Is Excessive Patent Protection a Problem for the Economy? Patents Should Only Be Granted When They Ensure Technological Progress

In many areas of technology, the road to new products leads through a dense thicket of existing patents that threatens to hinder innovation. A new ZEW study has found that patent rights are often distributed among many companies, creating the risk of blockades to innovation. Dr. Georg Licht explains the long-term consequences.

The number of patents protecting products has increased significantly in the last decade. It is estimated that devices such as semiconductors or mobile phones are protected by hundreds or even thousands of patents. Why is that?

New products often employ a variety of different technologies and manufacturers rarely possess the technological expertise for all of them, which is why they are forced to rely on inventions of other companies. Moreover, technological advances today are more interdependent than they were several years ago, and the speed of development for new products and the demand for product differentiation has rapidly increased. Companies now see the licensing of patented inventions to competitors and other third parties as an important source of revenue alongside product sales.

An empirical study carried out by ZEW shows that companies tend to invest less in research and development when the technology in question involves many overlapping patents. What does this mean for the economy’s long-term innovation?

The widely held view that patents serve as incentives for companies to invest more in research and development is not always true. A technological landscape populated by a huge amount of patents can increase the risk for companies to unwittingly use a small piece of property owned by another company and hence reduce the profit from innovation. Companies thus hesitate to invest into those technological areas. But this observation alone cannot determine the extent to which innovation suffers. More research does not automatically equal greater prosperity. What is clear is that the patent “thicket” causes enormous transaction costs and these transaction costs no doubt slow innovation.

Are there ways to neutralize the negative effects of patent thickets – whether through market-based means or through government legislation?

On the one hand, care must be taken to grant patents only for inventions which really are significant technological advances. For instance, many have criticized the US patent and trademark office for being too lax about what counts as a significant invention. It is trivial inventions  what perverts the patent system in the long run. On the other hand, it must be easier to establish fair, reasonable and non-discriminatory standards in licence agreements (known as FRAND), though, of course, it is difficult to define what these are in individual cases.

In a globalized economy it is difficult for any single country to implement regulation successfully. What is the European Union doing to make the patent situation more transparent?

Much would be gained if patent rights in Europe were easier to fight in court. The European Commission has submitted various recommendations for establishing unified legal regulations for defending and contesting patent rights. Presently, each EU member state has different regulations and the validity of a patent registered at the European Patent Office can be disputed in EU countries according to their own patent legislation. In June of this year the European Council once again submitted a proposal for a uniform patent system. It is still uncertain whether this attempt to harmonize patent jurisdiction in the EU will succeed or whether the egos of individual countries will prevail.

Big companies love to take over firms with many patents in a specific area. What do you think when a company’s value is measured more strongly by its intellectual property than by its real products?

According to previous ZEW studies, companies with patents that have the potential of blocking other companies are likely to be candidates for takeover. The threat of takeover can thus act as a counterweight to blocking attempts or excessive licence fees. What’s more, today there are more and more business models  whose goal is not to produce and market new products, but to generate inventions and sell patent rights. Given the increasing technological complexity of new products I find nothing objectionable with these developments. This can of course lead to speculative overvaluation of company, but this is part and parcel of a market-based system.

Georg Licht earned his doctoral degree in 1990 at the University of Augsburg and holds a degree in economics from the University of Heidelberg. He has headed the Research Department of Industrial Economics and International Management at the Centre for European Economic Research (ZEW) since 1992. His research interests lie in the economics of innovation and high-tech start-ups. Licht is member of numerous advisory boards both national and international, including the OECD, the European Commission, and the Federal Statistical Office of Germany.