By Donald Zuhn --
Yesterday, the Manufacturing Alliance on Patent Policy (MAPP) released a report which indicates that the apportionment of damages provisions found in the Senate (S. 1145) and House (H.R. 1908) patent reform bills would have several adverse effects. The apportionment of damages provisions in these bills attempt to apportion the value of a product that can be attributed to a patented invention and the portion that can be attributed to other components or aspects of the product. The report notes that while proponents of the above bills have argued that apportionment is needed to fix a flawed U.S. patent system, "in all of the rhetoric about the inadequacy of the U.S. patent system, the resulting problems faced by innovators in this country, and the need to elevate apportionment of damages to solve those problems, careful examination of the likely effects of an apportionment-centric system of damages have been lost."
The results of the 12-page report, entitled "The Likely Adverse Effects of an Apportionment-Centric System of Patent Damages," were announced on Wednesday during a press teleconference attended by Patent Docs. MAPP representative Stan Fendley, the Director of Legislative and Regulatory Policy for MAPP member Corning Inc., noted that the debate on patent reform, which has been fought by the IT and biotech/pharma industries, was missing an objective analysis of the possible effects of patent reform legislation. As a result, eleven companies and organizations formed MAPP, and commissioned Dr. Scott Shane (at left), a Professor of Economics at Case Western Reserve University, to prepare a report on the impact of apportionment of damages. In his report, Dr. Shane concludes that an apportionment-centric system of damages would have five specific adverse effects, including:
2. Decreasing the value of U.S. public companies by $38.4 billion to $225.4 billion;
3. Decreasing research and development spending in the U.S. by $33.9 billion to $66 billion per year;
4. Putting between 51,000 and 298,000 U.S. manufacturing jobs at risk; and
5. Favoring industries employing fewer people over those employing more people.
Reduction in the value of patented technology
Dr. Shane estimates that under an apportionment-centric system of damages, the value of U.S. patents would decrease by $34.4 billion to $85.3 billion. He arrived at this estimate by first determining how the amount of patent damages would change were patent reform legislation containing an apportionment of damages provision enacted. To do this, a randomly selected group of patent attorneys were surveyed and asked whether the apportionment of damages provisions in S. 1145 and H.R. 1908 would, if enacted, lead to an increase or decrease in damage awards. The group estimated that these provisions would lead to a 20-39% decrease in damage awards. Next, Dr. Shane calculated the value of U.S. patents by multiplying the average patent value ($93,463 to $118,988; as determined in three separate studies discussed in the report) by the total number of U.S. patents in force (1,838,242; as determined in a separate study). Finally, the expected reduction in damages was multiplied by the value of U.S. patents, since the report concludes that the value of a patent is a function of the amount of damages that one can collect in an infringement suit.
Reduction in the value of public corporations
Dr. Shane estimates that under an apportionment-centric system of damages, the value of U.S. public companies would decrease by $38.4 billion to $225.4 billion. He arrived at this estimate by taking the average of two different methodologies: one conservative and one liberal. Under the conservative approach, the portion of the value of public companies that can be attributed to patents (0.8-1.0%) is determined by dividing the value of U.S. patents in force that are held by public companies ($77.3 billion to $98.4 billion; determined using two separate studies) by the total value of U.S. public companies ($9.8 trillion). Therefore, under the conservative approach, a 20-39% decrease in 0.8-1.0% of the value of public companies that can be attributed to patents yields a reduction in the value of public companies of $15.5 billion to $38.4 billion. Under the liberal approach, which utilizes algorithms devised by Ocean Tomo, the value of public companies that can be attributed to patents is 11.3%. Therefore, under the liberal approach, a 20-39% decrease in 11.3% of the value of public companies that can be attributed to patents yields a reduction in the value of public companies of $225.4 billion to $431.2 billion. By taking the higher of the conservative range and the lower of the liberal range, Dr. Shane estimated that the value of U.S. public companies would decrease by $38.4 billion to $225.4 billion, which constitutes a reduction in value of 0.4-2.3%.
Decreased investment in research and development
Dr. Shane estimates that under an apportionment-centric system of damages, research and development spending in the U.S. would decrease by $33.9 billion to $66 billion per year. He arrived at this estimate by first determining that apportionment would lead to a 14.0-27.3% decline in R&D investment (as explained in more detail in the report), and then multiplying this decrease by U.S. R&D expenditures ($342.9 billion, $241.8 billion of which was paid by corporations; as determined in a separate study).
Adverse impact on manufacturing employment and compensation
Dr. Shane notes that in 2006, U.S. manufacturers had $5.02 trillion in total receipts and employed slightly less than 13 million people who received $757.5 billion in total compensation (as determined in a separate study). Using the 0.4-2.3% reduction in value calculation discussed above, and an estimated market value for manufacturing companies of $5.02 trillion (i.e., equivalent to total receipts), Dr. Shane determined that apportionment would reduce the value of U.S. manufacturing companies by $20 billion to $115 billion, which would translate to a loss in annual revenue of $20 billion to $115 billion. If U.S. manufacturers were to attempt to recover the lost revenue by cutting jobs, Dr. Shane estimates that 51,000 to 298,000 manufacturing jobs could be lost (as explained in more detail in the report).
Favors some industries over others
The report states that "[e]ffective patent reform needs to enhance innovation in all industries, not enhance innovation in one industry at the expense of innovation in another," concluding that "[t]he apportionment legislation fails to meet this condition because it benefits some industries at the expense of others." In the report, Dr. Shane describes two broad classes of industries: complex technology industries, in which products comprise numerous separate patentable elements, and discrete technology industries, in which products comprise a small number of patentable elements. Because each patent is more valuable to discrete technology industries, and further, because patented elements are more likely to make a disproportionate contribution to the value of discrete technology products, Dr. Shane contends that discrete technology industries would be more adversely affected by apportionment. Moreover, discrete technology industries employ 8.1 million people as compared with the 5.0 million employed by complex technology industries (as explained in more detail in the report). Thus, Dr. Shane concludes that apportionment would favor industries employing fewer people.
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