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More Evidence Is In—Alice Has Been Good For R&D

Tuesday marked one milestone—utility patent number 10,000,000.  But it also marked a far more important milestone—the 4-year anniversary of the Alice decision.  Looking back on those 4 years, Alice has been a clear success in eliminating patents that never should have issued.  It’s had a very limited impact on patent prosecution, with most applications entirely unaffected and affected applications as likely to be allowed as not.  And a recent paper has provided evidence that Alice’s impact on R&D investment has been positive.

“Patents v. Innovation”

The paper by Sridhar Srinivasan, titled “Patents v. Innovation: Evidence from Public Firms,” uses the Alice decision as a natural experiment to examine the impact of the decision on companies that were focused on the business method patents most affected by Alice as compared to companies that were focused on other technologies.  By correlating intensity of business method patent activity to R&D expenditures, the paper can draw conclusions about whether Alice has had a positive effect on the industries most affected by the decision.

The most interesting graph is Figure 6.  Figure 6 illustrates how R&D intensity—as obtained from Compustat data—changes based on the company’s exposure to Alice-type patents.1 Companies with the lowest exposure represent a baseline level of change.

Graph depicting the ratio between Alice exposure and R&D

Obviously, companies with a high proportion of business method patents would feel some impact from Alice.  However, that impact is minimal—they expend almost as much money on R&D as before, suggesting that those companies simply shifted their R&D away from R&D on business methods.  But companies in the middle experienced significant growth in R&D investment. At the same time, companies generally filed less business method patents, particularly companies that had not previously been focused on that type of patent.  

Innovation Wins

The paper suggests a primary mechanism for this is the ability of companies to shift spending away from defensive patenting into R&D.  In other words, with the risk of being sued on a low quality patent reduced by Alice, firms were both able and willing to spend more money on R&D.

Contrary to the predictions at the time of Alice and contrary to unsupported statements made more recently, Alice has not only not been “the death of hundreds of thousands of patents” or “devastated” research, but in fact appears to have helped the software industry and R&D in general develop even faster.

  1.  Exposure is defined as the number of business method patents filed as a percentage of all patents filed by a given company.

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