Patent Reform Legislation on Damages May Hurt Patents and the Economy

Many critics have complained that patent damage awards are too high and that the damages should be based solely on the patentable features of the invention, rather than on the entire market value of the product that incorporates the invention, as is currently the case.  Congress has responded with proposed legislation to “apportion” damages in this way.  No patent reform bills made it through Congress in 2008, but patent reform remains hot in 2009.

Critics of apportionment calculations, including Chief Judge Michel of the Federal Circuit, have argued that such calculations will make infringement trials even more complex than they already are and that the courts are not equipped to make such determinations on damages.  They also argue that no studies have been conducted as to the effect of the proposed legislation on the value of US patents.  Well, now we have one such study.

Professor Shane’s Study

The Manufacturing Alliance on Patent Policy has issued a paper entitled The Likely Adverse Effects of an Apportionment-Centric System of Patent Damages by Scott Shane, Professor of Economics at Case Western.  Prof. Shane believes the proposed damages legislation will result in the following:

1. Reduction in U.S. patent value of between $34.4 billion and $85.3 billion.
2. Reduction in value of U.S. public companies of between $38.4 billion and $225.4 billion.
3. Reduction in R&D of between $33.9 billion and $66 billion per year.
4. Between 51,000 and 298,000 U.S. manufacturing jobs put at risk.
5. Industries employing fewer people favored over those employing more people.

Reduction in Patent Value

Prof. Shane believes that the value of patents is no longer based on the opportunity to obtain an injunction against infringing activity after the Supreme Court’s eBay decision.  The value is now based on damages that can be obtained in an infringement suit.

To get the numbers on the reduction in the value of patents, Prof. Shane conducted a survey of patent attorneys at law firms.  The survey respondents estimated that the proposed patent reform legislation would result in a 20% to 39% reduction in damage awards.  He then relied on several academic studies that put the average value of a US patent at $93,463 to $118,988, and numbers from the PTO of about 1.8 million patent in force.  This puts the total value of US patents at $171.8 to $218.7 billion.  A 20 to 39% reduction in damage awards would reduce these numbers by $34.4 to $85.3 billion.

Reduction in Company Value

Prof. Shane then uses two studies that suggest that the the percentage of a company’s worth that based on patents held by US public companies is 0.8% to 1% on the low end to 11.3% on the high end.  As of November 2008, market capitalization of Wilshire 5000 companies was $9.8 trillion.  A 20% to 39% reduction in these numbers results in a decrease of about $38.4 to $225.4 billion in the value of the companies.

Reduction in R&D Investment

Prof. Shane relies on a paper that estimates that anything that reduces the value of a patent by 10% will result in a corresponding 7% reduction in R&D investment.  A 20% to 39% reduction in patent value will result in a reduction in R&D investment of 14% to 27.3%.  According to the National Science Foundation, industry paid $241.8 billion in R&D in 2006.  A 14% to 27.3% drop in patent value would thus result in a $33.9 to $60 billion decrease in industry-funded R&D.

Prof. Shane provides similar calculations to reach his other conclusions that would result in job loses and smaller firms.

While it is good to finally have a study on damage reform, there are too many assumptions that Prof. Shane has to make to give us a real picture of the effect on patents and innovation.

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2 Responses to “Patent Reform Legislation on Damages May Hurt Patents and the Economy”

  1. Patent Reform 2009 Continued « Inventive Step Says:

    [...] Manufacturers Alliance on Patent Policy (MAPP), which last month published a study that showed that Patent Reform Legislation on Damages May Hurt Patents and the Economy, wrote a letter to President Obama yesterday urging him to oppose patent reform legislation such as [...]

  2. Patent Reform Update: Analysis of Administrative Challenges « INVENTIVE STEP Says:

    [...] damage apportionment issue, Scott Shane, Professor of Economics at Case Western, wrote a paper on how the changes to damage apportionment would hurt the patent system and the economy.  Sen. Jeff Sessions (R-AL), the new ranking member of the Judiciary Committee, asked Prof. Shane [...]

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