Changing the Patent Debate: Study Finds Potential Benefits To U.S. Economic Growth of Up to $200 Billion Annually. Frozen Licensing Central Economic Problem.

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Economists Incorporated, a premier economic consulting firm located in Washington, D.C., released a new study, "Unlocking Patents: Cost of Failure, Benefits of Success," analyzing the economic costs of dormant patents. Emerging marketplace solutions identified as holding promise to expand significantly the number of patents licensed and commercially used.

Premier economic consulting firm in Washington, D.C.
The economic value of these dormant patents...is an estimated $1 trillion.

Economists Incorporated (EI), one of the world’s premier economic and public policy consulting firms, today released a new study, “Unlocking Patents: Costs of Failure, Benefits of Success,” finding that the biggest problem with the U.S. patent system is not the much-discussed assertion about abusive patent litigation. Rather, it’s a patent licensing market so constricted by high transaction costs and legal risks it prevents literally 95 percent of patented discoveries from ever being put to use to create new products and services, new jobs, and new economic growth. Simply “unlocking” patent licensing from the constraints of those costs, the study finds, would enable tens of thousands of now-dormant inventions to be licensed and commercialized, adding up to $200 billion a year to the economy.

The study was prepared by two economists with a long track-record of ground-breaking public policy research. Dr. Robert Litan is currently a non-resident Senior Fellow at the Brookings Institution and has directed economic research at Brookings, the Kaufman Foundation and at Bloomberg Government. His most recent book, Trillion Dollar Economists, has won praise in reviews in the Economist, the Wall Street Journal, and Fortune Magazine. Dr. Hal J. Singer is a Principal at Economists Incorporated as well as a Senior Fellow at Progressive Policy Institute and an Adjunct Professor at Georgetown University's McDonough School of Business.

In their study, the authors cite evidence showing that the vast majority of patent owners and businesses “cannot bear the costs or risks associated” with licensing patented inventions. The result is that “a substantial portion of the two million-plus patents granted, and thus the knowledge and technology they embody, is not commercialized or used to benefit others.”

The economic value of these dormant patents, or “Rembrandts in the attic,” is an estimated $1 trillion.

Previous research suggests that up to 80 percent of all new technical knowledge is contained in patents alone. Yet the study’s authors point out that usually it is only the largest resource-rich companies that can afford the high costs and legal risks associated with using this patented knowledge to develop new products and services. For the overwhelming majority of mid-sized and smaller companies, patents represent not a treasure trove of new technical knowledge but a growing multi-million-dollar infringement risk and wasted investment.

Dr. Litan and Dr. Singer illustrate how this constricted patent licensing system harms the economy. “It is as if the economy were playing a game of baseball in which the only hits that counted were home runs by players on very well-financed teams. In such an economy, vast numbers of other valuable or “run-producing” innovations — triples, doubles, [or] singles — generated by many other firms, universities or individual inventors cannot be economically licensed given the potential risks or costs of litigation.”

Although a patent system so limited to “home runs” certainly leads to losses for inventors of more modest innovations — as well as for businesses who might commercialize these into profitable new products — the greatest loss is to society as a whole. Indeed, Dr. Litan and Dr. Singer cite previous economic research which demonstrates that the social benefits of innovation can exceed the private gains inventors and businesses derive from innovation by as much as 25 to 1.

Is there a way to expand the numbers of patents licensed and commercialized? Litan and Singer evaluate legislative and other proposals aimed at reducing abusive patent litigation, and conclude that it is impossible at present to determine if their net effects will be positive. In fact, none of these measures, they argue, will address the fundamental flaw in the patent system today — “namely, its inability to ‘scale’ beyond the small portion of overall patents, the so-called ‘home runs,’ owned by large companies with [the] resources to participate in the system.”

The authors also note: “…to the extent that high transactions costs and the risks of patent licensing are deterring innovators from even filing patents in the first place, or in the case of many businesses choosing to keep their innovations as trade secrets rather than public knowledge via patent disclosures, society loses from the failure to disseminate new knowledge that could be used by others to develop other innovations.”

In contrast, the study suggests that private sector market solutions, which do not require any changes in law, provide the best opportunity to produce a more efficient and economically useful patent system. As stated in the report: “Various new for-profit initiatives are in their early stages, addressing different aspects of the system.”

The study’s authors estimate that if such emerging private sector solutions, including those found in companies such as the U.S. Patent Utility, RPX Corporation, and LOTNET, succeed in increasing the numbers of patents licensed by 20 percent to 40 percent, this would add as much as $200 billion a year in new growth to the U.S. economy.

The study was supported by The U.S. Patent Utility. The authors take sole responsibility for its contents.

Economists Incorporated is a premier economic consulting firm in the fields of law and economics, public policy, and business strategy. We offer expert consulting and testifying services in the context of litigation, arbitration, proposed mergers and acquisitions, regulatory hearings, and business planning. Our clients include legal counsel, businesses, trade associations, government agencies, and multilateral organizations.

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Dawn Higgins
Economists Incorporated
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