Abstract patents and startup funding: Evidence from Alice v. CLS Bank

Through its Alice v. CLS Bank (“Alice”) ruling, the U.S. Supreme Court tightened eligibility standards for patents covering abstract ideas implemented on a computer, which, in turn, sharply increased examination stringency in a narrow set of technology areas. The decision has generated significant debate among policymakers and practitioners, particularly over its effects on startups, which has led to recent proposals in the U.S. Congress to reform patent eligibility laws. We provide a theoretical discussion and related empirical evidence on the impact of Alice on startup activity. Our empirical analysis complements existing firm-level analyses by estimating industry-level impacts, which can capture effects on entrants and non-patenting competitors that traditional designs may miss. Total venture capital funding in affected industries exhibited an increase of 42 percent relative to less-exposed industries. We show that, in the affected areas, obtaining a patent did not materially increase a startup’s likelihood of raising venture capital before Alice, a feature of the affected industries that likely mitigated the potential negative impacts of increased stringency. In addition, after Alice, patent grants fell sharply and newly granted patents became less likely to be purchased by patent assertion entities or litigated, suggesting that reduced transaction costs from patent thickets and reduced monetization of low-quality patents may have contributed to the increased funding.