Patents protection is uniquely helpful for small, innovative businesses

Big, established companies typically build on their investment in distribution and brand while innovation often arrives as a result of imitation or acquisition.   Because new product attributes, often protected by IP law, have to be acquired—whether by purchase or imitation (e.g. YouTube, in the case of Google) — these larger corporations prefer that it be cheap.  Imitation and acquisition is cheaper   if there are no effective IP rights to be concerned about.   As a result, larger companies will typically call for reform that pushes too far against effective IP protection.

What is overlooked in the debate is that the policy goal should be economic growth through quality jobs, i.e. employment for the “knowledge worker” and investment in new businesses.  This brings into focus the effect of weakening IP protection on smaller companies.

Small businesses have been proven to be the most innovative.  The anecdotal evidence of world-changing  technology companies that started in a “garage” is borne out by statistics. The U.S. Small Business Administration, in March, 2009, reported that “[s]mall patenting firms produce 13 times more patents per employee than large firms do, and these patents are twice as likely as those from large firms to be among the one percent most cited [by] others in their patent applications.”

The latter statistic means these are quality patents or at the root of a larger technological wave of innovation. Therefore, it is the smaller companies that seek to file and obtain patents that are later judged pioneering.   But weakening of IP protection under the rubric of “patent reform” threatens to limit investment in these smaller, innovative companies and their likelihood of success in the face of well-healed   competitors who wish to free-ride on their achievements.

There are several proposed changes to U.S. patent law that will likely render IP law weak protection for small businesses.  These changes include a “race to the patent office” system for priority between competing inventors, increasing fee costs to small companies building an IP portfolio,  increasing the existing hurdles to prove infringement while giving imitators several opportunities to force small businesses to prove the validity of their inventions (see Sec. 5 of the Patent Reform Act of 2009).  These procedural changes will be readily exploited by imitators of technological innovation because of the sheer cost to defend against them: costs most small businesses are incapable of sustaining.

It is dangerous to put smaller, innovative companies in such a precarious position.  Smaller firms like those that produce quality patents represent a large fraction of high-tech jobs in the U.S. For example, in the U.S., 32 percent of jobs in computer-related services are in a firm with less than 100 employees.  (An International Comparison of Small Business Employment, Schmitt and Lane, Center for Economic Policy Research, August 2009).   To weaken IP rights for these smaller companies represents a threat to their existence because larger foreign companies will have more of an opportunity to exploit the inventions of these companies by imitation without payment.   This threatens the job growth that these smaller companies provide in this country.  And it should not be overlooked that the loss of engineering jobs goes hand in hand with the loss of other service jobs. If an innovative company is lost, not only do the engineering jobs go, but the support jobs as well.   Adopting policies that let these high-quality jobs go overseas is a breach of the contract between the Federal Government and the American worker made in the early 1990’s.