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Washington Law Review

Abstract

Legislators and industry leaders claim that patent strength in the United States has declined, causing firms to innovate in foreign countries. Because, however, patent law is bound by strict territorial limitations, one cannot strengthen patent protection by innovating abroad; as a result, scholarship has largely dismissed the theory that foreign patents have any effect on where firms invent. In essence, then, there is a debate pitting industry leaders against scholarship about whether firms can use offshore innovation to secure stronger patent rights, influencing the rate of innovation. To resolve this puzzle, we offer a novel theory of patent rights—which we empirically test—to dispel the positions taken by both scholarship and industry leaders. Given that technology is generally developed in one country, the innovation process exposes the typical inventor to infringement claims only in that jurisdiction. In turn, we demonstrate that inventors have powerful, counterintuitive incentives to develop technology where patent rights are weaker and enforcement is cheaper. Specifically, it typically costs more to defend a patent infringement claim in the United States than to lose one in another country (the cost to litigate a patent in the United States averages about $3.5 million and royalty awards have surpassed $2.5 billion). Our findings suggest that industry advocates and patent scholars overestimate how much innovation strong patent protection generates while underestimating the deterrent effect of these high costs of patent enforcement. This empirical research contributes to the theoretical understanding of patent rights by shedding new light on this important, yet largely dismissed, dimension of where innovation takes place. We received invaluable support from international research organizations and patent attorneys working for top-tier law firms. Notably, the Global IP Project, a multinational research group spearheaded by Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, the leading global intellectual property law firm, and Darts-ip, an international organization dedicated to the study of global IP litigation, provided proprietary data. This enabled us to explore whether firms optimize value by placing research and innovation in countries with “better” patent laws. To verify our models, we interviewed notable patent attorneys practicing in the United States, Europe, and Asia.

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