Most Americans are unaware that intellectual property-intensive businesses account for nearly $6 trillion in value added, roughly equivalent to 40 percent of the U.S. GDP and greater than the GDP of any other nation in the world other than China. The opportunities contained in intellectual property (“IP”) resources, including patents, have led our businesses to shift focus from land and material resources to IP resources.
Make no mistake: IP is a key driver of our economy. IP-intensive industries directly and indirectly support 40 million jobs, or nearly 30 percent of all U.S. jobs. These are jobs that pay well. According to the U.S. Department of Commerce, the average weekly wage in IP-intensive industries overall is 42 percent higher than in other industries, including 73 percent for patent industry jobs and 77 percent for copyright industry jobs. Moreover, IP is critical to our balance of trade, as goods from IP-intensive industries account for 60 percent of all U.S. exports.
Given the jobs, exports and wage premiums those businesses support, the question has to be, “What else can we do?” Many will immediately answer that we must protect our IP from infringers in developing nations and elsewhere. While that may be an acceptable answer, we also believe we must protect our IP from ourselves.
Patent-related litigation in the U.S. is stifling our ability to take full advantage of one remarkable competitive advantage that we enjoy globally. For example, residents of the U.S. and Japan own approximately 47 percent of all of the patents in force around the world. It could be that the growing awareness of patent value is driving the increase in patent litigation. The growth in patent litigation is restraining innovation and inhibiting the creation of more high-paying jobs that will yield higher economic growth.
With an eye towards reducing the volume of patent litigation, President Obama signed into law the Leahy-Smith America Invents Act in September 2011. This law has the objective of reducing lawsuits that determine the rightful owner of patent rights, but it does not directly address patent infringement litigation brought by non-practicing entities (“NPEs”).
It is no secret that patent litigation has been on the rise for the past several years. Much of the growth in this litigation is driven by NPEs. NPEs are business entities focused solely on acquiring patent rights and realizing the value of those patents through licensing and enforcement of the patent. In essence, NPEs capitalize on the patent rights, not through their own operations but by excluding others from (1) making, (2) using, (3) selling, (4) offering for sale or (5) importing an invention. While there is absolutely nothing wrong with asserting claims against those who infringe another’s patent rights, the increasing potential that one may face a claim by an NPE does limit innovation.
There is concern that a larger percentage of claims brought by NPEs prove unsuccessful as compared to those claims brought by practicing entities. For example, a 2012 study on patent litigation found that the success rate in claims brought by NPEs from 2006 through 2011 was only 24 percent as compared to 30 percent from 2000 through 2005. In contrast, the success rate for practicing entities was 38 percent in 2006 through 2011, compared to 31 percent from 2000 through 2005. Whether supported by the underlying facts or not, many observers attribute the declining and lower success rates for NPEs compared to the practicing entities to frivolous lawsuits brought by NPEs. Irrespective of that claim, our own experience is that the growing likelihood of a claim brought by an NPE is sure to cost $3 million or more to defend. As a result, innovation is stifled by the growing probability of an assertion.
In particular, we have found that IP inventors and owners are predisposed to employ their IP in just their core business rather than finding uses in alternative markets. That is because the IP owners are unfamiliar with the alternative applications and markets and fear the costs associated with the possibility of having to defend their IP for a use that has uncertain prospects. The downside, of course, is that IP owners are walking away from additional resources they could obtain for these alternative applications, thereby significantly diminishing the value of their own IP.
IP is a huge driver for economic growth. With the transition to a knowledge economy, creativity and innovation are essential to a more prosperous and sustainable future. IP rights continue to be an important tool for stimulating and rewarding that creativity. Entrepreneurs should leverage their IP through alternative applications to stimulate economic prosperity. Their reluctance to do so - because parties that stake a claim to the same rights cannot figure out how to share the wealth of IP - eliminates the creation of additional jobs, economic growth and wage premiums.
Our government in collaboration with the legal profession is best placed to tackle additional patent reform, thereby unlocking the power of meaningful economic growth in our country. The bottom line: our friends, neighbors and fellow citizens who would hold the new and potentially higher-paying jobs do not care how the economic benefits are shared.
Glenn D. Sacks, CPA, CFE, is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. He has over 30 years of accounting experience in public accounting, securities litigation and private industry. Steven L. Henning, PhD, CPA, is the Partner-in-Charge of the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. He has more than 20 years of experience in public accounting, securities litigation and consulting and also serves on the executive committee of the firm.