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The Patent Drain on Economic Growth

This article is more than 9 years old.

Slow economic growth since the Great Recession has been devastating for employment, middle class incomes, and federal and state budgets. Worse, many economists are predicting slow growth for the next generation. A number of policies — from tax and immigration reform to more innovation friendly regulatory treatment of the health, energy, finance, education, and communications sectors — could help launch a much needed new boom.

But another often-overlooked but persistent drain on the economy also needs attention. Intellectual property (IP) was written into the Constitution and ever since has been a key to U.S. inventiveness and entrepreneurship. Over the years, however, the system has broken down in a number of ways. An overworked Patent and Trademark Office issued too many patents of questionable quality and in markets (software is the prime example) where the very idea of patentability is questionable. An explosion of low quality patents ignited an explosion of litigation, and today the legitimacy of IP itself is under assault.

Official seal of the USPTO (Photo credit: Wikipedia)

Registering and defending true innovations is important. IP creates incentives for technological exploration, experimentation, and commercialization. It helps us pass knowledge through the generations and deliver new products and services to consumers. But abuse of IP can do just the opposite — moving the state of play from the lab to the courtroom, elevating lawyers above entrepreneurs and consumers.

A PriceWaterhouseCoopers study shows patent suits in the U.S. grew to over 5,000 in 2012 from around 1,200 in 1991. Some of these suits are legitimate, involving real disputes over true IP. Many, however, are just a result of the new IP game, where IP is a legal strategy disconnected from the real world of products and services.

We’ve recently covered high profile cases of hyper-litigation, such as the battle between Apple and Samsung, who are engaged in some 40 suits across the globe. Non-practicing entities (NPEs), often called “trolls,” have also been a chief cause of IP chaos. Foreign governments are even launching sovereign NPEs to protect native firms from international competition. France Brevets, Taiwan’s Industrial Technology Research Institute, Japan’s Innovation Network Corporation (INCJ), and Japan’s IP Bridge have all sued foreign competitors. In a world of integrated global supply chains and intangible value, it’s a new form of protectionism.

NPEs and smartphone and software cases get most of the headlines. But cases involving everyday consumer products are all too common as well, and they create an unnecessary drag on the economy.

Take, for example, the case of CLIO USA, a maker of teeth-whitening strips sold under private label branding by Target , CVS, and others. The private label whitening strips sell for around half the price of Procter & Gamble ’s market leading Crest strips (e.g., $20 vs. $40 at Target). P&G, however, is trying to force the generics off the market by asserting patent infringement. P&G already chased Johnson & Johnson and Be-Well out of the market, and tiny CLIO, with a 2-3% market share, is the next target. Earlier this year, the Patent and Trademark Office found in CLIO’s favor. But P&G is suing in its local Cincinnati federal court and could wear down its tiny competitor even without winning the case.

Real intellectual property embodied in true inventions and innovations is crucial to our economy. But faux IP, embodied in obvious and overly broad claims and backed by fierce litigation, is triply bad. It discourages small innovators and new market entrants. It artificially boosts prices and thus harms consumers. And it gives true IP a bad name, undermining a foundation of our knowledge economy.

No one thinks IP policy is easy. IP requires balancing the interests of innovators, consumers, and would-be competitors. There is no single, full-proof solution. But shrinking the opportunities for egregious litigation is a good place to start.