Tuck School of Business | Who wins and who loses when IP protection weakens?

One of the fundamental legal principles in the United States is the protection of the intellectual property of authors and inventors.

This protection derives from the Patents and Copyright Clause of the Constitution, which grants Congress the power “to promote the progress of science and useful arts, by guaranteeing for a limited time to authors and inventors the right exclusive on their respective writings and discoveries”. Congress first codified patent protection in the Patent Act of 1790. Section 101 of the most recent Patent Act lists the subject matter which may be patented: “any process, machine, manufacture or new and useful composition of matter, or any new and useful improvement thereof.

Much of the Supreme Court’s case law has interpreted the Patent Act over the years, creating exceptions to the law and further clarifying the general language of the law. In Alice Corporation v. CLS Bank International in 2014, the Court dropped something of a bombshell on the patent law landscape. It ruled that patent applications for computer-implemented inventions – including systems, machines, processes and articles of manufacture – are not eligible for patent protection if they are simple abstract ideas that don’t turn into something new. The Alice decision immediately threatened companies in several patent-intensive industries, such as data processing, software and measurement or microbiology and enzymology testing, challenging their existing patents and the companies’ ability to apply them. get new ones.

While the Alice decision has been the subject of numerous studies by legal scholars, the ripple effects of the decision on business and innovation have been difficult to quantify. That’s the challenge Professor Gordon Phillips and his colleagues at Tuck take up in “Intellectual Property Protection Lost and Competition: An Examination Using Machine Learning”, a new working paper that uses a new machine learning methodology to analyze a mine. patent data. The article examines how the Alice decision may impact businesses in two main areas: by potentially revoking or denying patents that existed or were applied for prior to the decision, and by undermining future patent, growth in sales and profitability.

Regarding post-Alice changes in sales growth, profitability, and firm value, they found an asymmetric impact: big firms win and small firms lose. Large exposed companies gain in sales and market valuation, while smaller companies see their operating margins and market valuation shrink.

To determine which companies might be vulnerable to the new criteria in the Alice decision, Phillips and his co-authors reviewed the text of patents and patent applications between 1994 and 2014. This yielded 3.8 million patents, so they limited their analysis to these patents alone. that have the same cooperative patent classification as patent applications that were rejected after 2014 under the Alice criteria. This reduced their sample size to 642,678. Next, they used “a deep learning-based language model called BERT to predict the probability that each of the patents granted before Alice in the sample could be invalidated by the Alice decision,” the authors write. The BERT model was released by Google in 2019 and stands out for its ability to process words in relation to all the other words around them, thus helping to understand the context of words.

Once they identified firms vulnerable to the Alice decision, the co-authors examined the impact of the loss of intellectual property protection on innovation, performance, competition, and mergers and acquisitions. businesses. They found that post-Alice patents decline significantly for both large and small companies, and a significant increase in R&D for small companies. “These findings are consistent with attempts by small firms to rebuild their innovation portfolio and rebuild product differentiation after losing intellectual property protection on their existing patents,” the authors write.

Gordon Phillips is the Laurence F. Whittemore Professor of Business Administration at Tuck. He teaches the optional course on venture capital and private equity.

Regarding post-Alice changes in sales growth, profitability, and firm value, they found an asymmetric impact: big firms win and small firms lose. Large exposed companies gain in sales and market valuation, while smaller companies see their operating margins and market valuation shrink.

What could explain this asymmetric impact? The authors show that this is due to changes in competition for small firms – including increased venture-funded entry into their market and lost product differentiation – and limited legal options to replace lost business. protection of intellectual property. Large companies affected were also less likely to buy smaller companies. They documented these small companies using non-competition and non-disclosure agreements as substitutes for patent protection.

Since the Alice decision particularly harms small businesses, the document highlights “the benefit to small businesses of disambiguating Alice or even repealing Alice as a recent bipartisan bill attempted to do” , they conclude. They also note that Alice has some advantages and the loss of intellectual property protection – there is increased competition and fewer lawsuits targeting large companies by non-producing entities that some commentators have called patent trolls.