanced post-grant review procedures (see page 6). With respect to fee setting
authority, the report holds that the USPTO can use this tool to significantly reduce delay and uncertainty (see Id.). For instance, the USPTO can raise money
to spend on IT infrastructure and to hire additional Examiners so it can modernize operations (see Id.). The front-end costs are also subsidized by back-end
issuance and maintenance fees, so successful Applicants pay a higher share of the costs than unsuccessful Applicants (see Id.). The report posits that “[w]ith
fee-setting authority, the USPTO could deliver on its aggressive goal (enunciated in the FY 2011 President’s Budget) of reducing to 20 months total average pendency”,
which is a 40% improvement over current levels (see Id.).
The report also makes the case that enhanced post-grant review procedures can reduce the cost of patent disputes. “Challenging invalid patents is particularly
daunting for small firms with limited resources. As a consequence, some analysts believe that large firms have been able to use even weak patents to threaten
litigation, thereby forcing small competitors with breakthrough technologies out of business” (page 7). The report alleges that post-grant review offers a much less
expensive mechanism for challenging weak patents and thus offers a solution to this problem (see Id.). This would also have the effect of improving patent
quality since weak patents could be struck down during post-grant review (see Id.). The report estimates that the cost of post-grant review is 50-100 times
lower than the cost of litigation (see Id.). Accordingly, only strong patents would be expected to survive and potentially be enforceable in litigation,
preventing an unwarranted exercise in market power (see Id.). As long as costs do not exceed $100,000, the report estimates that post-grant review could
produce a benefit of between $8 and $15 for every dollar invested (see Id.).
The U.S. Department of Commerce report offers some interesting statistics regarding how patent reform may produce benefits for the American economy. The Department of
Commerce notes that patent reform “is likely to expand the Nation’s innovative output while adding $0 to the Federal deficit. This deficit-neutral form of stimulus
presents an economic opportunity that should be seized” (see page 8). If the Department of Commerce’s findings are correct, this seems to be wise advice indeed.