Much of the conversation about patents in recent years has been about litigation, especially the type of litigation that involves non-practicing entities. And, while patents themselves are a purely legal notion, they represent quite a bit more. They are, in these days of technological innovation, vital business assets. If this is the case, though, why is the licensing of patents so difficult, and how much could a market-based change in patent licensing actually impact the U.S. economy?
The answer to that last question, at least according to a recent study by Economists Incorporated, is quite a bit – upwards of $200 billion, in fact. InsideCounsel recently spoke with the authors of the study, Dr. Robert Litan, senior fellow at the Brookings Institution, and Dr. Hal J. Singer, principal at Economists Incorporated, to discuss their findings.
The study, “Unlocking Patents: Costs of Failure, Benefits of Success,” began with a look at the big picture. “We asked the question – what if the debate over patents was changed from a legal-centric debate over patent lawsuits, non-practicing entities, etc. and instead focused on enhancing commercialization on the existing stock of patents, most of which are unlicensed. We changed that conversation to a market-oriented one. If market solutions keep improving, what would the gains be?”
It drew Singer’s attention as well. “The notion of making a market between patent holders and users, looking at the frictions and transaction costs that stand in the way of deals being struck, creating a two-sided market, bringing patent holders and users together to put down their arms and make love instead of war seemed ingenious,” he says.
The study is especially timely, as gridlock in Washington has prevented any further patent reform legislation from passing. With inactivity in Congress, it has fallen to the business community to try and solve the problems with the patent licensing system. Companies such as RPX, LOTNET and U.S. Patent Utility have developed models to do something different with patents. RPX buys up high risk patents and licenses them to its members; LOTNET brings more of a credit union type approach to patents; and U.S. Patent Utility figures out which patents are most relevant to a company, tailors a package of patents for that company, and helps it avoid lawsuits. This method also gives patent owners a way to generate revenue from their otherwise dormant assets.
“The stat that struck me was how few patents were being put to use,” says Singer. “It was apparent that there are frictions that are getting in the way of deals.” The study endeavored to determine what effect an increase in patent licensing would have on the economy. It estimated that if patent licensing increased by 20 to 40 percent, utilizing the patents that the study describes as “not home runs, but singles and doubles,” that would generate $8-$15 billion in patent licensing revenue while providing social benefits of between $100-$200 billion per year.
The market solutions from RPX, LOTNET and U.S. Patent Utility are all in the early stages, and they are all marketing their solutions aggressively. At this point, these platforms are still growing, and it remains to be seen if one model dominates or if they all coexist. As with any market, one could reach a critical mass of members, making it more attractive to others.
But it is clear that, in order to reap the economic benefit mentioned by Litan and Singer, the business community will have to be the ones pushing change. “Regardless of what Washington does, one thing they are not going to change is the law-centric aspect of the patent system,” says Litan. “A patent is a legal notion, and the only way to know the boundaries of a patent is to litigate it. There will always be legal uncertainty associated with patents and legal costs associated with them. Regardless of what Washington does, there is room for market solutions to protect people against lawsuits and encourage owners who are fearful of lawsuits to commercialize their assets.”
And, according to the minds at Economists Incorporated, if these marketplaces can help unfreeze patent assets, the windfall for the American economy could be quite significant.