A controversial book is turning conventional patent wisdom upside down. Patent Failure, by James Bessen and Michael J. Meurer, has brought out both sides of the debate in an attempt to answer the question: Are patents worth the trouble? 

The conventional wisdom is, patents stimulate R&D investment, bring wealth to innovators, and encourage business and economic growth. But economists and law professors James Bessen and Michael J. Meurer, in their new book Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, are poking holes in the theory.

According to the authors, their findings, from a wide range of empirical evidence from American law, history and economics, are clear and conclusive: While patents provide incentives to invest in research and commercialization for most businesses, they do not provide predictable intellectual property rights – just costly disputes and expensive litigation. In fact, Bessen and Meurer claim that only in some industries (like pharmaceuticals) do patent benefits outweigh its costs. Citing figures in 1999 (the latest year with complete data), they concluded that patent litigation costs outpaced patent profits:

• Of the $8.4 billion in global profits that came to publicly traded US companies from patents in 1997(rising to $9.3 billion in 1999), two-thirds went to chemical and pharmaceutical companies
• Domestic US litigation costs (presumably patent litigation) rose from $8 billion in 1997 to $16 billion in 1999
• US patent litigation has increased from 2,318 new cases in 1999 to 2,830 new cases in 2006 (down from 3,075 in 2005) – and companies doing the most R&D are sued the most

The authors claim that while innovative firms are rewarded with patents and enjoy the expected value of patent ownership, they also face the risk of being defendants in litigation. Commercializing a new technology opens the door to a patent owner asserting a patent against the innovator. To avoid this risk, innovators respond by "licensing patents in advance that might be asserted against them – or designing a product that steers clear of possible patent assertion."

Several experts agree. With patents typically worth less than $10,000, it does not make much financial sense to file patents even if companies routinely do so. And even companies like IBM – with their hefty patent portfolios, billion-dollar R&D budgets, and hundreds of patent lawyers on staff – are still leery that patent litigation would stifle innovation. Blame has been cast on courts and lawyers for creating more and fuzzier property rights.

But here's the other side, clearly expressed by other experts including Joff Wild in a recent Intellectual Asset Magazine (IAM) article. First, Bessen and Meurer's data are at least eight years out of date and their figures from that time seem to have undervalued profits made from patented products. That is, if IBM was generating $1.5 billion a year from licensing its patents, adding the revenues of other aggressive patent licensors of the time like Texas Instruments and Lucent Technologies would give a number considerable greater than the $3 billion patent-generated profits cited by the authors.

Second, Wild asks if the drain on innovation can really be traced to the fact that litigation costs outweighed patent-generated profits - or to the reality that back in 1999 most US companies did not have the expertise on managing and maximizing their patent portfolios. Wild goes for the second explanation, saying that even now companies have to learn how to use the patent system to their advantage.

Third, Wild questions why Bessen and Meurer focused solely on publicly-quoted businesses and neglected to factor in the role of private companies, universities and start-ups in their assessment of the US patent system. According to Wild, patents are high priority with most technology licensing officers at US research institutions and venture capital firms.

Additionally, in his blog, another IP legal expert, Duncan Bucknell, counters the author's claims by mentioning Google – a $170 billion company built on patents. He also refers to the much cheaper and faster patent enforcement in countries outside the US. So that even if Bessen and Meurer are right about the US litigation landscape, "it is not the end of the story."

Even while Bessen and Meurer do not advocate the abolition of the patent system, their findings that patent litigation risks are creating disincentives for R&D are certainly food for thought and should drive home the fact that the patent system needs to be fixed, and fast. No less than America's economic health is at stake.