Market of Ideas Research Notes

Patent Applications

In 2015 there were 629,647 patent applications. Assuming history is anything to go by, around 80% will be eventually granted. Patents are valid for 20 years from application, providing renewal fees are paid at 3½, 7½, and 11½ years. Scotchmer (1999) reports that half of all patents are not renewed past 10 years. It currently takes the patent office more than 2 years, down from more than 3 years before the America Invents Act, to process a patent application. Applicants can request that undue processing time be added back to their patent terms. There are other factors, like terminal disclaimers and being found invalid or unenforceable by courts, which affect patent terms. A conservative estimate of mean patent term is 10 years from application. We will therefore use the 2.5m patents granted from 2006 to 2015 as a proxy for the number of active patents.

Scotchmer, S. (1999). On the optimality of the patent renewal system. The RAND Journal of Economics, pp. 181-96.

Patent Trade

The trade in patents could take several forms. Patents could be sold (in part or in whole), securitized, licensed, or traded in some other fashion. The academic literature has little handle on the current scale of any of these activities. Our best estimate is that less than 5% of U.S. patents are currently licensed and that less than 50% are ever used in any way. In 2014, the rate for licensing relative to patent grants for universities participating in the Association of University Technology Managers survey was 23%. This rate has increased materially in recent years as the market for ideas gains some traction. However, universities don’t set out to create commercializable technologies. Private firms and small inventors should create patents with greater market relevance and so be able to trade at higher rates. We therefore suggest that 20% to 40% licensing rates are achievable, which would imply a difference in the percent of patents traded of between 15% and 35%.

There are no current estimates of the average number of transactions per patent. Some patents, such as those participating in some patent pools, may be licensed several thousand times. However, exclusive licenses are still very common and patent sales typically do not occur annually. A range of say 1 to 5 transactions per patent is a reasonable guess. Likewise, with so much rough estimation of other necessary numbers, no reasonable estimates of the magnitudes of spillovers is available. Innovation has strong positive externalities so the spillover factor should therefore be greater than 1. Moreover, innovation is an input into many different types of economic activity, including more innovation. This would suggest that, at least for the purposes of GDP accounting, the multiplier should be more than 2: The seller would experience the revenue from the license and the buyer would experience new revenue from the sale of a product or new innovation for which the input was necessary.

Patent Valuation

Estimating the average transaction value is difficult. The average value of a U.S. patent is essentially unknown. Academics have suggested average values including $0.5m, $1m, $1.8m, $3.8m, and $18m (in 2016 dollars) per patent, depending on the sample being considered. However, distributions of patent values exhibit extreme skewness (driving the mean well above the median), and there are always strong sample section issues. In some sectors, like biotechnology and pharmaceuticals, intellectual property has been estimated to account for around 80% of a product’s final selling price. In other sectors, were there many hundreds if not thousands of patents are required to make a product –a smart phone may require more than 7,000 patents – estimates of the relative value of intellectual property are much more difficult. Nevertheless, taking the sales price less the manufacturing cost, with adjustment for returns to brand, market power, and other factors, would suggest that patent value accounts for around ¾ of the sales price of high-technology products.

The cost of prosecuting a patent application, inclusive of fees and legal costs, is typically estimated to be between $20,000 and $50,000, depending on the patent’s complexity. The transaction value of patents need not cover this fixed cost, even if the patent holder doesn’t commercialize the patent themselves. The aggregate revenue from a portfolio of patents should cover both the cost of prosecuting applications and the research and development cost, and provide a return on average across patent-holders. As transaction volumes increase, and as transaction costs fall with standardization of licenses, more efficient intermediaries, and generally better markets, the average transaction value will naturally decrease. An estimate of $10,000 to $100,000 per patent trade is probably reasonable.

Patent Litigation

year	patent cases filed	unique patents litigated	number patents granted
2001	2424.0	1807.0	183970.0
2002	2531.0		184375.0
2003	2766.0		187012.0
2004	2771.0		181299.0
2005	2523.0		157718.0
2006	2581.0		196405.0
2007	2776.0		182899.0
2008	2576.0		185224.0
2009	2549.0		191927.0
2010	2770.0		244341.0
2011	3572.0		247713.0
2012	5461.0		276788.0
2013.0	6128.0		302948.0
2014	5086.0		326032.0
2015	5821.0	4686.0	325979.0