Market of Ideas Research Notes

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Outline

The Next Engine of U.S. GPD Growth: The Market for Ideas: Outline

  1. Intro
  2. US GDP & Growth rate
  3. Startup World vs Patent World
    1. In the world of startups accelerators, incubators, VC firms, unicorns, and ecosystems are all recognized terms and types of organizations. Lesser known though in the world of Intellectual Property which has it’s own players like trolls, brokers, aggregators, pools, etc etc
  4. Patent Application and Renewals
    1. number of patents granted/applied
    2. number renenwed
    3. renewal rates
  5. Value of a Patent
    1. Cost of prosecuting a patent application 20,000 to 50,000
    2. Patent value accounts for ¾ of the sale price of high tech products
    3. Average value in millions: .5, 1, 1.8, 3.8, 18 per patent
    4. Extreme skewness
    5. Mean value 577,000 in griliches, median was 25,000
  6. Patent Licensing
    1. University Licensing
      1. How much universities make
      2. number of licenses
      3. number of patents issued
    2. Corporate Licensing
      1. How much corporations make
  7. Patent Brokers
    1. Biggest Brokers
    2. Define
    3. Who they represent, who uses them
  8. Patent Trolls (NPEs)
    1. Who are they: buy up patents and exert them in bad faith
    2. Approximate numbers
    3. Litigation
  9. Patent Litigation
    1. Lawsuits per year
    2. America Invents Act
    3. IPR
  10. USPTO
    1. Budget
    2. Funding
    3. Has to petition to keep revenue, sec 22 of AIA lets these revenues be diverted to a reserve fund for use during Government shutdown
    4. Time spent on each patent
    5. Between 1/3 and ½ of litigated patents are found to be invalid
    6. Funding the USPTO will lead to better patents
  11. Federal Agencies doing Basic Research
    1. Budgets
    2. What they do
    3. number of Patents
  12. Who else does Research (corporate & academic

Patent Players

Patent Broker

Non Practicing Entity (Troll)

Patent Pool

Patent Aggregator

Innovator

Implementer

Patent Applications & Renewals

In 2015 there were 629,647 patent applications. Assuming history is anything to go by, around 80% will be eventually granted. Patents are valid for 20 years from application, providing renewal fees are paid at 3½, 7½, and 11½ years. Scotchmer (1999) reports that half of all patents are not renewed past 10 years. It currently takes the patent office more than 2 years, down from more than 3 years before the America Invents Act, to process a patent application. Applicants can request that undue processing time be added back to their patent terms. There are other factors, like terminal disclaimers and being found invalid or unenforceable by courts, which affect patent terms. A conservative estimate of mean patent term is 10 years from application. We will therefore use the 2.5m patents granted from 2006 to 2015 as a proxy for the number of active patents.

  • “no more than 50% of patents are renewed past 10 years” (Scotchmer 1999)
Scotchmer, S. (1999). On the optimality of the patent renewal system. The RAND Journal of Economics, pp. 181-96. Link
  • “less than forty percent of patentees pay all three maintenance fees"
USPTO.gov - Patent Term Adjustment (PTA) Questions and Answers.


Patent Trade

The trade in patents could take several forms. Patents could be sold (in part or in whole), securitized, licensed, or traded in some other fashion. The academic literature has little handle on the current scale of any of these activities. Our best estimate is that less than 5% of U.S. patents are currently licensed and that less than 50% are ever used in any way. In 2014, the rate for licensing relative to patent grants for universities participating in the Association of University Technology Managers survey was 23%. This rate has increased materially in recent years as the market for ideas gains some traction. However, universities don’t set out to create commercializable technologies. Private firms and small inventors should create patents with greater market relevance and so be able to trade at higher rates. We therefore suggest that 20% to 40% licensing rates are achievable, which would imply a difference in the percent of patents traded of between 15% and 35%.

There are no current estimates of the average number of transactions per patent. Some patents, such as those participating in some patent pools, may be licensed several thousand times. However, exclusive licenses are still very common and patent sales typically do not occur annually. A range of say 1 to 5 transactions per patent is a reasonable guess. Likewise, with so much rough estimation of other necessary numbers, no reasonable estimates of the magnitudes of spillovers is available. Innovation has strong positive externalities so the spillover factor should therefore be greater than 1. Moreover, innovation is an input into many different types of economic activity, including more innovation. This would suggest that, at least for the purposes of GDP accounting, the multiplier should be more than 2: The seller would experience the revenue from the license and the buyer would experience new revenue from the sale of a product or new innovation for which the input was necessary.

  • approximately 2.5m active patents available to participate in the market for ideas today

Market for Technology

  • "there is actually nothing new about the practice of extracting economic value from patents by selling off or licensing the rights. During most periods of US history, it was as common for inventors to profit from their creativity in this way as by starting their own firms or working as salaried employees in R&D labs. Indeed, the ability to find buyers quickly for patents was an important driver of inventive activity during the late nineteenth and early twentieth centuries, when patenting rates in the United States were at historic highs." (Page 4)
  • "Inventors looking for buyers or licensees for their intellectual property or for venture capital for new enterprises face many of the same information problems in the early twenty-first century as their predecessors did a hundred years before, and they are solving them in much the same way—by forming bonds with well-connected professionals whose judgment they trust" (Page 35)
  • "As in the past, the growth of the market for technology has given rise to new problems of asymmetric information that opportunists can exploit to their advantage. The most notorious examples today are intermediaries who buy patents with the aim of extracting licensing fees from infringers, sometimes from large businesses with deep pockets (like the railroads in the late nineteenth century), sometimes from small businesses with limited resources (like the farmers of the same period)." (Page 36)
  • Carlos J. Serrano, “The Dynamics of the Transfer and Renewal of Patents,” RAND Journal of Economics 41 (Winter 2010): 686–708 Link
  • 12.4 percent of patents obtained in last two decades of 20th century were sold
  • Another Serrano paper cited in above Lamoreaux et al, quote from Lamaoreaux:
  • "Using data on renewals, Serrano calculated that patents that were sold were on average about three times more valuable than those that were not" (Lamoreaux 35)
  • Estimating the Gains from Trade in the Market for Innovation: Evidence from the Transfer of Patents,” NBER Working Paper 17304 (Aug. 2011) Link
  • "In our analysis, the value at age one of a traded patent ($159, 466) is about three times the value at age one of a non-traded patent ($50, 507) (all values are in 2003 US dollars), and about 23% of the patents are traded at least once over their life cycle. The value at age one of a patent was estimated at ($74, 684)." (2011 Serrano Page 4)
  • "We find that about 50% percent of the patents had gains from trade below $3,416, and these patents accounted for only 3.7 percent of the total value of the gains from trade. At the same time, the top 10% of the patents with the highest gains from trade (gains from trade higher or equal than $30,970 per patent) accounted for about 70 percent of the total value of the gains from trade. Furthermore, we demonstrate that the top one percent of the patents represented about 25% of the total gains from trade." (2011 Serrano Page 5)
  • look at page 8 of this paper, equation for calculating value of holding a patent. "A Model of the Transfer of the Ownership of Patents"

General Patent Licensing

  • "at any given time, over about 95% of patents are unlicensed and over about 97% of patents are generating no royalties"
From Ideas to Assets: Investing Wisely in Intellectual Property Page 332

University Licensing

AUTM Report: 2014 Licensing Acticity Survey, Association of University Technology Managers

Data is for Universities/Academic Institutions
  • 5,435 licenses executed (up 4.5% over prior year)
  • 1,461 options executed (up 7.7%)
  • 549 executed licenses containing equity (up 17%)
  • 914 startup companies formed (up 11.7%)
  • 4,688 startups still operating as of the end of FY2014 (up 11.4%)
  • 965 new commercial products created (up $34.2%)
  • 6,363 U.S. patents issued (up 11%)

Corporate Licensing

  • "U.S. firms annually waste $1 trillion in underused IP assets by failing to extract full value through partnerships, according to Navi Radjou of Forrester Research."
  • "Many of the world’s patent systems were developed decades or even centuries ago and have not kept pace with the rapid technological advances of the invention community. The reasons for this gap include legal requirements, policies and patent office resources. Patent systems must take advantage of the same tools helping to accelerate the rate and pace of innovation."
  • “In 2005, the number of patent applications we received continued to grow at a rapid pace. Our office now receives many patent applications on CD-ROM, containing millions of pages of data. In short, the volume and complexity of patent applications continues to outpace current capacity to examine them. The result is a pending— and growing— application backlog of historic proportions.”
Jon W. Dudas Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office USPTO 2005 Annual Report
  • “Obviously, one thing a market does is to determine prices. With patents or patent licenses, this is reasonably tricky. Patent rights are options on an uncertain future. We ought to seek some guidance from how options markets operate.”
Frederic M. Scherer Harvard University

Patent Monetization


Patent Valuation

Estimating the average transaction value is difficult. The average value of a U.S. patent is essentially unknown. Academics have suggested average values including $0.5m, $1m, $1.8m, $3.8m, and $18m (in 2016 dollars) per patent, depending on the sample being considered. However, distributions of patent values exhibit extreme skewness (driving the mean well above the median), and there are always strong sample section issues. In some sectors, like biotechnology and pharmaceuticals, intellectual property has been estimated to account for around 80% of a product’s final selling price. In other sectors, were there many hundreds if not thousands of patents are required to make a product –a smart phone may require more than 7,000 patents – estimates of the relative value of intellectual property are much more difficult. Nevertheless, taking the sales price less the manufacturing cost, with adjustment for returns to brand, market power, and other factors, would suggest that patent value accounts for around ¾ of the sales price of high-technology products.

The cost of prosecuting a patent application, inclusive of fees and legal costs, is typically estimated to be between $20,000 and $50,000, depending on the patent’s complexity. The transaction value of patents need not cover this fixed cost, even if the patent holder doesn’t commercialize the patent themselves. The aggregate revenue from a portfolio of patents should cover both the cost of prosecuting applications and the research and development cost, and provide a return on average across patent-holders. As transaction volumes increase, and as transaction costs fall with standardization of licenses, more efficient intermediaries, and generally better markets, the average transaction value will naturally decrease. An estimate of $10,000 to $100,000 per patent trade is probably reasonable.

Griliches Excerpt: "Among the patents reported to be in current use and with relevant numerical responses and a positive gain (accounting for about 20 percent of all the relevant responses), the mean value was $577,000 per patent, but the median value was only about $25,000 (implying, under the assumption of log normality, 2.5 as the coefficient of variation and a standard deviation of about $1.5 million). If one includes all the no gain, loss, and not yet used patents, the mean gain falls to about $11 2,000, and the median is close to zero or below (computed from the tables in Sanders, Rossman, and Hams 1958, pp. 355 and 357). Even this lower mean number is quite impressive, roughly equivalent to $473,000 per average patent in 1988 prices (using the GNP deflator to convert it from 1957 prices), but so also is the associated dispersion." (Griliches 309)

Griliches, Z. (1998). Patent statistics as economic indicators: a survey.


Patent Litigation

year patent cases filed unique patents litigated number patents granted
2001 2424.0 1807.0 183970.0
2002 2531.0 184375.0
2003 2766.0 187012.0
2004 2771.0 181299.0
2005 2523.0 157718.0
2006 2581.0 196405.0
2007 2776.0 182899.0
2008 2576.0 185224.0
2009 2549.0 191927.0
2010 2770.0 244341.0
2011 3572.0 247713.0
2012 5461.0 276788.0
2013.0 6128.0 302948.0
2014 5086.0 326032.0
2015 5821.0 4686.0 325979.0

(Data from LexMachina and USPTO)

Data on Grants and Applications

UPTO Grants and Applications Table

Sourced from USPTO Table

Spreadsheet with Graphs available at: E:\McNair\Projects\Market for Ideas

Innovation Bills

Bills Relevant to Innovation

Below is a table containing brief overviews of the bills pertaining to innovation that have been passed or introduced by the 114th Congress.

Bill Prognosis Sponsor Full Title Date Introduced Status
S. 1890: Defend Trade Secrets Act of 2016 [1] Enacted Orrin Hatch (R-Utah) A bill to amend chapter 90 of title 18, United States Code, to provide Federal jurisdiction for the theft of trade secrets, and for other purposes. JUL 29, 2015 Enacted — Signed by the President on May 11, 2016
H.R. 9: Innovation Act [2] 36% Bob Goodlatte (R-Virginia) To amend title 35, United States Code, and the Leahy-Smith America Invents Act to make improvements and technical corrections, and for other purposes. Feb 5, 2015 Reported by Committee on Jun 11, 2015
S. 1137: PATENT Act [3] 36% Charles “Chuck” Grassley (D-Iowa) A bill to amend title 35, United States Code, and the Leahy-Smith America Invents Act to make improvements and technical corrections, and for other purposes. Apr 29, 2015 Reported by Committee on Jun 4, 2015
H.R. 2045: Targeting Rogue and Opaque Letters Act of 2015 [4] 24% Michael Burgess (R-Texas) To provide that certain bad faith communications in connection with the assertion of a United States patent are unfair or deceptive acts or practices, and for other purposes. Apr 28, 2015 Reported by Committee on Apr 29, 2015
H.R. 1832: Innovation Protection Act [5] 5% John Conyers Jr. (D-Michigan) To provide for the permanent funding of the United States Patent and Trademark Office, and for other purposes. Apr 16, 2015 Referred to Committee on Apr 16, 2015
S. 632: STRONG Patents Act of 2015 [6] 4% Chris Coons (D-Delaware) A bill to strengthen the position of the United States as the world's leading innovator by amending title 35, United States Code, to protect the property rights of the inventors that grow the country's economy. Mar 3, 2015 Referred to Committee on Mar 3, 2015
S. 926: Grace Period Restoration Act of 2015 [7] 4% Tammy Baldwin (D-Wisconsin) A bill to amend the patent law to promote basic research, to stimulate publication of scientific documents, to encourage collaboration in scientific endeavors, to improve the transfer of technology to the private sector, and for other purposes. Apr 14, 2015 Referred to Committee on Apr 14, 2015
H.R. 2370: End Anonymous Patents Act [8] 0% Theodore Deutch (D-Florida) To amend title 35, United States Code, to require disclosure of ownership and transfers of ownership of patents, and for other purposes. May 15, 2015 Referred to Committee on May 15, 2015
H.R. 1896: Demand Letter Transparency Act of 2015 [9] 0% Jared Polis (D-Colorado) To amend chapter 26 of title 35, United States Code, to require the disclosure of information related to patent ownership, and for other purposes. Apr 20, 2015 Referred to Committee on Apr 20, 2015

Agencies Conducting Basic Research

Historical Trends in Federal R & D [10]

Agency R&D Budget in Millions
DOD 67,194
NASA 11,594
DOE 14,612
HHS 30,655
NIH 29,205
NSF 6,085
USDA 2,493
Interior 878
DOT 901
EPA 529
DOC 1,551
DHS 934
VA 1,197
Other 1,515

Patent Brokers

List of Brokers [11]

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