Patexia Insight 79: Impact of Coronavirus on IP and Patents

Coronavirus and its global impact have affected almost every sector of the economy. With all of the job losses and the continued lockdown in more than 80% of US cities, at this point, it is clear we are in one of the worst recessions in recent decades.

This week, we decided to analyze the impact of Coronavirus on the intellectual property sector, specifically patents, for the next few years. We hope our analysis enables our IP community, specifically patent firms and IP-intensive companies, to better prepare and plan for this uncertain period.

To begin, we divide the patent related work into three main areas: patent prosecution, patent litigation, and patent transactions. We plan to have separate studies to cover litigation and transactions, but, historically, litigation has been recession proof. Companies use litigation as a tool to improve their bottom line during a recession.

On the other hand, transactions usually disappear quickly during recessions. This is not limited to patents alone. Usually, recession affects all kinds of M&A deals, and they may come to complete stop during uncertain times. Patents are no different. We reached out to some well-known non-practicing entities (NPEs) over the past couple of weeks to see how they anticipate the market reacting. Not surprisingly, they all confirmed that they’ve sidelined their ongoing negotiations and deals for the time being.

Prosecution, on the other hand, is different, as it is a long term investment. Smart companies look at new patent applications as capital investment with a potential return beyond the one or two years of recession (for up to 20 years or lifetime of the patent).

While the above statement is generally true, depending on many macroeconomic factors – such as market segments (e.g., life sciences vs. high-tech), driving forces behind the recession, response of local governments, et cetera – companies may take different strategies to navigate through a recession.

To gain more insights, we are going to analyze the US patent data during the last two recessions (the tech bubble of early 2000s and the financial crisis of 2008). We will look at how everything played out during those downturns.

To build a strong foundation for this analysis, first, we need to gather some insights about the overall growth in application filing, comparison of foreign-origin versus US-origin applications, and activities of different technology centers during the last 20 plus years. We will use our findings to draw some conclusions about the current uncertain environment Coronavirus is causing and make some predictions about the direction we are heading, as well as consider best practices during this time.

Baseline Growth in US Filings Over the Last Two Decades

Using the US Patent Statistics provided by the USPTO, we looked at a period of about 20 years (from 1997 to 2018). During this period, the number of applications grew by 177% from 232,424 in 1997 to 646,303 in 2018. This represents an average year-over-year (YoY) growth of 4.7 percent. However, the growth was not constant every year. We divided this period into two timelines: the first one was between 1997 to 2010, which covers the last two recessions and then, the second one, between 2011 to 2018.

The following chart shows the US filings by year from 1997 to 2010. During this period, the US application filings had a positive growth for every year except 2009.

The following chart shows the growth in the number of applications for each year from 1997 to 2010. Despite the two recessions during this period, the US filings grew at an average rate of 6.73 percent per year. During this period, US-origin utility applications grew at the average rate of 6.1 percent per year, while foreign-origin utility applications grew at the average rate of 7 percent per year. We call this period the growth period.

While studying increased foreign filings is interesting and shows that foreign companies’ interest in protecting their US market shares has been growing faster than US companies, we are not going to further examine it at this time, as it is not relevant to the subject of this study.

The second period is from 2011 to 2018. The following chart shows the filing activity for this period.

From 2011 to 2018, US filing growth dropped to an average of 2.7 percent per year (from 6.7 percent). During the same period, US-origin utility application filing dropped to 2.1 percent per year, while foreign origin utility application filing dropped to 2.8 percent per year. We name this period, the stabilization period.

Recent Trends in US Application Filings

Looking at the growth period and comparing that with the stabilization period, we can see a sudden drop in average YoY growth. This drop may stem from different factors; it is difficult to attribute it to a single source. The several factors we believe that contributed to this sudden drop in growth include:

• Drop in overall damage awards in patent cases in recent years, which caused a drop in overall patent value
• Introduction of PTAB and Inter-Partes Review (IPR). After IPR’s introduction in late 2012, within a year, we saw a sharp decline of growth in the number of patent applications (clearly visible in 2014). IPR is invalidating patents at a very high rate, which causes companies to question the real value of their investment in IP.
• The extra attention of corporations to cost control and pressure to reduce the prosecution cost.
• Gradual change in corporate IP mindset and move from quantity to quality. The impact of IPR, reduced patent value, attention to cost, and IP analytics/statistics has created a shift in the corporate IP strategy. This means more focus on filing quality patents.

Impact of the dotcom crash on US Filings

The tech bubble triggered the early 2000s recession. It officially started in March 2001 and ended after 8 months in November 2001 (source). As shown in the first two charts, the US filing growth dropped 3.1 and 2.7 percent in the two years immediately following the recession.

Analyzing the USPTO examination data also shows that the number of abandoned applications grew significantly during these two years. In 2002, the number of abandoned applications grew 86 percent compared to 2001, and it increased by 72 percent in 2003 before dropping to 16 percent in 2004. While a portion of those abandoned applications may have been due to the examiner’s rejections, the big increase may have indicated a temporary shift in the corporate IP management strategy. Corporations decided to cut costs during the recession by dropping less essential applications.

Analyzing the technology centers and areas of filing during this period exposes another fact about this period: The decline was not consistent for all sectors. While almost all technology centers saw a sharp decline in their YoY growth in 2002, some technology centers, including 2100 (computer architecture) and 2600 (communications), had negative growth. These two areas were at the heart of tech bubbles, and companies in those sectors saw the greatest effect.

Two other observations we made during this recession were a slight rise in provisional applications and an abandonment of issued patents due to non-payment of maintenance fees.

The first may show the desire of corporations to defer the filing of the utility applications before making a larger investment (postponing the cost). And the second one indicates the tightening of budgets and careful review of patent values internally before making a decision to pay the renewal fees.

Impact of the Financial Crisis on US Filings

The subprime mortgage crisis triggered the most recent recession, leading to the collapse of the housing bubble in the United States. This recession, which was worse than the dotcom bubble and spread to many sectors, officially started in December 2007 and ended after 18 months in June 2009 (source). Examining the first two charts above, we see zero growth in 2008 and half a percent decline in 2009.

We further looked at the growth of each of the technology centers for the period between 2007 to 2010. All technology centers showed negative growth in both years (2008 and 2009). Technology Center 2100 (Computer Architecture) was slightly positive in 2008 and then had a sharp decline of 17 percent in 2009. Life Sciences (TC 1600) had the smallest decline of about 3 percent per year in 2008 and 2009.

Lessons Learned

The recent filing trends, as well as the US application filing fluctuations during the two most recent recessions (the tech bubble in the early 2000s and the financial crisis of 2008), helped us arrive at the following conclusions:

1. Decline in Filing Activity: The filing trends suggest that we are already at the top of the growth curve as, for the first time, we saw a decline in filing activities, even with no recession in 2018. Lower damage awards for patent cases, introduction of IPR, and more cost control initiatives among corporations may have contributed to the decline in value of patents and, as a result, the decline in filing activity in recent years.
2. Sector-Specific Decline: The dotcom crash was mostly limited to the tech sector, while the financial crisis spread to more sectors. And in many of those sectors, the impact was global. We examined the USPTO technology centers to verify this finding. The negative growth during the financial crisis appeared in all technology centers, while it appeared in only a few technology centers during the dotcom crash.
3. Deferred Spending: Corporations tried to postpone some decisions to reduce their spending in the short term as much as possible. This was partly accomplished using provisional applications whenever possible.
4. Cost Cutting by Dropping Applications: The number of abandoned applications rose significantly during both recessions, which indicated that corporations tried to cut costs through abandoning non-essential applications.
5. Non-payment of Maintenance Fees: The number of expired patents because of non-payment of renewal fees went up during both recessions.

What is Ahead?

The Coronavirus impact is global and is affecting almost all sectors of the economy worldwide. While some will feel the pain with a delay, there will be a small group such as particular sections of healthcare and life sciences or e-commerce that may even benefit directly. Overall, we expect this recession to last longer and deeper than the two most recent recessions, and during this downturn, the IP landscape may change and as a result, we will be facing a new norm.

Patent practitioners were already feeling some pressure, as growth slowed in recent years and as corporations attempted to reduce the prosecution cost as much as possible.

The recession will only accelerate the changes that were already happening. Therefore, we expect to see a larger decline in filing activities (i.e., 2 to 4 percent) in 2020 and 2021.

We believe corporations will give quality more weight than quantity. The internal corporate IP departments will need to adjust their operations to make smart decisions when they choose what to file or maintain. This requires further integration of analytics, as well as market and business intelligence in their day to day operations.

Analysis of the portfolio strength and weakness (Patexia Insight 71) will help companies determine what to maintain, drop, or license out in order to minimize their portfolio’s cost while opportunistically license the unused IP. In addition, regular performance review and cost comparison of the patent firms working for companies can help them create a proper guideline and manage their patent counsel more efficiently (Patexia Insight 77).

On the other hand, the need for patent firms to improve their efficiency is more important than ever. Cost control and use of analytics and business intelligence can help firms achieve these goals, while making them more fit to operate under the new environment imposed by corporations and ongoing recession.

Contact us to learn how your clients, sector or competitors reacted to the last two recessions, and find the best plan and new ways to grow even during this economic downturn.

“Embrace uncertainty. Some of the most beautiful chapters in our lives won’t have a title until much later.” Bob Goff