“Perhaps a ground-up rethink of the U.S. patent system should be considered or maybe it is possible to fix many of these issues with a few tweaks. I am not sure, but it is important that it doesn’t just include the few who have made so much money off of an otherwise-backwater form of investment.”
The patent industry is in the doldrums. While the U.S. economy continues to endure historic, sustained growth, the stock market has skyrocketed, and new services, products, and investments launch every year, patents as an asset class have remained relatively flat for years. In the last decade, at best, patents as assets have shown anemic growth and stagnant value creation. While capital for litigation funding is available and overall U.S. patent grants and holdings continue to rise, patent valuations have not. Some blame the America Invents Act (AIA) and court decisions over the past decade as the reason why the market has not thrived.
I disagree. Any effects felt from changes in the law are symptoms of much more systematic problems that must be solved first for patents to fulfill their full potential as valuable investment vehicles. These problems—identified below— won’t be solved by rolling back regulations or reversing opinions and artificially increasing the value of unworthy assets. That will simply make it easier to enforce patents, and there is no evidence that this has ever been causation for innovation or competitiveness. Instead, it would largely benefit a small group of mostly white, older men who focus on monetizing patents. It is not surprising that these are the same ones who angrily denounce the system as unfair and seek to return things to the “good old days.” Sadly, those “good old days” were only good for a very few to the exclusion of almost everyone else and has led to the problems which I will detail below.
The real property market in the United States is measured at over $40 trillion; compare that to the value of the patent monetization market—roughly $400 billion—that is, roughly 100 times less valuable. In our information economy, we would expect individual patent value to be growing exponentially, but it’s barely budged. Why? To put it plainly, there are at least five major reasons why investment into IP has stagnated. For now, I will call them the Ambwani 5 (A5). Until we recognize and fix some major structural issues in the system, pricing will likely continue to average roughly $280,000 per sold patent, the secondary market will remain anemic and driven by a small cohort. If we can largely address these A5, I believe patents as a market and an investment will explode with growth commensurate with the current state and importance of technology and innovation in our economy. If we don’t address them, though, the industry will continue as a niche practiced by a few wizards of the dark arts.
The Ambwani 5
The U.S. Patent and Trademark Office (USPTO), European Patent Office (EPO), and others have done an admirable job of making it a lot easier to obtain patent data, but more should be done. Databases are still very hard to understand and use, much is proprietary, and even basic information is hard to obtain without paying substantial subscription fees. Most of the customers of these databases are law firms and companies who have their own goals, and don’t usually benefit from providing objective patent quality measurements or case success rates. For investment to flow into patents, we need better measurements and a way to make them easier to view. For instance, requiring better public transfer, assignment, disclosure and ownership data within a timely period could quiet title, reduce transaction costs, and ensure assets are transferred, making markets much more efficient.
Patents are exceptionally challenging to read and understand for sometimes even the most sophisticated lawyers (though many would not admit to it). Until we recognize and find a way to make patents simpler to comprehend for 99.9% of the population, their value will never be fully understood, much less embraced. Investors have a tough time measuring or understanding the value predictably, and the complexity and vagaries of patent drafting prevent investment and increase transaction costs.. To compare, there is no way to easily get a snapshot of a patent like you can a piece of real property, or even an entire company. Until we can get plain-English versions of patents everyone can understand, reading them will be for most like reading another language, with the resultant uncertainty and concern around investment. Put simply, people don’t like to invest in stuff they can’t read, let alone understand.
Any system catering to a small group of people that cannot be easily understood by outsiders will never achieve large adoption. Given history, education, and demographics, the vast majority of patent professionals are white males. While that is changing at a glacial pace, the industry continues to be dominated by a lack of diverse viewpoints. I am not talking about encouraging STEM or other programs to diversify, though that has benefits and should be encouraged. Sadly, that is probably too late to significantly increase the available pool of talent by the time such programs are implemented. What I mean is demonstrating how patents themselves can help communities outside of traditional patent practitioners and their clients—and making it easier for these communities to read, love, and benefit from using patents. If we could change the perception and practice of patents so that more diverse voices are heard, then more Americans will invest time and money into the asset class, and, similar to what has happened in real property and financial investments, there will be exponential industry growth. Otherwise, patents may continue to be the legal equivalent of country music—a niche genre with a rare breakout.
Investing in obtaining and maintaining a patent in many industries at the moment is like investing in a mine or an oil well. It should be no surprise that the vast majority of institutional investors are wary of including patents as part of their investment portfolio—they are simply too difficult to reliably predict their value. This is because the quality (though certainly not the quantity) of the output is low, so the chances of successfully enforcing a patent is low. This is part of a system to keep the barrier to filing costs low for public policy reasons. But the effect is that a very small percentage of patents granted have any real value. We know, for instance, that if someone invests resources in getting a high-quality, well-prosecuted patent, it can be the source of significant investment. Consider Orange Book pharma patents, which are usually the result of significant investments in filing and prosecution, and their much lower institution rate at the Patent Trial and Appeal Board (PTAB) compared to other patents. We know we can have good quality—the question remains do we want to pay for it. There is an obvious trade-off, but even if requiring a much higher quality would result in a drop in patent filings or grants, it would be offset quickly by much more investment in the filings and grants that did emerge, because the patent owners would be much better able to receive a return.
There continues to be much abuse in the system. There are simply too many litigations that are not based on quality, but settle simply because the cost of litigation is so high. This does not encourage institutional investment; it suggests patents are only as valuable as the cost of litigation. We must strive to make it harder for such litigation to occur, as it delegitimizes everyone else’s rights, provides bad incentives, and even skews patent policy discussions. If we do not, the “patent troll” sticker will continue to deter investors and others from participating.
Toward a More Systemic Approach
In sum, I’ve identified five major systemic issues that I see as preventing patents from becoming a robust asset class. You will note I am not providing specific solutions today, as many are interrelated, and all are rather complex. Perhaps a ground-up rethink of the system should be considered or maybe it is possible to fix many of these issues with a few tweaks. I am not sure, but it is important that it doesn’t just include the few who have made so much money off of an otherwise-backwater form of investment. What I do know is that investment in patents is important for the future of our information economy, but the industry itself—insular, opaque, and Delphic—is to blame for its current malaise. Addressing these issues will broaden the benefits of and investment in the system for everyone, and in the end, would result in intellectual property becoming as valuable, as traded, and as commoditized an asset as real property.
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