“How do Patents Affect Follow-On Innovation: Evidence from the Human Genome,” B. Sampat & H. Williams (2014)

This paper, by Heidi Williams (who surely you know already) and Bhaven Sampat (who is perhaps best known for his almost-sociological work on the Bayh-Dole Act with Mowery), made quite a stir at the NBER last week. Heidi’s job market paper a few years ago, on the effect of openness in the Human Genome Project as compared to Celera, is often cited as an “anti-patent” paper. Essentially, she found that portions of the human genome sequenced by the HGP, which placed their sequences in the public domain, were much more likely to be studied by scientists and used in tests than portions sequenced by Celera, who initially required fairly burdensome contractual steps to be followed. This result was very much in line with research done by Fiona Murray, Jeff Furman, Scott Stern and others which also found that minor differences in openness or accessibility can have substantial impacts on follow-on use (I have a paper with Yasin Ozcan showing a similar result). Since the cumulative nature of research is thought to be critical, and since patents are a common method of “restricting openness”, you might imagine that Heidi and the rest of these economists were arguing that patents were harmful for innovation.

That may in fact be the case, but note something strange: essentially none of the earlier papers on open science are specifically about patents; rather, they are about openness. Indeed, on the theory side, Suzanne Scotchmer has a pair of very well-known papers arguing that patents effectively incentivize cumulative innovation if there are no transaction costs to licensing, no spillovers from sequential research, and no incentive for early researchers to limit licenses in order to protect their existing business (consider the case of Farnsworth and the FM radio), and if potential follow-on innovators can be identified before they sink costs. That is a lot of conditions, but it’s not hard to imagine industries where inventions are clearly demarcated, where holders of basic patents are better off licensing than sitting on the patent (perhaps because potential licensors are not also competitors), and where patentholders are better off not bothering academics who technically infringe on their patent.

What industry might have such characteristics? Sampat and Williams look at gene patents. Incredibly, about 30 percent of human genes have sequences that are claimed under a patent in the United States. Are “patented genes” still used by scientists and developers of medical diagnostics after the patent grant, or is the patent enough of a burden to openness to restrict such use? What is interesting about this case is that the patentholder generally wants people to build on their patent. If academics find some interesting genotype-phenotype links based on their sequence, or if another firm develops a disease test based on the sequence, there are more rents for the patentholder to garner. In surveys, it seems that most academics simply ignore patents of this type, and most gene patentholders don’t interfere in research. Anecdotally, licenses between the sequence patentholder and follow-on innovators are frequent.

In general, it is really hard to know whether patents have any effect on anything, however; there is very little variation over time and space in patent strength. Sampat and Williams take advantage of two quasi-experiments, however. First, they compare applied-for-but-rejected gene patents to applied-for-but-granted patents. At least for gene patents, there is very little difference in terms of measurables before the patent office decision across the two classes. Clearly this is not true for patents as a whole – rejected patents are almost surely of worse quality – but gene patents tend to come from scientifically competent firms rather than backyard hobbyists, and tend to have fairly straightforward claims. Why are any rejected, then? The authors’ second trick is to look directly at patent examiner “leniency”. It turns out that some examiners have rejection rates much higher than others, despite roughly random assignment of patents within a technology class. Much of the difference in rejection probability is driven by the random assignment of examiners, which justifies the first rejected-vs-granted technique, and also suggested an instrumental variable to further investigate the data.

With either technique, patent status essentially generates no difference in the use of genes by scientific researchers and diagnostic test developers. Don’t interpret this result as turning over Heidi’s earlier genome paper, though! There is now a ton of evidence that minor impediments to openness are harmful to cumulative innovation. What Sampat and Williams tell us is that we need to be careful in how we think about “openness”. Patents can be open if the patentholder has no incentive to restrict further use, if downstream innovators are easy to locate, and if there is no uncertainty about the validity or scope of a patent. Indeed, in these cases the patentholder will want to make it as easy as possible for follow-on innovators to build on their patent. On the other hand, patentholders are legally allowed to put all sorts of anti-openness burdens on the use of their patented invention by anyone, including purely academic researchers. In many industries, such restrictions are in the interest of the patentholder, and hence patents serve to limit openness; this is especially true where private sector product development generates spillovers. Theory as in Scotchmer-Green has proven quite correct in this regard.

One final comment: all of these types of quasi-experimental methods are always a bit weak when it comes to the extensive margin. It may very well be that individual patents do not restrict follow-on work on that patent when licenses can be granted, but at the same time the IP system as a whole can limit work in an entire technological area. Think of something like sampling in music. Because all music labels have large teams of lawyers who want every sample to be “cleared”, hip-hop musicians stopped using sampled beats to the extent they did in the 1980s. If you investigated whether a particular sample was less likely to be used conditional on its copyright status, you very well might find no effect, as the legal burden of chatting with the lawyers and figuring out who owns what may be enough of a limit to openness that musicians give up samples altogether. Likewise, in the complete absence of gene patents, you might imagine that firms would change their behavior toward research based on sequenced genes since the entire area is more open; this is true even if the particular gene sequence they want to investigate was unpatented in the first place, since having to spend time investigating the legal status of a sequence is a burden in and of itself.

July 2014 Working Paper (No IDEAS version). Joshua Gans has also posted a very interesting interpretation of this paper in terms of Coasean contractability.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: