Polk Wagner calls it the “patent paradox.”

U.S. companies large and small are filing more and more patent applications each year, even as the actual value of those patents has continued to drop: Just 5 percent of all patents filed are eventually licensed while the rest end up all but worthless.

“People are seeking them out and trying to get more patents all the time,” says Wagner, a Penn Law professor. “But there’s no evidence—and in fact there’s some evidence that suggests otherwise—that patents are becoming more valuable in actual cash value.”

The patent process is a difficult and costly one, Wagner says, and companies often need to seek out the help of high-priced patent attorneys to guide them through the process. Even when dedicating enormous amounts of time and money to the process, however, about half of all patents filed are challenged by competitors—creating more legal costs. But if there are no actual rewards, Wagner began to wonder, why on earth do cash-conscious companies spend so much time and money on the rush for patents? “The expectation of actual cash value is by all accounts not particularly good,” he says. “So the real question was, ‘What’s going on?’”

In a paper that will be published by the Penn Law Review later this fall, Wagner and fellow Penn Law professor Gideon Parchomovsky attempt to find an answer.

According to Wagner and Parchomovsky, companies who are spending big money on patents aren’t necessarily interested in the success or failure of each patent filed. Rather, they are seeking to build what the researchers call the “patent portfolio”—and in today’s high-tech marketplace, these portfolios are weapons in themselves.

By building portfolios made up of thousands of patents, Wagner says, companies are able to fend off competition by, for instance, suggesting that a competitor’s new product might infringe upon one of theirs. On the other hand, a company who has a patent challenged by a top competitor may rebut that challenge by countering with a challenge of its own. And the more patents a company has, the more legitimate those seemingly random challenges can become.

“A diversified set of patents gives you the sort of heft, the sort of protection and the ability to negotiate with your competition that you can’t get with small numbers of patents,” Wagner says. “Larger companies are now saying, ‘We have 1,000 patents on this kin d of chip, so you’ve got to be infringing upon one of them—we can’t say which one, but I know I could win one of the 1,000 cases we could bring.’ Then they say, ‘Let’s just make a deal.’ Whatever is going on, they’re dealing with each other at the portfolio level.”
What has resulted, Wagner says, is an ongoing patent war in which actual patent value is increasingly irrelevant—but the patent portfolio is increasingly valuable.

“For the overwhelmingly vast majority of patents, [profit] never happens,” Wagner says. “Why? Because a lot of inventions don’t turn out to be any good. That’s just a fact of research and development. You’ve got to break a lot of eggs to make an omelet. In R&D, there’s a lot of broken eggs. But companies say the cost of not having patents like this is enormous.”

Wagner says the research not only explains the “patent paradox” but also suggests the patent system has changed, along with the traditional idea of what a patent is actually worth, and could help regulators create a more efficient patent system in years to come. Wagner and Parchomovsky, for example, suggest that making patents more difficult to win, or even creating patent quotas, may help the system run more efficiently.

The risk in not making changes, Wagner says, could be serious: If the system is left in its current state, innovation could be stifled. That’s because small companies and young inventors with exciting new technologies could be beaten back by huge corporations boasting patent portfolios.

“If a little company can’t come back against a [huge corporation], if they can’t play that way, then they really don’t have a seat at the table, and that could be very troubling,” he says. “I don’t know if we’ve seen this yet, but you can see how small companies would be at a disadvantage in the patent system.”

“If anyone needs patents, it’s not the big companies. It’s the little startups that have one product that they’re trying to change the world with.”