Every year, the U.S. economy suffers a consumer welfare loss of an estimated $25.5 billion because current patent law deters productive research, imposes administrative costs, and encourages excessive litigation, according to a new Phoenix Center study. These deadweight losses amount to over $200 for each U.S. household and equal 8.5% of the country's annual spending for research and development.

"Consumers are harmed by a patent system that grants patents too easily, makes it difficult for poor quality patents to be overturned, and provides fertile ground for 'patent trolls' to overburden our courts," said Lawrence J. Spiwak, President of the Phoenix Center and co-author of the study. "So long as our antiquated patent system does not account for the modern realities of today's high-tech marketplace, we will continue to impose an unnecessary brake on innovation in our economy."

Phoenix Center Policy Paper No. 30, Quantifying the Costs of Substandard Patents: Some Preliminary Evidence, estimates the consumer welfare losses that result from granting substandard patents in the United States with an equilibrium model that examines the impact that substandard patents have on the innovation process. The study uses an econometric model to estimate this research deterrence effect by quantifying the effect that substandard patents have on the issuance of valid patents in the United States. The study estimates that this effect costs the economy approximately $21 billion per year. Deadweight losses from administrative costs and excessive litigation due to substandard patents costs the administrative add an additional $4.5 billion annually.

"The presence of substandard patents deters legitimate innovation in the economy," said George S. Ford, Chief Economist of the Phoenix Center and study co-author. "In addition, litigation and administrative costs that result from granting substandard patents are wasteful from a social perspective. While our estimates are admittedly preliminary and are intended to be conservative, the analysis indicates the economic loss caused by substandard patents is large enough to warrant a serious debate about patent reform."

"Patents give patent holders monopolies, and when the law awards patents that have little or no social value, those monopolies harm consumers," said Thomas M. Koutsky, Phoenix Center Resident Scholar and study co-author. "Patent law is a balance between the welfare costs of these patent monopolies and the social gain from innovation, and our research indicates that the regime in the United States is out of whack."