Patent law is good for big pharma because it has no innovators



A new study adds some empirical firepower to the idea that poor patent laws are crushing innovation in the technology industry. Researchers from the London School of Economics studied citations from patents that were invalidated by U.S. judges and found that invalidation increased the number of subsequent innovations in technology, but not in pharmaceuticals.

“Patent invalidation has a significant impact on cumulative innovation only in the fields of computers and communications, electronics, and medical instruments (including biotechnology). We find no effect for drugs, chemicals, or mechanical technologies.”

The effect is greatest in the electronics industry. For instance, Linkedin VP of Engineering Alex Vauthey recently explained why much of the company’s software is open source. In essence, it’s better when the entire Internet community can help build an application. “LinkedIn really embraces open-sourcing,” he said. “We’re actually leveraging the community of software developers that help with that. With traction, the software gets more secure, more reliable. At the end of the day you use better software to build applications.”

Additionally, open source software also helps out their employees, no matter where they end up next. “We want our employees to leave LinkedIn as much better professionals than when they arrive. By being able to contribute to an open-source project, you have the opportunity to get the code that you’re writing looked at by a lot of people.”

The wide variety of contributors makes open innovation much more effective, as opposed to granting a monopoly to one firm in the form a of patent.

But in pharmaceuticals, there isn’t the same community of innovators, and a single drug can take billions of dollars to manufacture. In this industry, the researchers found, patents do not harm innovation.

Interestingly, the researchers also controlled for so-called “patent trolls,” entities that exist solely to sue others for patent breaches. “We ?nd that only 12 patent cases in our sample involve a troll. When we drop these observations and re-estimate the model, we obtain estimates that are essentially identical.” In other words, patent trolls aren’t the only reason bad intellectual property policy harms the tech industry.

Indeed, startups seem especially vulnerable to bad patent policy, because they do not have the legal or economic negotiating power to deal with big business. “The results show that bargaining breakdown occurs when it involves large patentees,” the researchers write. “Small ?rms are less able to resolve disputes ‘cooperatively’ without resorting to the courts.”

Congress is making some movement to reform patent policies for software, but we’re unlikely to see much happen until after the 2014 election.

You can view the full report here [PDF].