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USPTO ‘lottery’ creates huge economic advantage for winners

July 20, 2017

In a recent paper from the National Bureau of Economic Research (NBER), the authors contend the U.S. Patent Office (USPTO) has created a lottery-type system that creates great economic benefit for startups and other patent-seekers that drew lenient patent examiners. In What Is A Patent Worth? Evidence from The U.S. Patent “Lottery,” the authors found that patent applications by startups that were reviewed by lenient USPTO examiners had, on average, 55 percent higher employment growth and 80 percent higher sales growth five years later. Those startups also pursue more and higher quality, follow-on innovation. These results are, in large part, due to increased access of funding from VCs, banks, and public investors.

After reviewing nearly 35,000 first-time patent applications filed by U.S. startups between 2001 and 2013, the authors came to the stark conclusion that the aforementioned economic benefits of winning a patent is in large-part due to random chance. While completing their study, the authors found that one feature of the USTPO’s review process has created a lottery-type system – individual review. During the review process, patent are assigned to individual reviews some that are more lenient than others with regards to granting the patent. Since patents are randomly assigned, the impact of being assigned to a lenient review (those that approve patents at a higher rate than the overall average for all USTPO reviews) has created an environment were “some applicants win patent rights while others do not, simply because the former were lucky enough to draw more lenient examiners.”

In addition to the economic impact of winning a patent, the authors also found that first patent grants also increase both the number of future patents granted by 49 percent and the quality of those patents (with the average number of citations per subsequent patent increasing by 26%).

With regards to the attraction of capital, the authors found that a patent increases a startups chance of securing funding from VCs by 47 percent and a collateralized loan by 76 percent. For companies that were either started by first time entrepreneurs and/or located in areas with low VC activity, a first-time patent grant was especially effective in facilitating a VC investment. The presence of a patent also more than doubles the odds of the startup attracting funding through an IPO.

While the authors provide no clear solution to address the lottery-type system, the authors conclude that the any reform of the U.S. patent system must take into account the potential risk of stifling growth by negatively impacting the availability of capital for innovative startups. 

patents, federal agency