Advancing Knowledge and the Knowledge Economy National Academy of Sciences January 10/11, 2005 The National Academies - Washington, D.C. Dietmar Harhoff Institute for Innovation Research, Technology Management and Entrepreneurship (INNO-tec) Ludwig-Maximilian University Munich The Demand for Patents and the Evolution of Patent “Quality”

2 Agenda The Status Quo of the Patent System – A European Perspective A Tradeoff between Patent Quantity and “Quality”? Indicators of Decreasing Patent Quality Incentive Structures in a Vicious Cycle What helped Europe to be better off? Policy Measures

3 The Status Quo of the Patent System – A European Perspective As in the U.S.... high growth rates in applications putting tremendous strain on patent offices new subject matter (biotechnology, software, business methods) stable grant rates (about 67% at EPO) more complex patents (claim structures) Other than in the U.S.... relatively low share of business method and software patents (~4 vs. 20 per cent of applications) (as of yet) no indication of increasing likelihood of litigation decreasing overall likelihood of opposition (down from 10.1% in to 5.9% in ) – mainly driven by IT and related sectors

4 A Tradeoff between Quantity and “Patent Quality”? What is going on? An arms race – as more and more marginal applications are filed, “patent quality” decreases. What is “patent quality”? high evaluation standards rigorous implementation of standards by patent offices and courts clearly delineated, non-overlapping patent rights minimum “inventive step” standard rigorously applied What are high-quality patents? high inventive step legally “robust” = small likelihood of revocation in courts, low uncertainty for investment, small likelihood of hold-up

5 A Tradeoff between Quantity and “Patent Quality”? The Central Problem excessive breadth low inventive step... in large numbers hold-up problems high transaction costs frivolous litigation (or threats) “system overload”

6 A Tradeoff between Quantity and “Patent Quality”? two measures number of claims claims are an important determinant of patent office workload claim structuring reacts to price signals share of X references in search reports prior art classified as X indicates that the “X-rated” prior art document is sufficient to threaten novelty/inventive step higher share indicates that applicants include more questionable claims in their applications

7 Indicators of Decreasing Patent Quality

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9 Incentive Structures in a Vicious Cycle? increases in the demand for patents, mainly for strategic reasons leading to high workloads in corporate patenting departments... leading to low-quality applications, exploding numbers of claims and ever more refined patent tactics... leading to high workloads in patent offices, operating in a pro- quantity policy environment... leading to badly delineated, broad patent rights with low inventive step and relatively low social value... leading to a cluttered IP space with high transactions costs... leading to the need for more coordination among applicants... leading to lower opposition activity

10 Incentive Structures in a Vicious Cycle? electrical engineering, software, IT N=156,018 instruments, organic/petrol chemistry, mech./process engineering N=352,030 pharmaceuticals, biotechnology, cosmetics, food and agriculture N=33,305 An opposition puzzle?

11 What helped Europe to be “better off”? higher standards in patent examination better post-grant review mechanisms in favor of challengers (opposition, annulment) higher standards applied to software and business method applications technical judges in some patent courts fewer strategic opportunities in courts and – paradoxically - relatively high costs of patenting (as compared to U.S.)

12 Policy Measures Three Approaches I.debunk the pro-quantity view of patents - otherwise it will continue to guide public policy thinking II.raise the first hurdle (patenting criteria) to improve the quality of patents and to reduce grants and applications a.do not make patenting cheaper and cheaper – this invites marginal inventions to be patented b.impose tighter notions of inventive step and non-obviousness c.impose fees on strategic behavior, e.g. complexity in patents (claims) d.strengthen examiners’ incentives and rights to refuse patent grants effectively III.impose/raise the second hurdle (post-grant patent reviews)

13 “... the knowledge economy that will be...”... should utilize elements of open source, user-based and community-based innovation... should rely on mechanisms like reciprocity and reputation... should not rely completely on intellectual property rights, as they crowd out the other mechanisms Towards that objective, the scope of patent systems and their use need to be limited and carefully delineated. Broader and cheaper patent protection does not mean more knowledge production or diffusion – currently, it is the exact opposite.