Recently, a number of companies from the information technology and financial services sectors have been pushing Congress to change the patent system.
The companies have been seeking passage of the Patent Reform Act of 2009 (H.R. 1260 and S. 515). So far, the legislation has been introduced in both the House and the Senate, and the Senate Judiciary Committee has reported out the bill.
Among the most important aspects of the proposed legislation are, one, a change in the way damages are calculated that would reduce the amount that a patent holder could collect in the event of infringement and, two, the creation of a mechanism for third-party-initiated administrative review of issued patents. These changes, though they may sound arcane, are not good for entrepreneurs. (Full disclosure: companies opposed to this legislation have financed some of my research.)
According to economists Jean O. Lanjouw and Mark Schankerman, small firms are more likely than large firms to litigate to protect their intellectual property. Therefore, efforts to reduce the size of damages would hurt small companies more than large ones. (Here’s a small-business guide to intellectual property.)
Moreover, as the National Venture Capital Association and others have explained, smaller damages would most likely motivate large companies to infringe on start-up companies’ patents since the potential of large damages is one of the key deterrents to patent infringement. (See the movie “Flash of Genius” for an example of this story.)
Large, established firms could use the proposed administrative review system to undermine new companies’ intellectual property because the latter simply lack the resources to defend their patents. In fact, analysis by Mario Calderini and Giuseppe Scellato of a similar system in Europe shows some disturbing evidence of the tendency of large companies to use the proposed administrative review process in just this way.
Research shows that having patents helps young technology companies get venture capital financing. The proposed changes to the patent system might undermine investor confidence in the effectiveness of patents, which could cause them to cut back on the financing of new companies that depend on patents to protect their products and services.
Finally, the proposed changes to the patent system might make high-tech start-ups less eager to innovate. If patents are weakened, entrepreneurs will have less confidence in their ability to use the patent system to protect their new products against imitation and may respond by cutting back on their research and development spending.
Maybe Congress will realize that its time is better spent solving the problems that are ailing this country than on changing our patent system in ways that will hurt entrepreneurs.
Scott A. Shane is a professor of entrepreneurial studies at Case Western.
Comments are no longer being accepted.