The Impact of Alice v. CLS Bank on Startup Activity

Alice v. CLS Bank (2014) was a major Supreme Court patent decision that increased the stringency for business method and software patents. What was the impact of this decision on innovation? 

We find that exposed industries saw an increase in aggregate venture capital funding, with effects concentrated in industries with high levels of patent assertion entity activity before the decision.

We contribute to existing work by looking at industry-level startup funding. Standard designs look at existing firms' exposure to the decision, but might miss out on impacts on non-patenting and new firms.

Using a diff-in-diff across industries based on each industry's exposure to the decision (as measured by startups applying for patents in affected technology areas), we find a 42 percent increase in venture funding.

We also find that the decision significantly reduced the rate at which Patent Assertion Entities purchased patents granted in Alice-affected units. 

More generally, we see a large decrease in patents granted in the affected technology areas (~75% decrease).

The results might seem inconsistent with prior work showing that patents increase venture funding at the firm level, but we show that: i) startups in these areas were not sensitive to obtaining marginal patents pre-Alice; ii) there are likely to be large negative spillover effects.

The results are more consistent with other work showing that publicly traded companies with high exposure to Alice increased R&D spending after the decision, and that smaller publicly traded companies complained about increasing competition from startups.

There has been ongoing Congressional debate over legislation to overturn Alice and other related Supreme Court patent decisions. Our work suggests that overturning Alice may lead to an increase in marginal patents, which might be especially relevant in the current AI boom.

Our work complements existing findings in the literature, and there's quite a bit more to do in terms of connecting changes in the IP system to downstream markets (consumers, workers).