Patents: A Too Costly Arms Race

The role of patents and other instruments of intellectual property has grown in recent years. It may suffice to say the patent applications have grown more than proportionally in all major offices (international, European, American, and Japanese). However, one should be careful in assessing this evidence, as it can provide a limited view of a more complex phenomenon.

There is no doubt that patents are a important source of competitive advantage for firms, and this is truer in certain industries than in others. Firstly, patents protect the right of the inventor to appropriate up to the totality of the economic benefits resulting from the innovation effort. This way, there is a strong ex-ante incentive for R&D investment decisions. Secondly, patents facilitate the technological transfer to third parties and this generates significant benefits both on the supply-side and the demand-side. Thirdly, the publication of patent documents, also for inventions than will never reach the commercialization stage, enables experimentation and cumulativeness in future processes of invention. However, recent works have argued that in some cases the strategic use of patents has attenuated the virtuous workings of these three principles (see Adam Jaffe and Josh Lerner, 2004). The two authors argue that patents are now more easily released than before and they they afford excessive legal protection to their holders, so that in certain cases they might hinder rather than foster innovation, especially in software and electronics. More and more, patents are used as arms pointed against actual and potential competitors. This creates an endogenous incentive to increase patent applications, even if it is not directly economically advantageous: a sort of arms race that negatively affects the overall level of innovation. In the study with Stine Grodal, Institutional Logic and Status: Strategic Patenting in the Legal Services Sector, we have looked at what strategies patent holders pursue to increase economic benefits. Note that in this case benefits are strictly private and do not necessarily correspond to societal benefits. In particular, we have found four strategies aimed at making fuzzier the applicability of a patent: an excessive number of claims, the use of a deliberately vague and generic language, delaying communications with the patent office, and the breaking up of a single invention into several patents. Our research study is innovative for several reasons. It is the first study providing an overall vision of the strategic behavior of patent holders; it analyzes the whole set of European patent applications over the 2001-2005 period (half a million inventions); finally, for the first time it hypothesizes that patent strategies are jointly pursued by the inventor and his/her legal representative (thereby looking into the interactions between the two that affect the propensity to use patents strategically). What emerges is that holders tend to have a strong patenting experience and a rather large size. And that the experience of the legal representative has an inverse effect: representatives with less experience have a higher propensity to use patents strategically. Also, representatives with higher visibility have higher legitimacy in adopting such practices. To conclude, the equation more patents = more innovation needs to be more carefully investigated. Patents remain important competitive assets for firms, but in recent years contingent events have led to a different use of them with respect to the past. This realization is dawning among large players having vast patent portfolios: they are realizing that the patents race ends up being more onerous for them than for other players.