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In the Nation's Interest

Patents 101

By Jeffrey Hooke
Vice President and Director of Economic Studies

Global Filings

Worldwide patent applications have been increasing steadily for the last four years, following a brief decline after the 2008 financial crisis. Globally, over two million applications were filed last year, with the top filing countries being China, the United States, and Japan.  A handful of countries account for the bulk of patent filings. Historically the U.S. has been the frontrunner in patent activity, but Chinese filings have grown rapidly over the last ten years, elevating China to the top spot.

What is a Patent?

A patent represents intellectual property (IP) protection. It provides an inventor with the exclusive right (in a country where the patent is approved) to exclude others from using, making or selling the invention (or trademark or industrial design) without the inventor’s express consent. Inventors usually begin the patent application process in the country that has the largest commercial market for the IP.

In order to approve a patent application, governments want the invention to incorporate three attributes:

     • Novelty or newness;
     • Sufficient difference compared to similar items; and
     • A practical purpose.

Approval on the grounds of fulfilling these requirements is not guaranteed by filing an application. The U.S. government approves roughly one-half of patent applications. Approval provides the inventor with 20-year protection in the U.S., and most other nations allow a similar exclusivity period.

For a U.S. invention to obtain foreign patent protection, the inventor must file an application in the respective country or region where protection is sought. (The European Patent Office serves a “region” of 30 countries, so only one application is needed there.) To accelerate the process, a recent treaty enables a “patent prosecution right” whereby patents deemed allowable in the original filing country undergo accelerated review in other participating countries. Nevertheless, obtaining protection in the major economies is a laborious and expensive process.

Filing, Maintenance and Assertion Costs

The application process is not cheap, and maintaining a patent (in the U.S.) can run $50,000 - $100,000 over the patent’s life. Asserting a patent -- i.e., protecting the invention’s exclusivity against infringement – is far more expensive. A reasonable budget in the U.S. is $1-5 million for assertion, and a sensible cost estimate for overseas assertion is the same.

Why is the Patent System Critical to Free Enterprise?

Patent protection is an important facet of the free enterprise system. Protection provides individuals (and corporations) with incentives to create and invest in new technology, since they know they will have a monopoly on their invention – and thus the opportunity to profit if the invention is marketable – for a specified period. “Rule of law” in the patent arena is thus an important factor in encouraging innovation. That being said, enforcement is expensive and infringement suits take years to reach completion, if an out-of court settlement isn’t reached.  Emerging market economies often fail to honor patents.  Indeed, some firms in fast-moving, hi -tech fields decline to file patents, in the belief that the filings give away trade secrets that can’t be protected in real-time.

Top International Filers of Patents

Among international applications, Panasonic (Japan), ZTE (China), Huawei Technology (China) and Qualcomm (U.S.) were the most prolific corporate filers. The University of California, MIT, Columbia University, the University of Texas, and Harvard were the top university filers.

Patents Can Be Very Valuable

The value of intellectual property, trademarks and industrial designs is illustrated by values in the stock market and M&A market. Companies with valuable intellectual property trade at values far in excess of their tangible accounting assets ( such as inventory, equipment, and real estate). For example, Amgen, the big pharmaceutical company, has an equity capitalization of $115 billion, and, yet, its tangible accounting value is negative. The earning powers of its drug patents, and its future discoveries in the research pipeline, convince investors to place a high price on the business.

In 2013, the largest patent infringement award (in a jury trial) was $1.2 billion for Carnegie Mellon University against Marvell Technology Group. A notable $2.2 billion settlement was reached by Pfizer, the large drug company, as it sought to enforce the patent for its anti-reflux drug against Teva Pharmaceuticals and Sun Pharmaceuticals. Most patent disputes are settled out-of-court, and many jury verdicts are reversed on post-trial motions or on appeals.

Because of the sizable money involved in certain patents, some investment firms have taken to acquiring many patents and then asserting rights, sometimes in a frivolous manner. This practice is referred to as “patent trolling.” The goal of many patent trolls is to extract cash settlements from firms that want to avoid the expense of patent litigation.

Policy Ideas

To promote innovation, governments might consider lowering the cost of patent filings and maintenance. Also, an international treaty that replaces the single country filing process, with a multiple country system (like Europe’s) might be a good idea. Streamlining the filing process for multiple countries would encourage investors to support research for more new inventions.