Are Patents Hindering Innovation?

Photo ParisTech Review / Editors / September 23rd, 2011

In 2011 the U.S. Senate passed a bill reforming the patent system, without appeasing controversies that for the past ten years have been agitating academic circles as well as the Silicon Valley. Patents are generally considered to fuel innovation. But do they?

There is a variety of intellectual justifications to the patent system. In the old days the legitimate rights of inventors were brought to the forefront, whereas in modern times investment in R&D took precedence. A macro kind of argument, finally, argues in favor of the fact that a powerful incentive for innovation is provided when creative rights are protected.

Quite an old story
Patents in their modern form arose in the early stages of the industrial revolution. A bill was passed in the United States in 1790 and another one in France the following year, in line with the droits d’auteur system that was implemented at Beaumarchais’ initiative. Although they pertained to two different legal contexts, these laws were based on the same principle: to allow the dissemination of techniques while simultaneously protecting the property of the inventors on their creation.

Compared to the monopolies and privileges that the Old Regime had hitherto granted, this system was both more closed and more open – practicing an activity was in theory open to all, however, the techniques involved were themselves protected. This in a certain way was the exact opposite of the previous system, where everyone could borrow the next man’s techniques but in order to do so had to earn the right to exercise a trade or business. Such a right was bestowed by authorities or guilds.

Patents are published, meaning that what they protect becomes public knowledge. At the present time, in France, publication takes place 18 months after filing, or as much as five years in the case of pharmaceutical molecules. Theoretically a third party could use the patented technique as long as royalties are paid to this effect; however the patent holder is liable to refuse to grant such a license. Lastly, a patent lasts for a limited amount of time, depending on the country.

What the system, as we understand it today, is about, therefore pivots around a double axis: the dissemination of knowledge (publication) and the protection of the interests of the person or persons who have spent time or money developping this knowledge. As noted by the economist Daniel Cohen, in his comments on the report issued by his colleagues of the Economic Analysis Council (a French government think tank), the absence of intellectual property “may simply deter research, at least in the absence of adequate public funding. It may entice innovators to keep their secrets, and thus further reduce the productive use of an idea for the benefit of the community.”

Driven by its double pattern of dissemination and protection, the mechanism of patents has without the slightest doubt constituted a key factor in the remarkable boom of innovation that began with the Industrial Revolution. The development of large modern companies owed much to comparative advantages, and first and foremost amongst them was technology. The guarantees offered by patents acted as incentives to allocate energy, funds and skilled labor to what has been known since the 1920s as Research and Development. Patents provide a guaranteed return on investment. This is especially true in sectors such as pharmaceuticals and aerospace, where the development of a molecule or an aircraft goes through a process whose time scale is on the order of ten or twenty years.

New stakes in an age of things immaterial and globalized
More recently, a different mechanism was identified. It has a hand in the development of new companies: by protecting the innovations start-ups are working on, patents allow them to attract the capital they need.

The intangible nature of certain products or processes, such as computer programs, makes it even more crucial to protect inventors against the proliferation of copies that would eventually dry up their markets. This is what a young Bill Gates pointed to in 1976, in an open letter to hobbyists: he explained to users of BASIC that for the most, without really caring to reflect about it, they had stolen the software. So doing they “prevent good software from being written”. For “who can afford to do professional work for nothing?”

Protecting intellectual property therefore appears as an ever more central stake in an economy based on the exchange of ever more sophisticated goods – some of which are intangible and easy to reproduce and copy.

Meanwhile, in a context of globalized markets, the role of patents has become an extremely sensitive issue. It was in 1893, during the first globalization (1870-1914), that the United International Bureaus for Intellectual Property were founded: they allowed contractors to ensure exclusivity for their discoveries and inventions abroad. More recently, the World Intellectual Property Organization was established in 1967, becoming a few years later a UN agency. But it was chiefly around 1993-1994, at the time an agreement for the establishment of the World Trade Organization (WTO) was being negotiated, that the question emerged as a strategic issue. The problem now being the explosion of counterfeit production in emerging countries. At the initiative of the United States, an agreement was signed on “Aspects of Intellectual Property relating to trade.” It established minimum standards that member states must comply with.

An epidemic of patents?
Above all, it etched in stone the increasingly central role of intellectual property protection, ensured by bodies such as the United States Patent and Trademark Office and the European Patent Office. Because in a context marked by the globalization of trade, the growing importance of technology and the dematerialization of an increasing number of goods, the number of patents exploded. In 1990, the USPTO issued 99 000 patents, twice that figure in 2004, and currently 500,000 applications are being filed each year, with a backlog of more than one year.

However an ever-growing number of voices are challenging the validity of this “epidemic of patents” – such is the title of an article published in BusinessWeek in 2006, which denounced the “ludicrous” inflation of “junk patents”. To be validated, a patent must not cover something obvious. But courts have gradually tightened this concept of obviousness, thus fewer and fewer things are deemed obvious, ergo more and more things are now patentable. “One of the primary culprits in this situation is the evisceration of the obviousness test by the Federal Circuit Court of Appeals” There is a dear price to be paid for businesses more and more confronted with claims of infringement by such dubious patent holders. The author of the article notes that even if they do win their cases, it is only after several years and expenditures in the millions of dollars have intervened. The U.S. innovation system (and therefore the world’s) is at risk of choking off because of the interference from patent-everything-in-sight tapeworms.

Patent trolls
In recent years a new kind of players has emerged, whom insiders call “patent trolls”: companies or individuals that enforce the patent system not to protect their inventions or something they would actually produce, but to make money in a way that can relate to blackmail or extortion. For instance by patenting processes that already exist but are not protected, or, more often, by first acquiring a patent (from a firm in bankruptcy) and then suing a company that uses said protected technology. For the latter, options narrow down to choosing between paying a steep price for a license, or running the risk of ending up locked up in litigation with all the costs it incurs.

The emergence of patent trolls is partly due to patent offices, as noted as early as 2004 by an OECD report pointing that unoriginal patents or whose scope was excessive have been issued, allowing their holders to obtain undue benefits at the expense of other inventors and customers. The problem arises particularly in the areas of software, biotechnology and business methods, where patent offices and courts have had a most difficult time adapting to rapid change, developing institutional skills, evaluating the state of the art and establishing appropriate standards regarding the scope of granted patents.

But beyond the responsibility incumbent on authorities, the matter also revolves around the increasing sophistication of consumer products. As noted by Yann Ménière (Cerna, Mines ParisTech), there are often hundreds of patents, sometimes thousands, involved in a given technologically advanced product (like a portable phone). This is called a patent thicket. In this context, there is no such thing as certainty, and uncertainty about intellectual property has become a source of economic and legal hazard. In their scramble for solutions, companies have resorted to acquiring patent portfolios, which allow you to threaten competitors as much as they threaten you, and instead proceed to settle on an agreement. It was the main objective of record buyout of Motorola Mobility by Google last August. The giant primarily sought to defend its Android platform, which is threatened by multiple complaints for patent infringements.

In such a model, where one is forced to acquire large patent portfolios as countervailing protection, only large companies can afford to secure legal safety, says Yann Ménière. This is precisely the claim of two U.S. academics, Michele Boldrin (University of Minnesota) and David K. Levine (University of California, Los Angeles), which in their book Against Intellectual Monopoly accuse the patent system of curbing innovation, by removing fresh contenders from the competition. This very argument was reprised by The Economist: denouncing the predatory behavior of certain economic players, the British weekly compared them to the robber barons.

The patent system thus comes under criticism for favoring big fish at the expense of small players, while also being a nuisance for the former, through parasitism practices and extortion attempts.

Anticompetitive behavior
The 2004 OECD report focused on two domains that are particularly threatened by a patent system runaway: software and biotechnology.

Computer programs are complex products that combine multiple functions, each of which may be subject to a different patent. “The increased use of patents can therefore hinder innovations that are subsequent installments to earlier implementations, or the assembly of complex programs as it increases transaction costs.”

The report also stresses out the issue of interoperability, noticing a trend towards the reciprocal locking-in of software ecosystems. “The effects on the networks are also quite significant in the software industry and switching from a program or provider to another can sometimes be costly, forcing customers to use only dominant products, especially when there is no assurance of interoperability.”

These conclusions are consistent with empirical research by Bessen and Hunt, as well as earlier research conducted by Bessen and Maskin, based on the example of the 1980s : there was less concern for protection within the technology industry, a context which bolstered advances (notably the rise of the Internet). Such advances might not be possible anymore due to the present frame. Also, the researchers noted, those firms which are most likely to file patents have not been more productive or dynamic than others.

Is scientific innovation at risk?
In the field of biotechnology, where a higher proportion of knowledge is produced within a framework of public research, the OECD is concerned about the tendency among academic institutions to patent and thus privatize results, which may render access to knowledge more difficult for researchers. “In some fields such as genetic material or genetic testing, cases arise in upstream stages where patents could further hinder access to technology.” The report suggested that the quality (that is to say the novelty) and the scope of patents be reexamined and called upon authorities to explore other ways to foster the dissemination of knowledge, such as the public domain, and improve the dissemination of patented inventions, for example through the promotion of patent pools.

In a context of scientific competition between institutions, the propensity of universities to patent their research poses yet another problem, by challenging the principle of exemption, which allows the use of existing inventions for investigation purposes.

In the computing field as much as in biotechnology, innovation has a propensity for being cumulative, and overbroad protection of basic inventions may discourage inventors to take over if the legal owner of a key technology prevents third parties from accessing it within reasonable conditions. This is what investigation by Bar-Shalom and Cook-Deegan has demonstrated in the field of oncology (“Patents and Innovation in Cancer Therapeutics: Lessons from CellPro,” The Milbank Quarterly, 80, 4).

An outdated culture?
Finally, within the current context marked by the emergence of the free model, two recent studies have questioned the very culture that the patent system stems from.

Mark Lemley, a law professor at Stanford, lampoons the “myth of the lone inventor”. Hundreds of new technologies are developed almost simultaneously by two or three teams working independently from one another, and invention is a social phenomenon, not an individual one. “Inventors build on the works of those who came before them, and often new ideas are already in the air, resulting from changes in demand or the availability of a new market.”

Two other researchers, Bill Tomlinson and Andrew Torrance, had fun testing out different iterations by testing a “serious game” called PatentSim. Their simulation showcased three environments: in the first, patents were ubiquitous, the second was patent-free and the third one was a mix. In all three environments, students had to generate innovation, file patents and grant, infringe and defend them. In the end, mixed environments and environments where the patents were omnipresent showed similar results in terms of creation of value, while the patent-free environment generated more innovation, much higher productivity… and much greater social utility born out of innovation.

But this is just a game. In the meantime, on September 12, 2011, the U.S. Senate passed a patent reform through which the American system shifted principles on the matter, discarding the “first to invent” rule in favor of a “first to register the invention” one. Henceforth further consolidating the hold of the patent system over the actual world.

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