Patents Are A Weak Measure of Innovation Activity

After not seeing the word patent in my daily information routine for a few weeks, I saw it twice today – first in an article titled Turning Patents Into ‘Invention Capital’ (in the NY Times) and then in Region Sustains Robust Patent Production in the WSJ.  Both stirred me up early this morning, but for different reasons.

If you are interested in patents, I encourage you to read Turning Patents Into ‘Invention Capital’ as I’m very interested in your reaction.  I’d love to hear what you think in the comments (anonymous is fine if you are concerned about attribution on this one.)  I have an opinion and this article didn’t add anything to my thoughts (which is partly why I’m looking for yours as I’m curious what others think.)  So I hit Ctrl-W and went to the next tab in Chrome.

The title of Region Sustains Robust Patent Production was fine (and yes it refers to Silicon Valley), but the first sentence in the article made me nuts:

“The economic slump has yet to damp innovation in Silicon Valley, at least not by one widely followed measure: patent production.”

It’s a short article that basically states that Silicon Valley received a similar percentage of utility patents granted in the US in 2009 that it did in 2008 and 2007. 

“Silicon Valley denizens received 13,231, or 7.9%, of the total 167,350 "utility" patents granted in the U.S. in 2009, according to IFI Patent Intelligence, a unit of Wolters Kluwer Health that analyzes patent data from the U.S. Patent and Trademark Office. That is on par with Silicon Valley’s share of patents nationwide in 2008 and 2007, according to IFI.”

Other than the factual statement, there is no possible way the conclusion made in the first paragraph can be extracted from this data.  The primary flaw here is that patents take many years to be granted.  The number of patents granted in 2009 has nothing to do with the innovation activity in 2009! 

Now, I don’t believe that patent activity correlates to innovation.  While this might have been true in the 1970’s, there are so many factors in today’s broken patent system that undermine this.  The article even points one out in the list sentence:

“Like many tech firms, Cisco offers some financial incentives to employees who file and receive patents, he (Tony Bates, SVP at Cisco) says.”

The “pay to file” dynamic is a mechanism that undermines the integrity of the patent system.  Here’s the issue: assume I am a huge company that pays my engineers on average $100k / year.  I offer $1k for every patent filing they make during work time.  So, as an engineer, you can increase your compensation by 1% for every patent you file (forget about whether it actually gets granted).  As the large company, I’ve got a huge legal machine in place to file the patents – all you need to do as an engineer is going through a prescribed process, write up a bunch of stuff that gets dropped into the patent application, and come to a few meetings to review the patent application.  Is that worth an additional 1% of your comp regardless of the quality of the application?  Sure! 

Regardless of whether you think patents are useful, this is just such a crummy indication of “innovation”. 

  • http://www.facebook.com/lindel Lindel D Eakman

    The patents as a measure of current innovation is rather obvious. Newspaper filler for sure. I think I think I had better not comment publicly on the first one. Ask Shoberg about this in Boulder…

  • DaveJ

    "Bonasera… Bonasera… What have I ever done to make you treat me so disrespectfully? Had you come to me in friendship, then this scum that [beat your product in the marketplace] would be suffering this very day. And that by chance if an honest man such as yourself should make enemies, then they would become my enemies. And then they would fear you."

  • http://intensedebate.com/people/bfeld bfeld

    Awesome!

  • Phil Sugar

    What a great huge example of how the government, lawyers, and accountants suck the life out of the producers. I need to reread "Atlas Shrugged".

    My big take-away: 650 people not producing anything, dedicated to sucking the life blood out of producers like leaches.

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  • http://www.techdirt.com/ Mike Masnick

    Hi Brad,

    There have been a bunch of studies that show, pretty conclusively, that the number of patents does not, in any way, correlate to innovation activity. If you want, hit me up by email and I can send you some of them. I've been making a list. :)

    As for Myhrvold, he gets that kind of treatment every 2 years or so in some major publication (they rotate: Business Week, WSJ, NY Times, New Yorker). They all pretty much say the same thing. I did notice one interesting tidbit in the NY Times piece that I hadn't seen elsewhere before, and wrote about it here:

    http://www.techdirt.com/articles/20100217/1853298

    Basically, for years, IV hid behind the claim that it never sued anyone, but the NY Times reveals that the company has well over 1,000 shell companies, which is a popular tactic for patent trolls to hide who's actually suing (and, at least one IV patent has shown up in a lawsuit where IV isn't listed directly, but it doesn't take a genius to guess that they still have a financial relationship over that patent).

    It's a pure deadweight loss to society. No different than any other kind of shakedown business. Just that, in this case, it's legal, thanks to Congress.

  • http://twitter.com/graysky @graysky

    Back when I worked at IBM after the company I worked for was acquired I certainly witnessed the same patent machine at work that is described about Cisco. And even more important the financial reward was that having patent filings to your name was an important part of getting promoted into certain technical leadership positions. The original company had been around for ~10 years and had previously patented only a few things, that likely were the key innovations that they created. Post-acquisition there was an incentive to file patents around a bunch of tech, that may or may not be granted nor very critical.

  • anon

    More PR flufff for Intellectual Vultures. Note how they decline to spell out how many of those 650 gainfully employed people are actually (a) lawyers generating zero net economic value, (b) lobbyists and PR flacks (c) minions pursuing Mhyrvold's private fetishes like fancy kitchens etc.

  • Mike Dolbec

    Mike,

    I too have been frustrated by analysts conflating patent activity to innovation activity. For example, see: http://whatmatters.mckinseydigital.com/innovation

    I am interested in the list of studies that you refer to above (showing little correlation between patent activity and innovation activity).

    My own opinion is that patent activity is correlated with innovation more often in certain industries and hardly at all in others. Biotech vs. software for instance. The other problem is that the actual economic outcome from patents, beyond licensing revenue, is very hard to measure industry wide. For example, how many jobs were created because of (in spite of?) a particular software patent?

    I think patent activity is a weak leading indicator for "value created later". It gets cited because patents filed and granted are easy to count. But how do you measure the value created by patents that are used offensively? defensively? The only measure of the value of patents, that we can count easily, is the total market for patents bought, sold and licensed. This still seems quite small next to value created by all innovation.

    =Mike Dolbec

  • http://twitter.com/frederickcook @frederickcook

    The patent system is clearly broken. I was told by an IP lawyer recently that the average IP lawsuit costs $1.6M. This breaks start-ups, so having patents that don't get infringed upon is effectively a luxury that only large companies enjoy.

    That said, the system Mhyrvold advocates in which patents are respected by all companies and traded similar as securities may be the only "market solution" (ie won't involve an act of congress) for the system. He sees the way to do this as aggregating patents under one entity which has the resources to enforce them.

    I'm not saying it's the best solution, but if Mhyrvold got his way, he wouldn't have to be a "patent troll," he would be like an investment banker of patents, which would be an improvement over the current system.

  • http://intensedebate.com/people/sigmawaite sigmawaite

    Okay, I read the Myhrvold NYT piece and the HBR article, etc. He's putting lipstick on his pig.

    He writes a lot that he should know is nonsense about research, applied research, patents, and business.

    E.g., "Invention’s stepchild status is reflected in the way it’s typically funded, which I call the charity model. The entities that provide the vast majority of research funding to U.S. universities — mostly government agencies like the National Science Foundation, the National Institutes of Health, and the Department of Defense, along with private donors — do so without any expectation of a financial return. In other words, research grants are gifts, not investments."

    Nonsense: It's NOT "charity": Most of the funding is for US national security, and there Congress is getting what they want — a solid base of research and labor for US national security. The 'applied' part is in layers of additional, large RDT&E organizations, FFRDCs, Lockheed, etc. The NIH funding is, uh, for responding to voters who want progress on major diseases, etc.?

    E.g., "The shrinking handful of corporations that still fund long-range research have the same mind-set. Their leaders rarely run research as a business in its own right; instead, they fund it as an act of faith that the ideas produced will somehow create value as they percolate through the product organization."

    Nonsense: If they do much research, then it is for "business", mostly as in the current legal patent battles. Also the "act of faith" is mostly nonsense: The business typically severely blocks any contact with the "product organization" because they want to protect their existing, successful lines of business from any 'disruption'.

    His goal, more useful, applied research to make strong businesses and improve the world is fine.

    But he wants too many chefs in the kitchen: He wants separate groups for research, applied research, products, money making businesses and with 'markets' with patents and lawyers in the middle. Nonsense.

    There is NOTHING to stop just one team, or even just one person, from the steps: (1) see market need, (2) do some research to meet the need building on past research, (3) build product, (4) start business, (5) make money.

    To improve this, he is correct: Better funding would help. Computing is a grand exception since now a $1000 computer can do so much, but otherwise funding is usually just crucial.

    Here's the real funding bottleneck: With the possible exception of parts of biomedical technology, nearly no funding source is able to look at results, say, just on paper, as from NSF funded work or ready for a patent application, evaluate the business potential (for other than patent trolling), write a check, and make money doing this.

    Myhrvold implies that he CAN do such evaluations. Okay Nathan, then DO IT, and mostly f'get about the patent lawyers. Eat your own dog food. Uh, Nathan, QUALCOMM had Viterbi's work on coding theory, and he built a BUSINESS out of it. Your company is much different.

    Uh, to check out your ability to evaluate, for something I'm not working on now, here's a take-home exam: For zero-day monitoring of server farms and networks, be both multi-dimensional and distribution-free (original research) and close to the best possible Neyman-Pearson result and, thus, save money on both false alarms and missed detections and, BTW, beat the Google, Microsoft, Sun funded Patterson RAD Lab monitoring research effort at Stanford and Berkeley. Build on the Hahn decomposition from the Radon-Nikodym theorem (with von Neumann's proof); right, NOT 'computer science'. Exploit k-D trees to make the computing fast. Sell to the most important farms and networks and then exit to Microsoft (their work in monitoring sucks more), HP, IBM, EMC, etc. Can you evaluate this direction?

    Do you even know the Hahn decomposition? Uh, it's not physics. If you can evaluate such work, then post here and we'll talk, also about something much more valuable than zero-day monitoring. Else you are just a big legal effort, i.e., a patent troll wasting the time of the poor HBR readers, etc.

    Net, except for patent trolling, no one can make a 'market' on intellectual property assets outside investors can't evaluate. Indeed, part of the crucial value is the ABILITY to evaluate.

  • Rick Frenkel

    The other thing that I'd like to point out, and let me say that I'm speaking solely for myself here and not for my firm, my former company, or any clients, is that the number of patents issued, even if it is a measure of innovation, it has a big lag built into it. The Patent Office is way far behind in examining many applications, so if a company is having a banner year in 2009 in terms of patent issuances, it is likely due to an explosion of patent filing in 2004 or 2005 (if not earlier), and not due to any current-year activity. A company could completely stop filing patents in 2009, for example, and still get a record number of patent issuances.

  • Bill Mosby

    Hmmm, paid to file. An enterprising patent opponent could conceivably be paid well to get a lot of stuff filed that even the PTO wouldn't grant.

  • Tom Murphy

    As consultants in ChE, we usually solve a problem in 6 months, or so, and file a patent app. withe the client. He smiles, says "Thanks, this is our Trade Secret!"
    Tom Murphy, P.E. Puritrol, Inc.

  • Dr. RTFM

    Companies aren't that stupid; they have internal review processes to only file patents that they think would succeed.

  • Dr. RTFM

    Life principles #3: Do better or don't complain. Application: any fool can see that there are problems with the current patent system. Please propose your alternative, so that we can see if it is better, worse, or just hopelessly naive.

  • Anon

    I'm not especially well-versed in intellectual property law, but his business model appears to be working out. If the NYT-reported profits of $1B are correct, he's making a lot of money off of this. So he doesn't have much of a reason to stop now.

    I do think that many patents are overly-broad and basically concepts moreso than actual inventions.

  • bobm

    Well, maybe. A rresponsible organization that knows about "patenting" does not let its engineers file a patent on every new idea, willy nilly. In my experience (40+ years in household name high tech), it has a process which reviews the "inventions" and has a set of criteria as to whether or not to file a patent application. The first criterion is a budget (duh) for writing and filing applications, closely followed by the judgment of experienced engineers and managers as to the potential value to the company of a patent which might issue. When the system fails (for example, due to lazy managers) a creative engineer can, indeed, double his salary but that is rare.. IBM used to have an award program (maybe it still does) which gave inventors as much as $6K for an issued patent, much more for a very good one. IBM got a lot of patents as a result; who would argue the money was wasted?

  • http://intensedebate.com/people/bfeld bfeld

    I don’t think this implies in any way that companies are stupid.  It’s well known that many companies believe the right strategy, under today’s patent system, is to massively overfile and see what gets through.  So it’s actually a “smart corporate strategy” (given today’s messed up patent system) to file a large amount of crap.

  • http://intensedebate.com/people/bfeld bfeld

    “Responsible organization” – while there are plenty of large tech companies that have a process like this, I know of others that have a “let’s just throw whatever we can out there and see how big a pile we can get.”  I’m not sure what the “responsible organization” standard actually means since the ones that take the approach I just described are certainly serious companies that execute well.  I guess I just don’t know what “responsible” means in this context (or – more importantly – how to enforce it!)

  • http://twitter.com/direwolff @direwolff

    My take on the Intellectual Vultures…ah, I mean Ventures… NYT article is that they are simply positioning themselves to collect rents from as many technology innovators as possible. Like some sort of tax collector (minus the obvious benefits). With all of the funding they've raised, their train has left the station, and it's in their best interest that the patent system remain status quo, no matter how nonsensical that system is at this stage for software and biz process patents. Because they have no morality over this issue and a large war chest, that makes them extremely dangerous to our ecosystem.

  • Bill Mosby

    Institute a review of software patents in some venue other than a courtroom and throw out claims that can be shown to have been prior art at the time the patents issued. Like Peer to Patent, but retroactive and with more resources. That is if the Supreme Court doesn't get around to clarifying the situation first.

  • http://www.silverskygroup.com Tim Casey

    I have worked as an in-house patent counsel for Apple, SGI and MCI, but also worked in priviate practice dealing with many individual inventors and start-up to small businesses. That is what I do now. Your perspective that issued patents do not respresent a timely measure of innovation is true, due to the extreme time delay between filing and issuance. Your perspective that patent filings do not represent innovation is only true with respect to larger companies. Very few engineers at the companies I worked for were encouraged to be innovative because patents existed – maybe because we had an incentive program – but whether we filed patent applications or received patents had nothing to do with encouraging their innovation.

    They had their own obligations to get projects completed and products/services delivered on schedule. Their innovation was driven by their desire to keep their job, maybe get a bonus, maybe make their stock options worth something, to do something fun, etc. Patents were something their managers and the legal department worried about.
    (Continued)

  • Tim Casey

    However, every day I deal with independent inventors, start-up entrepreneurs and small to medium sized businesses that know that in the absense of some form of intellectual property protection on their developments (often patents, but not always), they might as well not bother because if they develop an attractive product or service, it is simply going to get taken from them. I have seen it happen, so it is not just a myth as many want to believe. So it might get taken anyway, and they might not have the resources to enforce the rights they have, but occassionaly they do, and the mere thought they have something in their back pocket in the event they need it provides them with the comfort they need to take the next step and disclose their idea to others, or introduce the product or service they hope will be a hit.

    While their patent activity does not directly reflect their innovation, they would be thinking of things irrespective of whether they could patent them, their patent activity does directly relate to their willingness to make public their ideas. This is the point you completely miss.
    (Continued)

  • Tim Casey

    The patent system was designed to encourage people to disclose their idea, versus keeping them as trade secrets, which was the norm prior to the formalization of the patent system. If someone developed a new idea, they tried to prevent others from finding out about it, often binding the apprentices within their trade to secrecy. This type of activity results in an inefficient society because too many different people in the same trade will ultimately spend time trying to develop the same idea. Whereas if the idea is disclosed, others can learn from the disclosure and improve upon it. If they only want to copy it and add nothing to society, then they have to pay for that pleasure, but if they want to do something different and better, they are encouraged.

    So, at best, your perspective is a narrow minded one that is far too much focused on big businesses, and not the real engineers, scientists and entrepreneurs in this country who risk everything they have to do something new and different.

  • http://brokensymmetry.typepad.com Michael F. Martin

    Cisco is really not the bad guy in this regard. Their filing strategy has gotten much leaner in terms of identifying the truly nonobvious stuff. Their GC Mark Chandler is a visionary.

    But there are plenty of other big companies that are guilty. There are many structural problems with the current system, which together misalign incentives. An emphasis of quantity over quality, etc.