New Building Blocks for Jobs and Economic Growth

New Building Blocks for Jobs and Economic Growth
Intangible Assets as Sources of Increased Productivity and Enterprise Value

A conference presented by
OECD, Athena Alliance, The Conference Board, Kauffman Foundation, and US National Academies
hosted by the Georgetown Center for Business and Public Policy

May 16 and 17, 2011
Rafik B. Hariri Building,
Georgetown University, Washington, D.C.


Monday May 16:

and welcome

(8:45 – 9:00)

the conference is all about: Kenan Jarboe, President, Athena Alliance

remarks and introduction: Richard Boucher, Deputy Sec. General, OECD

Lohrfink Auditorium, 2nd floor


: (9:00 – 9:45)

Bernanke, Chairman, Board of Governors of the Federal Reserve System

Lohrfink Auditorium, 2nd floor


roundtable discussion
: (9:45 – 11:15)

Moderator: Jon Spector, CEO, The
Conference Board

Otaviano Canuto,
Vice President, Poverty Reduction and Economic Management Network, World Bank  

Howell, CEO, Corporate Flight Management

Edward Jung, Chief Technology Officer and Co-Founder of
Intellectual Ventures

Lisa Lynch, Dean, Heller School for Social Policy and
Management, Brandeis University

Carl Shapiro, White House Council of Economic Advisors

David Stafford, COO, Michelin Americas Research Company

Manuel Trajtenberg – Professor and
former Head of Israel’s National Economic Council

Lohrfink Auditorium, 2nd floor


Break (11:15 – 11:30)

Coffee available on 1st floor


briefing rounds
(11:30 – 12:30)

Classrooms 1st floor: 130,
145, 155, 160

of workshop process: participants to go to their “start” room as
assigned. Participants in each workshop will receive a briefing on the topics
to be covered in all the other workshops.


Lunch (12:30 – 1:15)

Fisher Colloquium, 4th floor


group sessions #1
(1:15 – 4:15)

Global Competition
and Collaboration

Competitiveness, Jobs and Growth

Emerging Measures for
Strategic Management

Next-Generation Innovation Ecosystems

Classrooms 1st floor: 130,
145, 155, 160

to go to their workshop room as assigned.

managed breaks – coffee available 1st


the same workshops repeat on the morning of day two, but with a different group
of participants.  Each conference
attendee participates in two separate workshops during the course of the two


back and synthesis conversation
(4:15 – 5:15)

Lohrfink Auditorium, 2th floor


and Dinner
(6:30 – )

Paul Kedrosky, Kauffman Foundation

Senator Chris Coons (DE)

Commons, 3rd floor

Dinner: Fisher Colloquium, 4th floor


Tuesday May 17:

to day two
(8:45 – 9:00) Kenan Jarboe, Athena

Fisher Colloquium, 4th floor


group sessions #2
(9:00 – 12:00)

Global Competition
and Collaboration

Competitiveness, Jobs and Growth

Emerging Measures for
Strategic Management

Next-Generation Innovation Ecosystems

Classrooms 1st floor: 130,
145, 155, 160

to go to their workshop room as assigned.

managed breaks – coffee available 1st

the same workshops as afternoon of day one, but with a different group of
participants. Each conference attendee participates in two separate workshops.


and report out
(12:00 – 12:45)

Fisher Colloquium, 4th floor


Cafe rounds

(12:45 – 1:45)

Facilitated small group conversations
on conference topics

Fisher Colloquium, 4th floor


summary session
(1:45 –2:45)

Moderator: Lesa Mitchell, Vice-President
for Innovation, Kauffman Foundation

Rebecca Blank,
Under Secretary of Commerce for Economic Affairs, Department of Commerce,
United States

Tony Clayton, Chief Economist, Intellectual Property Office,
United Kingdom

Raine Hermans, Director,
Strategic Intelligence, TEKES – the Finnish Funding Agency for Technology and

John Mayo, Executive Director, Georgetown Center for
Business and Public Policy

Ken Warwick, Chair, Committee on Industry, Innovation and
Entrepreneurship, OECD

Fisher Colloquium, 4th floor


(2:45 –3:00)

Director, Directorate
for Science, Technology and Industry (STI), OECD

Cohon, Chairman, Athena Alliance

Fisher Colloquium, 4th floor


Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth

Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth
June 23, 2008
A National Academies’ Conference
in conjunction with Athena Alliance

Investment in intangibles, according to a 2006 Federal Reserve Board staff analysis, exceeds all investment in tangible property and, if properly accounted for, would raise US productivity growth by 20 percent for the period 1973-1995. These assets — computer software, R&D, intellectual property, workforce training, brand equity and organizational capabilities — now account for three quarters of economic activity. Increasingly, they are a principal driver of the competitiveness of US-based firms, economic growth, and opportunities for American workers. Some intangibles, like intellectual property, are being securitized, auctioned, and traded; a few years ago no one contemplated the existence, let alone the extent, of such “technology markets.” Yet despite these developments many intangible assets are not reported and are treated in the national economic accounts as expenses rather than investments. And there is no coordinated national strategy for promoting intangible investments apart, perhaps, from R&D.

This one day conference, hosted by the National Academies’ Board on Science, Technology and Economic Policy (STEP), in cooperation with the Committee on National Statistic and sponsored by the Commerce Department’s Bureau of Economic Analysis in response to a congressional directive, includes discussions of what are intangibles and how they work, how intangible investments compare and contribute to growth, how intangibles are created and used by firms, and what the government’s role should be in supporting markets and promoting investment in intangibles.

For an agenda, click here. Presentations are available online at the STEP website. The presentation by Dr. Jarboe of Athena Alliance: US Policies for Fostering Intangibles, outlines the size of the federal government’s investments in intangible assets and outlines a number of policy steps that can be taken to foster the creation and utilization of intangible assets in the US economy.

Mission Intangible: A Conference on the Financial Impact of Extra-financial Information

Mission Intangible: A Conference on the Financial Impact of Extra-financial Information
December 14, 2007
Athena Alliance and the Intangible Assets Finance Society

There’s more to corporate performance than what can be gleaned from traditional financial reporting. We know that information on intangibles (also know as “extra-financial” information) plays a major part in investment decisions. One study found that non-financial criteria constitute, on average, 35 percent of the equity investor’s portfolio allocation decisions. But, it is not always readily available. Another study reported that over half of the information investors want is not reported on the balance sheet. This one day conference held in the heart of Wall Street brought together a number of experts and practioners. Dr. Cynthia A. Glassman, Undersecretary of Commerce for Economic Affairs, and former Commissioner of the U.S. Securities and Exchange Commission, was the keynote speaker. Her keynote speech is available online.

For summaries of the conference, see Intangible Asset Finance Society Conference Solidifies Understanding of Emerging Asset Class and IAFS seeks to spread the intangible asset message to the wider business community – Intellectual Asset Management.

The Dragon and the Elephant: Understanding the Developing Innovation Capacity in China and India

The Dragon and the Elephant: Understanding the Developing Innovation Capacity in China and India
September 24 and 25, 2007

Athena Alliance and the Board on Science, Technology, and Economic Policy (STEP) of the National Academies, in collaboration with the Urban Institute, the State University of New York Levin Graduate Institute, and Woodrow Wilson International Center for Scholars, hosted a conference comparing and contrasting India and China’s growing science and technology capacity. Topics included broad areas such R&D, education, financing and the legal and regulatory environment as well as key industrial sectors such as aerospace, pharmaceuticals, information technologies, and energy. The agenda and the presentations are available online. The summary of the conference can be read online or downloaded from the National Academies website:

Innovation and Design: Keeping America Competitive

a Congressional briefing luncheon


Roger Martin, Professor of Strategic Management and Dean of the Rotman School of Management, University of Toronto

John W.
Leikhim, Director, Corporate Innovation Capability, Procter & Gamble

by Congressman Dave Hobson (OH-7)

hosted by
Athena Alliance and
the Congressional
Economic Leadership Institute

Held at the Rayburn House Office Building, Washington, DC
June 14, 2006

Click here to download a PDF
of this report.

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Click here to view Dr. Martin’s full remarks.

Click here to view Mr. Leikhim’s full remarks.


session began with welcome and preliminary remarks by Dr. Kenan Jarboe,
President of Athena Alliance, followed by David Klaus, President of CELI, who
introduced Congressman Hobson.


Rep. Hobson opened the seminar by noting the large number of young
people in attendance, saying that America’s
future is in science and it is important that more young people become involved
in science. After briefly describing what Congress was doing to fund science
and technology, he turned to the focus of the seminar: what makes American
companies fertile ground for innovation, design, and product development and
the policies and programs Congress should consider to support them.


Rep. Hobson introduced Professor Roger
Martin, Dean of the University of Toronto’s
Rotman School of Management, who is leading a ground-breaking effort to
redefine business education for the new design-based economy. Dr. Martin is a
leading expert in using design as a way of approaching and sustaining
innovation. Rep. Hobson then introduced John Leikhim, Director of Corporate
Research and Development Innovation and Capacity at Procter and Gamble. Mr.
Leikhim has served as the company’s Director of International Technology
Coordination, Director of New Business Development Organization, and Director
of Corporate Innovation Capacity. Rep. Hobson said Mr. Leikhim would share how
design and innovation really happen in the corporate setting and what types of
policies can strengthen America’s


Dr. Martin began by talking about challenges to the competitiveness
agenda, especially in a world that is becoming more focused on innovation and
design, and suggested how the agenda could be improved.


He said he is especially fascinated
by the difference between the approach scientists take to their work and the
approach they take in the world, where they are less scientific—if not
superstitious—in their thinking about the American economy. If we are to have
an innovation policy that best serves the nation, he asserts that we need to
think more factually about what is happening in the economy.


As an example, Dr. Martin
challenged the National Academy of Science report called Rising Above the Gathering Storm. The report asserts that emerging
countries are catching up to the United States
in scientific and technological know-how. To prevent the United States from
falling behind, the report calls for greater
government support for science and math education, more federal funding for
science and engineering research, greater support for higher education, and
more generous tax credits for corporate R&D.


This presents a vision of the U.S.
economy as losing ground economically, where the high-tech sector is key to economy vibrancy.


The report contends this vibrancy
is threatened because each year China
produces 600,000 engineers, India
produces 350,000, and the United States
produces just 70,000. Dr. Martin said it is true that the Chinese and India
economies have grown as a percentage of the world economy, as their populations
have grown. However, he said, the real numbers of scientists and engineers at
the undergraduate level are closer to 350,000 for China,
112,000 for India,
and 137,000 for the United States.
So rather than the United States
being way behind at the index as the percentage to population, we see the United
States. at 100, China
at 58, and India
at 22. In addition, America
employs one-third of the world’s science and engineering researchers; 35
percent of science and engineering articles are published in America;
and the United States
spends 40 percent of the world’s R&D dollars. So it is hard to argue that
the United States
is not strong and leading the world in science and engineering.


Second, Dr. Martin argued that,
contrary to popular opinion, in the United
States the high-tech sector is tiny compared
to the overall economy. The six sectors of information technology,
communications technology, aerospace vehicles, aerospace spending, medical
devices, and pharmaceutical and biotech account for about 1.96 percent of U.S.


compares to one single sector—financial services—which at its narrowest
definition is 3.23 percent of all jobs (which is 65 percent bigger than the high-tech
sector) and at a broader definition is actually 6 percent of jobs (or three times bigger than all the high-tech
sectors combined).


is also the widely held belief that high-tech sectors are important because
they provide high-wage jobs. In fact, financial services wages are 13 percent
higher than high-tech sector wages.


In addition, there is the concern
that government funding for R&D is declining. Absolute government R&D
spending has actually increased since 1953, but has fallen as a percentage of
the economy. Private-sector spending has increased and become the real driver
of R&D.


Thus, it is hard to support the
conclusion that the United States
is way behind in science and technology and that increased support of the
high-tech sector is needed.


Rather than focus on high tech, Dr.
Martin said, broad-based innovation is much more important to the economy.
Research show that the largest increases in productivity in the 1990’s came
from six industries: wholesale trade,
retail trade, securities (financial sector), semiconductors, computer
manufacturing, and telecommunications. He noted that wholesale trade, retail
trade, and securities cannot be defined as high-tech sectors. He also noted
that productivity research shows these sectors are highly competitive and that
this competition is a key feature for productivity growth.


Another factor for innovation is
producing business leadership. Among America’s
seven global leaders that are high-tech companies, only two of their CEOs have
any scientific training of any sort. According to Dr. Martin, people outside America
recognize better than we do our massive investment in business education, with
22 percent of undergraduate degrees and 25 percent of master’s degrees in the
discipline of business.


Thus, Dr. Martin sees the policy
recommendations of the various pieces of innovation legislation as incomplete. Investing
in R&D is fine, but more needs to be
done to meet the competitiveness challenges.


He specifically cautioned against
the recommendations on R&D tax credit. For many years, he said, Canada has
had one of the world’s most generous R&D tax credit regimes, returning 25
percent of R&D spending compared to just 6 percent for America. Yet Canada’s
amount of corporate spending on R&D is among the worst in the OECD. He said
there is absolutely not a shred of proof anywhere in the world that increased
R&D spending is based on the R&D tax credit.


would be more helpful for policy is the explicit recognition that innovation is
in the other 98 percent of the economy, not the 1.96 percent of the economy represented
by the high-tech sector. Given this, innovation policy needs to focus on companies
like Procter and Gamble, which are in that 98 percent that we believe is
responsible for economic prosperity. Business model innovation is as important
as R&D-driven innovation. Many innovation companies, such as Wal‑Mart,
Dell, Federal Express, Southwest Airlines, and Vanguard Financial, are not seen
as innovative companies because they don’t do a lot of what is traditionally
seen as R&D. But this is the kind of innovation that makes a difference.


Rather than focus on R&D, tax
policy should focus on business investment. America
is a low-tax country (the third lowest in the OECD), but has a shockingly high taxation of business investment
(second highest in the OECD—only
Canada is higher). Right now, the U.S.
and Canadian tax systems discourage business investment. Sweden actually has a much smarter tax system than the United States or Canada, with a margin effective tax rate on business
investment of 12 percent.


Dr. Martin closed by stating that
he thought the overall U.S.
competitiveness agenda was good, but dominated more by superstition than fact.
The United States
could create a much better policy if people would take a closer look at what
the economy actually is like and base their policies on those facts.




Mr. Leikhim opened his presentation by pointing out that innovation
is not just a good idea, but rather ideas that consistently translate into
great products and services that improve lives and win in the global
marketplace. Systematic, sustained innovation is the foundation of our economic
engine—not only for P&G, but also for America


Mr. Leikhim described P&G’s
innovation as “a kind of magic that becomes part of people’s lives”; that is why, even though P&G is a
knowledge-based company, it does not spring to mind when people think of
cutting edge science and technology. Innovation is P&G’s life blood of
growth, and the company invests over $2 billion in R&D each year—placing
its R&D spending in the top 15 U.S.
companies outside the pharmaceutical industry. While P&G taps the
innovation source of the globe, the United
States is the heart of its R&D
enterprise. P&G’s R&D
competencies include chemistry, engineering, material sciences, biological sciences,
medicine, veterinarian science, and mathematics—a breadth driven by the
company’s purpose of providing consumers with a range of products that improve
the quality of their lives.


Mr. Leikhim used the example of
Crest White Strips, explaining that to develop the product P&G worked
backwards from the consumer need for a convenient, affordable solution to
whiter teeth. Their R&D solution resulted in a new product category that
went from zero to $300 million in two years—launched from the United
States to the global market. P&G’s growth from this and other product
innovations fuels growth across the U.S.
economy, generating business for its domestic suppliers totaling $8 billion a


According to Mr. Leikhim, P&G
believes the key to success in today’s global marketplace is using
innovation—not only in products and technology, but also in the supply chain
business model—to decrease the time it takes to bring a product to market. The
global marketplace is characterized by rapid change, the elimination of
geographic boundaries, and fluid global-based abilities—and founded increasingly on models of open


As Tom Friedman described in The World is Flat, many countries with
low-income markets are now an excellent source of quality, low-cost manufacturing,
but these markets are also showing rapid geographic growth in
innovation-support industries. And beyond manufacturing and services, these
markets are providing new pure innovation services in material, products, and
manufacturing processes.


Mr. Leikhim said the harsh
reality is that if U.S.
companies don’t keep sustaining innovation at the forefront, economic growth is
going to happen somewhere else. Other nations are investing in both leading
edge research and on expanding their talent pool. We need to form collaborative alliances in
which academia and industry, enabled by government, drive innovation together.
He said the National Science Foundation has the potential to be the premier
federal resource for creating high-tech products and stimulating our nation’s
innovation leadership.


For example, Mr. Leikhim said,
the development of biologically derived raw materials from renewable
resources—biopolymers and biofactors from plants—provides a win for both U.S.
agriculture and consumers seeking sustainable materials. For a large commercial
enterprise like P&G, the present and future are driven by such creative
scientific thinking. However, the National Academy of Sciences, in Rising Above the Gathering Storm, and
the Council on Competitiveness, in Innovative
, outline problems facing the United
States that P&G believes need to be
addressed to maintain our leadership in innovation.


Mr. Leikhim said the NAS report
makes a compelling case for the decline in U.S.
science, technology, engineering, and math capabilities, reflected in K-12
education, a shortage of university graduates and basic research staff in these
fields, and somewhat decreased attention to these fields in society as well as
public policy. NAS recommended changes to education, research, higher
education, and economic policy that are captured in several bills before
Congress. P&G supports these initiatives because investment in innovation
will boost the economy and strengthen the company’s ability to succeed
effectively in the rapidly changing global environment.


According to Mr. Leikhim, we need
new approaches to collaboration among academia and industry, enabled by
government policy, which maximize the strength in the university and the
corporate R&D communities. Business input can mean studying the correct
target, increasing the probability of pulling emerging technology into the

Mr. Leikhim concluded by defining
three major shared responsibilities for addressing the innovation challenge:


Creating interest and passion in physical
science and mathematics through high-quality education.

Sustaining the creation of important new
technology platforms in order to create “new-to-the-world” businesses through
leadership and basic research.

Bringing innovative talent and innovative
research together to transform scientific advancement into practical new
products and services, launched through the creation of knowledge-based



Rep. Hobson then opened the session to questions. He began by
commenting that over the last 25 years there has been a shift among
corporations away from the research portion of R&D toward more of just the
development part. Corporations are on a much shorter timeframe. The federal
government has to pick up that research, in the national labs and in
collaboration with the universities. But even government research, such as the
Defense Advanced Research Projects Agency (DARPA), which was a premier
long-term research agency, have shifted to a shorter-term view. He thinks that
is the basic problem for the future of competitiveness in this country: how we
fund it. His congressional committee has taken on that challenge and
dramatically increased the investment in science.


A participant said the number of
business degrees coming out of China
and India may
be more important than the number of science degrees. He asked the speakers to
comment on the fact that India
and China are
increasing the number of business graduates—and whether the increase in trained
managers is a threat to U.S.
competitiveness, given the earlier comments on the importance of business


Dr. Martin replied that the
Chinese are revving up very quickly, increasing from zero not too long ago to
about 12,000 a year with a goal of 33,000 in three years. America
is at roughly 140,000. He thinks China
and India
absolutely are getting their economies together and increasing their investments.
But he is nervous about the United States
investing in generic science-based research or education as the answer. The
answer is in creating more people that can do the kind of conceptual, creative,
design-oriented thinking which will be needed in the future—not in playing the
old game.


Rep. Hobson said it would be
interesting to know how many of those people earning degrees in foreign
countries are trained by people who received an MBA in the United
States. Dr. Martin noted that the Chinese
government’s policy for Executive MBAs is that 40 percent of the courses must
be taught by non-Chinese professors. The schools are thus required to form a
joint venture with business schools outside China
to bring in outside knowledge.


Dr. Jarboe expressed concern that
we need people who are not only trained in business and technology, but also
have a creative side. He mentioned the new Stanford
Design School
(D-School) and the Illinois Institute of Technology and asked how the Rotman
School is combining those areas.
Dr. Martin said we have to meld together the best of design education,
engineering education, and business education. He is doing that right now along
with David Kelly, the Design Engineering Professor at Stanford, and Patrick
Whitney, the Director of the Institute
of Design at the Illinois Institute
of Technology. They are working together to forge a relationship between those
disciplines. He thinks we need to produce people who have design business and
technology capabilities wrapped into one—the new 21st Century
skills—and it will be a long time until China and India will be able to catch
up with us in this area.


Another participant commented on
some of the dramatic changes occurring in business schools and asked what can
be done to derive innovation generally from higher education, considering the
reductions in science and engineering funding. Dr. Martin said funding things
like the Stanford D-School—an actual integrative effort—would be one. At the Rotman
School, all the funding to do
integrative thinking comes from the private sector because public funding tends
to be based on peer review, and therefore funds only what has already been
done. He added that money for the D-School comes from the founder of the German
software company SAP. So he thinks the government can get in the business of providing
funding for integrative activities at the intersection of technology/design/business.


A participant asked about the
significance of a German company funding the D-School and whether there were
institutional mechanisms for this type of funding—which led one participant to
make a comment about Congressional earmarks.


Dr. Martin responded that one of
the most important things was to provide encouragement for these types of activities.
Concerning innovation in business schools, he believes that there is innovation
because the schools get ranked by a number of sources, such as Business Week, US News & World Report, and The Wall Street Journal. This type of information—such as requiring
airlines to post on-time departures and lost baggage statistics—is always a
spur to innovation.

Rep. Hobson commented on how the
initial requirement for MBAs and PhDs drives over-specialization. He noted that
when he was a young mail boy at P&G, the company had a program—called
Diamonds in the Rough—to identify outstanding and innovative thinkers who might
not have strong formal credentials. He said the military tries to do that now,
giving an opportunity to people who don’t fit the normal criteria. But this
requires management with the foresight to recognize these special talents.


A discussion followed about how hospitals
in Cleveland working together in a new general medicine program—made possible
by funding from a Congressional earmark—brings together people who normally do
not come together except in a competitive role.


In response to a question about
patents and patent reform legislation that would remove the automatic
injunction penalty for patent infringement, Dr. Martin questioned whether
patents had gone too far. He said it was a huge step, and an error, when the
patent office decided you do not have to actually deliver a thing to its office
and have the office figure out whether it is patentable; all you have to do is
deliver a concept paper. The result is patenting of concepts and business
models based on incredible vagueness. He also is concerned about the
development of “patent trolls” and the shrinking of the public domain.

A participant asked about what P&G’s
practice of “tapping into more talent pools” means for the United
States in terms of local economic opportunity
and success. Mr. Leikhim described its three dimensions. First, he said P&G
has a large R&D presence outside the United
States and is tapping selectively into areas
where there is the greatest strength of innovation, especially in specific
markets and products. Second, looking at the United
States, with the major scientific pool
facing retirement, P&G sees relatively small pools of candidates and must
choose from a dozen people versus 50. Finally, he said over the next decade we
have the ability to develop the pool here; if we do not, P&G may we be
forced to go overseas.


Rep. Hobson added that international
marketing is as important as R&D. He noted that one of P&G’s greatest
marketing successes was to penetrate China’s
beauty market. He believes that P&G probably has one of the best marketing
strategies in the world.


The session’s co-host, Mr. Klaus,
wrapped up the meeting by mentioned another P&G marketing success,
Pringles—which were available at the head table. With that, he thanked the
speakers and the moderator and adjourned the meeting.

Is the US Patent System Endangering American Innovation?

Is the US Patent System Endangering American Innovation?

a Congressional briefing luncheon with

Adam B. Jaffe, Professor of Economics, Brandeis University
co-author of Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, And What To Do About It

Susan DeSanti, Director of Policy and Planning, Federal Trade Commission

David J. Kappos, Vice President, Assistant General Counsel, Intellectual Property, IBM.

Moderated by Congressman Jim Cooper (D-TN).

hosted by
Athena Alliance and
the Congressional Economic Leadership Institute

Held at the Rayburn House Office Building, Washington,
June 8, 2005

Click here to download a PDF
of this report.

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The session began with welcome and preliminary remarks by David Klaus, President of CELI. Next, Kenan Jarboe, President of Athena Alliance, set the stage with a quote from Dr. Jaffe’s book:

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears.

Congressman Jim Cooper then introduced the speakers.

Professor Adam Jaffe began by noting that most of his presentation is discussed in detail in his book, co-authored with Josh Lerner of Harvard University: Innovation and Its Discontents. (A shorter summary of the book is available as a paper with the same title.)
According to Professor Jaffe, two changes have occurred in the past few years in the patent process. Patents have become easier to get. At the same time, court decisions have made patents easier to enforce, and increased monetary damages and other rewards from enforcement. This combination creates strong incentives to wield patents as offensive competitive weapons, rather than defensive protectors of innovative products.

The result is an increase in market uncertainty – and a less than optimal level of investment. Patent litigation is expensive and uncertain. The threat of litigation can force innovators to pay substantial royalties to others, or to abandon development of new products and processes altogether. Companies’ attention and resources are diverted from innovation to litigation strategy, thereby undermining U.S. competitive advantage in developing innovative new technology.

The problems stem from both the operation of the US Patent and Trademark Office (PTO) and the incentives for litigation.

Patents are supposed to be granted only if the invention is “novel” and non-obvious. However, the combination of underfunding/understaffing at the PTO and court decisions on legal standards has resulted in significant dilution of these standards over the last 15 years.

The underfunding problem is exacerbated by the diversion of funds (in the form of patent fees) from the PTO to other uses (see Chart 1).

Chart 1: Fees collected by USPTO, but diverted by Congress to other uses

The main problem is not just “silly” patents, e.g. the self-buttock-kicking-machine. More important than silly patents are patents granted to “inventions” which are obvious. This creates uncertainty for investors and inventors facing possible infringement claims.

As a result, a vicious cycle has been created: an overwhelmed PTO, along with lower standards, means that patents are easier to get. Since patents are easier to get, there are greater incentives to file for more and more patents (for things that would not have been patented before). As a result, the PTO is even more overwhelmed (with dubious applications).

Until 1984, there was a decline in the number of patents per capita. Since then, patents have dramatically increased (see Chart 2). Some of this is a real increase in invention; a major source of the increase, however, is more marginal patents.

Chart 2: The Increase in Patent Applications and Grants

The review process should be strengthened and the quality of patents improved, so that only truly innovative inventions are granted patents. Two steps toward reforming the patent granting process are more resources for the PTO and the injection of more information into the process (from the outside world).

The key to patent quality is information. In today’s complex and fast-changing world, patent examiners simply cannot, acting on their own, adequately “search” to determine if a pending patent should be granted. There is a need for incentives and opportunities for third parties to come forward with information showing that the idea behind a pending patent is not new or was obvious to people in the field. This could occur both in a pre-grant submission of what is called “prior art” (evidence that the invention existed before) and a post-grant re-examination process.

Reforming the “continuations” process, which allows applicants to keep patent applications going and continually modify them over time to keep the application pending even though it was originally denied, would be another improvement.

The other part of the problem is litigation. The litigation process aggravates the problem because of the presumption that a PTO-issued patent is valid. It is harder to invalidate the patent than it is to prove infringement. “Clear and convincing evidence” is needed to prove invalidity; only “preponderance of the evidence” is needed to prove infringement. But the evidence is clear that patents cannot necessarily be assumed to be valid. Given this presumption, there is a greater danger of attempting to fight an infringement claim. In addition, the alleged infringer is subject to triple damages for “willful infringement,” even if no copying occurred, and may be subject to injunctions which shut down entire operations.

The playing field between parties in patent litigation needs to be level, so that the threat of litigation based on dubious patents is not so frightening. Some ways of doing that include: switching to “first to file” rule while requiring publication after 18 months, so people can know what patents are out there; increasing protection for people who unknowingly use patented technology (protection for “prior use”); and creating a right to request re-examination within the PTO to permit more cost-effective and reliable determination of the validity of contested patents.

However, there will always be patent litigation. Mistakes will occur and there are inevitably close cases in which no one can know for sure if a patent will be held valid. Because of this, there is a need to reduce the financial danger posed by pursuing new products in the shadow of murky patent situations. This would include strictly limiting triple damages and creating some notion of apportionment of damages so that a small component does not endanger entire product investments.

Professor Jaffe closed by noting that these are difficult issues involving important trade-offs. Making it easier to prove patent invalidity levels the playing field between patent holder and alleged infringer. But it also undermines the value of patent protection for those who really deserve and need it. Making it harder to get injunctions shutting down infringers reduces the risk associated with threats of litigation. But it also alters, perhaps fundamentally, the meaning of patents as “intellectual property.” These are the important balances that need to be reached as the process of patent reform moves forward.


Susan DeSanti then described the work of the FTC. The FTC got involved in the issue of patents because of the rising importance of intellectual property as a business asset. After an extensive set of hearings, the FTC came out with a report, To Promote Innovation, The Proper Balance of Competition and Patent Law and Policy in October 2003. During early 2005, the FTC co-sponsored a series of three town meetings with the National Academies’ Board on Science, Technology, and Economic Policy (STEP) and the American Intellectual Property Law Association (AIPLA). STEP had published its own report on patent reform, A Patent System for the 21st Century in April 2004. The AIPLA had issued extensive comments on both reports. This series of meetings was to conclude with a conference in Washington, D.C., on June 9, 2005. (A summary of those town meetings can be found at the FTC website.)

From the FTC’s perspective, the issue is innovation. There are two competing mechanisms for promoting innovation: competition and patents (which are anti-competitive grants of limited monopolies). Public policy should be to only grant monopolies when there is an overall gain to society. Since granting patents limits competition, there needs to be a clear understanding of the trade-offs involved.

The problem from the FTC perspective is that right now there are too many questionable patents – which get in the way of competition in those areas.

She then gave examples of how patents work in two different sectors: biotech and software. In biotech, a company faces a tough set of options if it wants to get into a new area of research where there may be questionable patents:

1)  It
can do nothing – not do the research;
2)  Since it can’t question the validity of the patents until there is an infringement case, it can go ahead but face the risk that it will be involved in costly litigation later on; or,
3)  It can license the questionable patents – which is in effect a tax on innovation.

The situation is more complex in software. In biotech, everyone generally knows what all the patents are. Software companies operate in an environment where there are hundreds of overlapping patents. The only way to know what is out there is to go ahead with product development and see if an infringement case appears. At that point, the companies can negotiate their way through the patent thicket.

These differences point out the problems in crafting solutions. Software and biotech companies agree on the need for a post-grant review process (as advocated by Jaffe and others). They disagree on the length of time that the process should be open. Biotech would like a nine month period for post-grant review challenges. After nine months, patents can no longer be challenged in the administrative process, but only through litigation in infringement cases. Biotech wants this certainty so that they can take their patents to investors for financing.

Since software companies don’t know all of the patents that are being issued in the area and whether they might be infringing or not, they want the post-grant review process to be more open- ended. In this case, the process would be an alternative to litigation that can be used whenever an infringement claim pops up.


David Kappos then spoke from the perspective of a company that is involved in both sides. IBM has the world’s largest patent portfolio (which it seeks to protect) but is also facing a record number of infringement claims and litigation.

He sees the topic becoming more and more important worldwide with growing international tension between intellectual property rights and the needs of innovative economies?. He stressed the need for balance. There should be strong patents that are enforceable – but they need to be correct patents.

From IBM’s perspective, the innovation system is changing. There are still the two models of innovation that we normally think of: scientists working in university, government or corporate labs and individual inventors. But there is also a new model of collaborative innovation. This new model comes about because of the complex nature of the problems. No individual or company has the ability to address all aspects of the problem. So companies and individuals are forced to work together. The classic case in point is the open source movement, which has been successful in software development and is now moving into other areas.

However, the intellectual property system is not in tune with this model of innovation.

The patent system is not completely broken, but it does need reform. A few of the areas he suggests for reform include a post- grant review to ensure quality and a pre-grant submission of “prior art” to create better information for the patent examiners. He noted that these changes will likely create a mini-industry on patent research and information brokering – which will also create better information for the system.

However, even with pending patent reform ideas, the patent system will still be in conflict with the open collaboration model. Therefore, IBM is taking steps to strengthen that model. These include pledging to donate 500 patents to an open source commons (a “patent commons”) and pushing for royalty-free use of patents that are part of standards for software interoperability, through OASIS (Organization for the Advancement of Structured Information Standards).

He concluded by noting that in the end legislation will be difficult because of different needs of different industries.


Congressman Cooper then moderated a short question and answer period. The first question from the audience concerned the differences between biotech and software. It was stated that software does not follow all the patents issued in their area. Is this because the standard of obviousness is too low? And is the result of this unitary system of patents (same rules for all industries) a bias of investment to biotech (where they know the patents) away from software (where they don’t)?

Professor Jaffe answered that the obviousness standards are too low – the Amazon one-click patent being the classic example. But he is unclear as to how to fix that specific problem. The post-grant review and the pre-grant submission of prior-art will help. These processes will also create a system where people will pay attention more.

Ms. DeSanti mentioned that companies have been reluctant to use the existing system of submitting prior art. Currently, they don’t know if examiners will pay attention to it. And they don’t want to take the chance later on during litigation that the court will rule since the prior-art was submitted, the patent must have taken it into account already and it therefore can’t be used in an infringement case.

Mr. Kappos noted that this is exactly why legislation to change the process is important. Companies need to be able to submit commentary on why the prior-art is relevant to a patent – not just the existence of the prior art.

Two audience members made brief comments. One noted that the key issue was disclosure, reminding the audience that the purpose of granting a patent is to disclose information to the public that would otherwise be treated as a tradesecret.

The other, who identified himself as a former patent examiner, noted that more funds for the PTO would not necessarily solve the problem. Because examiners need to use the prior- art to determine obviousness, the key is not just getting the prior-art but learning how to determine obviousness.

A question was asked about proposed solutions. What was the appropriate mix of legislative solutions versus changes in PTO practices?
Professor Jaffe answered that the legislation must be predicative. Legislation can result in behavior changes. For example, increasing submission of prior art with commentary and other changes to bring in relevant information from outside the PTO will help change examiner behaviors by giving them better information.

With that question, Congressman Cooper noted that time for the session had run out, and thanked the panelists and audience for their participation.