When Legal Uncertainty Undermines Innovation

Why It Matters

Clear patent rules are crucial for innovation. When courts change what can be patented, investor confidence falters, jeopardising funding for emerging technologies.

Key Takeaways

• Legal uncertainty over patent eligibility led to a measurable decline in venture capital funding for biotech startups.
• The effect was strongest for firms holding gene-related patents, whose funding fell by around 5% per month during court disputes.
• Stable, predictable patent laws are essential to sustain investor trust and technological progress.
  

The Power and Fragility of Patents

For early-stage technology firms, patents serve two vital roles: they safeguard innovations from imitation and signal value to investors. Startups often have little more than an idea or prototype to offer, so a patent can be their most valuable asset.

But this system depends on clarity. If regulators or courts start to question what qualifies for patent protection, investors begin to hesitate. The result can be a sudden drying up of funds, as uncertainty makes it harder to judge which technologies are commercially viable.

A Legal Battle that Shook Biotech

In the early 2000s, U.S. biotech firms commonly patented sections of human DNA, nucleotide sequences, linked to diseases or diagnostic tests. This was accepted practice until the high-profile Myriad Genetics case challenged the legality of gene patents.

Between 2010 and 2013, the courts swung back and forth: first invalidating Myriad’s patents, then reinstating them, and finally, in a landmark Supreme Court ruling, deciding that naturally occurring DNA cannot be patented, though synthetic DNA (cDNA) can.

For three years, the biotech industry was left in limbo. Thousands of similar patents suddenly looked vulnerable, and investors struggled to assess the risks.

Tracking the Investment Fallout

Using data on more than 3,600 biotech startups founded between 1996 and 2013, this study analysed how funding patterns changed during this period of legal uncertainty. Combining patent and venture capital data with statistical and machine learning methods, it compared firms holding gene-related patents with those that did not.

The findings were clear: once courts began questioning the validity of gene patents, venture capital investment declined. Startups with more gene-related patents were hit hardest, experiencing an estimated 5% monthly reduction in the likelihood of receiving new funding. The effect intensified as the case reached the Supreme Court, reflecting growing investor unease.

Importantly, this drop was unique to the period of legal uncertainty, no similar declines appeared in earlier years. Even after controlling for firm size, patent quality, and other factors, the pattern remained.

Business Implications

The study underscores how fragile innovation ecosystems can be when legal definitions shift. For investors, predictability is as important as protection. When the boundaries of patent law become unclear, capital retreats, and promising technologies risk stagnation.

Policymakers and courts, while rightly focused on fairness and preventing overreach, must weigh the economic ripple effects of uncertainty. As emerging fields like artificial intelligence, synthetic biology, and quantum computing raise new questions about what counts as a patentable invention, ensuring legal stability will be critical to sustaining investment and innovation.

 

Authors & Sources

Authors: Shivaram Devarakonda (Nanyang Technological University), Vilma Chila (University of Amsterdam)

Original Journal: Industrial and Corporate Change

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