By William Matcham
For the Center for Intellectual Property x Innovation Policy blog, in fulfillment of obligations for the Thomas Edison Innovation Law and Policy Fellowship
Highlights:
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- Policymakers frequently debate the effectiveness of the U.S. patent system – critics claim that problems arise from the ineffective patent application and examination process.
- We fill a large gap in the economics literature by building an economic model of the patent prosecution process.
- The model implies that patent screening is relatively effective, in large part because the examiners are well motivated. However, restrictions on negotiations could improve screening outcomes.
- We view our work as the first part of a broader research agenda assessing the effectiveness of resource allocation in public agencies that incentivize and fund innovation.
The Importance of Public Institutions in Fostering Innovation
In a forthcoming research article, Mark Schankerman and I estimate an economic model to evaluate the effectiveness of patent screening at the U.S. Patent and Trademark Office (USPTO). Part of a broader research program, the project shows how economic models can be used to study and improve the efficiency of resource allocation by innovation-related public agencies. I worked towards writing this paper in conjunction with the George Mason University Scalia School of Law’s 2022-2023 Thomas Edison Innovation Law and Policy Fellowship. I am very grateful for the thoughtful comments I received from Distinguished Commentators and scholars involved with the Fellowship.
Public agencies play a central role in fostering innovation through two primary channels: direct and indirect funding of public and private research, and allocating intellectual property rights, specifically patents. In the United States, for example, federal investment in Research and Development (R&D) activities amounted to $120.9B in 2015 alone. Moreover, nearly 400,000 patents were issued by the USPTO in the same year.
Despite their evident importance, little is known about whether innovation-supporting public institutions allocate resources efficiently and how organizational changes affect agency performance. In our first project on this topic, we study the U.S. patent system, focusing on the quality of screening—the allocation of property rights for innovation— by the Patent Office.
The Growing Policy Debate
The effectiveness of patent screening and its implications for the quality of patents is a hotly debated policy issue. There is growing concern among academic scholars and policymakers that patent rights are becoming an impediment rather than an incentive to innovation. These concerns have been prominently voiced in public debates, in recent U.S. Supreme Court decisions, and culminating in the Leahy-Smith America Invents Act of 2011, the most significant statutory change to the patent system in half a century.
Critics of the patent system claim that the problems arise mainly from ineffective USPTO screening, where patents are granted to inventions that do not represent a substantial inventive step—especially in emerging technology areas such as business methods and software. The issue is essential because granting “excessive” patent rights imposes social costs: higher prices and restricted quantities of patented goods, greater enforcement (litigation) costs, increased transaction costs of R&D, and the potential to undermine the process of cumulative innovation.
What We Do
We develop an economic model of the patent screening process, which incorporates incentives and intrinsic motivation of examiners and the actual structure of multi-round negotiation in the current system. By intrinsic motivation, we mean examiners’ desire to ensure their decisions align with the USPTO’s mission, which is to award inventors property rights over their invention, consistent with statutory and judicial prescriptions. We estimate the model using new negotiation-round-level data on examiner decisions and text data from 20 million patent claims. We conduct counterfactual, “what-if” analysis of how reforms to incentives, fees, and the structure of negotiations affect the quality and speed of patent screening.
Advantages and Uniqueness of Our Analytical Framework
The patent prosecution process is an advantageous context to study the effects of incentives and motivation on screening for two primary reasons. First, the multi-round negotiation between the applicant and examiner fits naturally into a specific economic modeling tool called a “dynamic game,” which forms the basis of our model. The model is “dynamic” in the sense that we allow multiple negotiations over time between the examiner and the applicant, and a “game” in the sense that both examiner and applicant make decisions that account for how the opposing party will respond. Such a model is necessary in this context because existing empirical (so-called reduced form) analyses are not capable of analyzing how examiners and applicants would both respond to changes in the patent screening regime. For this one needs a full model of the process, capable of doing such counterfactual analyses.
The second advantage of the patent context is the quality of data. The USPTO collects detailed data on all applications, not just granted patents. For this paper, we constructed a dataset covering around 55 million patent application decisions across 20 million patent claims between 2010-2015. For applications, we observe each examiner’s decision on each patent claim over all rounds of the negotiation. Advanced natural language processing (NLP) techniques assist us in measuring the “distance” between different patents, an important metric for understanding strategic behaviors by both applicants and examiners. Together with the characteristics of examiners and applicants, we use these data to estimate our model of the patent application process.
Key Findings
Our estimates imply several key empirical findings; we focus here on two of the core insights:
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- Intrinsic motivation plays a significant role in contributing to the accuracy of patent screening. Junior examiners are more motivated than seniors on average, but there is considerable variation within both groups. Further, using the estimated parameters, counterfactual analysis shows that removing intrinsic motivation increases the frequency of examiners granting invalid patents fourfold. This finding highlights the importance of designing human resource policies that effectively select examiners with high intrinsic motivation and ensure they sustain this motivation throughout their careers.
- Innovators pad their patent applications, but the examination process screens much of this out. By this, we mean that applicants initially claim greater property rights than are warranted by the true “inventive step” of their innovation. Moreover, there is substantial variation in the degree of padding across patent applications. This result highlights the importance of effective screening. We estimate the average level of padding at around 8-10%. This exaggerated scope of the patent applications, in turn, implies that approximately 80% of claims start below the distance threshold for patentability and thus should be rejected. The multi-round screening process substantially narrows the scope of patent rights sought and, in so doing, reduces that number to about 7% among granted claims (though nearly one in five granted patents contains at least one patent claim that does not meet the threshold).
Reforms to the Patent Screening Process
Our counterfactual experiments reveal the effects of a range of specific policy changes the USPTO could consider. To take one example, limiting the negotiation rounds would substantially reduce the granting of invalid patents and, naturally, improve the speed of prosecution. However, such a limit would force abandonments by applicants who only need to make moderate adjustments to meet the required standards. This in turn could dissuade inventors from developing their valuable ideas in the first place. On net, we find that the benefits of reducing negotiation rounds outweigh the costs, suggesting that rounds restrictions are worthy of consideration.
Concluding Remarks
Our study serves as an important first piece of research highlighting the crucial role of intrinsic motivation in public agencies, particularly in the context of innovation-promoting institutions. It exposes the complex trade-off between the speed and quality of application processing and applicants’ incentives to innovate. We believe this work lays a strong foundation for further academic inquiry into the efficiency of resource allocation in innovation-supporting public agencies.