capital required to establish semiconductor manufacturing capacity is an even more substantial barrier. Yet, in a study commissioned for this project, Ziedonis (2003) suggests that patent protection has been critical to the rapid growth in the number of semiconductor design (“fabless”) firms that do no manufacturing. It seems likely that patents have become a more important basis for raising venture capital for biomedical research applications, especially those arising from university activity (Henderson et al., 1999).

Increasing Costs

The direct costs of the patent system are significant, increasing, and in some cases may adversely affect innovation.

The direct costs associated with the acquisition, exercise, and defense of patents are examined further in Chapter 3. Here we simply enumerate some of them to support our proposition that the patent system’s evolution merits close attention. First, from the point of view of the inventor or firm applying for a patent, it is estimated that the average corporate U.S. patent prosecution now costs the applicant $10,000-$30,000 in fees. Legal counsel represents the vast majority of that amount, as fees paid to the USPTO are low and have been fairly stable since 1990. The costs at least to large entities of most elements of U.S. patent prosecution have been increasing at an annual rate of 10-17 percent, according to a survey of corporate and private practitioners conducted biannually by the American Intellectual Property Law Association (AIPLA). These figures should be interpreted cautiously, as they represent only two sets of observations over a few years and derive from a nonrandom survey of attorneys.

Corporate managers and attorneys agree that the costs of conflicts over patents have also increased rapidly. The median cost to each party of proceeding through a patent infringement suit to a verdict at trial is at least $500,000 where the stakes are relatively modest. Where more than $25 million is at risk in a patent suit, the median litigation cost is $4 million for each party, according to the AIPLA survey results. Moreover, litigation occupies significant time and attention of business managers and technical personnel, not merely in-house and external counsel, in deciding corporate strategy, participating in depositions, and testifying in court. This process is particularly burdensome for small firms and start-ups with fewer managerial personnel and less access to capital finance (Lerner, 1995). Thus, the direct and opportunity costs of litigation may affect the rate of innovation in ways that are hard to measure or even detect.

A neglected and largely undocumented cost of the patent system is associated with working out licensing arrangements or negotiating royalties or simply fending off threats of infringement. This was highlighted in the Hall and Ziedonis interviews of semiconductor company executives as a significant cost of the current patent-intensive cross-licensing system in that industry despite its relative effectiveness in avoiding the far higher costs of litigation (Hall and Ziedonis, 2001).

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