Reforming the Patent System Toward a Minimalist System-Becker

The patent system (I concentrate on patents) is supposed to encourage innovation, the foundation of economic progress. It does this by giving patent recipients exclusive control for a specified period of time over use of their patented goods, machinery, processes, or services. It has long been recognized that patents impose costs on society since patents keep out competition, so that the monopoly power of patent holders enables them to raise prices and lower outputs. However, until recent years many other costs of the patent system received little attention, including paradoxically that this system might in fact discourage innovations.

Posner has a very good discussion of many costs of a patent system. These include not only the monopoly power given to patent recipients, but also time-consuming and expensive patent litigation because of overlapping patents, patent trolling to gain control of large numbers of patents not for use but to force compensation through litigation, and the ability to patent minor improvements over existing technologies. One additional important cost is that companies in many developing countries, in particular China, do not worry about patent infringement, and often produce much cheaper copies that undercut patented products. These companies have an advantage over companies in developed countries that refrain from producing patented products because they fear punishment from the courts for infringing patent rights.

Patent infringement lawsuits, copying by companies in developing countries, and many other obstacles to profiting from innovations under the modern patent system not only discourage certain types of patent applications, but may also reduce the incentive to innovate itself. Why apply for a patent if the information in the application makes it easier to produce copies? Moreover, the potential profit from an innovation might be more than dissipated through lengthy patent litigation that involves also the risk of large fines- as in the recently imposed fine on Samsung of over $1 billion for allegedly copying software patented by Apple.

The various harmful effects of the patent and copyright systems encouraged Arnold Plant, an English economist, to publish over 75 years ago two influential articles on why England and other countries would be better off without patents and copyrights. Among other things, he argued that the temporary monopoly power given to patent holders often led to inefficiently high prices and reduced output of patented goods, that many persons would continue to invent even if they could not patent their inventions, and that patents distort innovations in favor of goods and processes that can be patented and away from innovations that cannot be patented. His favorite example of the latter is basic research in the sciences that produced the theory of relativity, the theory of evolution, and in more modern times our understanding of DNA and genes. He believed that the patent system induced some creative scientists to work in areas that could be patented rather than on basic scientific research that could not be patented.

Although ending the patent system is a clean solution to all the problems induced by modern patenting, it clearly is not desirable given the importance of industries like the pharmaceutical industry. Since this industry spends on average hundreds of millions of dollars bringing to market a successful drug, pharmaceutical companies would not invest such large sums without the protection of patents (or without other benefits). Probably the best solution would be to maintain the patent system on drugs and a few other products that are expensive to innovate and cheap to copy, and eliminate patents on everything else. In particular, this means eliminating patents in the software industry, the source of much of the patent litigation and patent trolling.

I admit it is not clear where to draw the line between what should and should not be patentable. However, one can start by eliminating the ability to patent software, and go on from there to prune the number and type of inventions and innovations that are eligible for patent protection. Plant was not right about the desirability of eliminating the patent system, but he erred in the right direction. We should try to move much closer to where he wanted to be, and away from the present system.

 

Comments

[Ingulf]

One way to distinguish software from pharmaceuticals is that it's much easier for pharmaceutical patents to have a clear boundary, as noted by Bessen and Meurer. Indeed, it seems to me that the boundaries of software patents are problematic even in theory: it is a corollary of Rice's theorem[1] that there is no general mechanical way of checking that a given piece of software fulfills a given set of criteria, such as those represented by a patent claim.

[1] http://en.wikipedia.org/wiki/Rice%27s_theorem

[Ben Tilly]

I would challenge the notion that the current patent system is a particularly good fit for the pharmaceutical industry. I grant that it is a better fit than patents are for software. But I think that we can do better.

The great expense that the pharmaceutical industry needs to defray is not research, but the cost of getting FDA approval for treatments. On average this costs hundreds of millions, and success is far from guaranteed. In the event of success, the patent system provides protection allowing those costs to be recouped.

But patent protection is only available for novel discoveries. What happens if the treatment that needs to be evaluated is not a novel discovery? In that case nobody can possibly recover the cost of getting FDA approval. That ends all possibility of commercialization, and typically also blocks research into that treatment.

As an example I offer Helminthic therapy. For example preliminary research and anecdotal evidence suggests that hookworm is the most effective known treatment for hundreds of thousands of sufferers from Crohn's disease. But the FDA has ruled that this treatment would need FDA approval. Hookworm is not patentable, and therefore this line of research has dead ended and the treatment is not legally available within the USA.

The Hatch-Waxman Act provides an example of Congress providing a temporary monopoly to a non-discoverer for having been willing to undertake an expensive and necessary action that benefits the public good. (In that case for having sued a patent holder to demonstrate that an available generic is a valid substitute.) Offering temporary protection for companies that pay for FDA evaluation of new treatments could serve the same need for the pharmaceutical industry that patents do now, but without leaving the current gap that causes unpatentable treatments to be overlooked and ignored.

[Tmartinowen]

There is a case for thinking what happens when you remove patent protection- what are the full consequences. In the case of a patent I hold (and I am working to bring a consequent product to market)the consequence is clear. Those with deeper pockets and established routes to market become the beneficiaries of my creativity. Is that the outcome you desire?
BTW if you socialised your medicine maybe the whole world would benefit - because then it would be in your interests to validate lower cost and more effective treatments rather than ones produced for profit.

[Futureoncoming]

So, what is the best way to start the movement to prune the patent system? Do we start a petition?

[Emellaich]

One way to view patents is that the period of exclusivity is "payment" for the fact that you have revealed your secrets in the patent filing process.

Certainly, this is an advantage to the public in teaching them how to make a cotton gin. However, is there any value in teaching them how to do one-click checkouts? Once the innovation is introduced the 'secrets' are obvious in this latter case.

[Dbhalling]

I have a lot of respect for Posner, but the fact that he does not know the difference between property rights and monopoly disqualifies anything he says about patents. First of all the patent statue states that patents are personal property. Second of all, a monopoly is a right to a market. All property rights give you the right to exclude. A patent does not even give you the right to make or sell something, so it cannot be a monopoly. Clearly Posner does not understand the basics of patent law. He is not a patent attorney and many non-patent attorneys fail to actually study the law in this area. Third, patents are granted for the reason all property rights exists, because the owner created something. Since Posner does not understand this simple fact, all his conclusions are suspect.

There is absolutely no empirical evidence that countries are better off without a patent system. If you look at the Fraser Institute or the Wall Street Journal/Heritage Foundation surveys of economic freedom, you will see the richest countries and the most economically free countries have the strongest patent systems. Those countries in the lowest 20% do not innovate, and do not have a wide dispersion of technology and live on the edge of starvation. The fact is the most innovative countries and those with the widest dispersion of new technologies and the wealthiest are those countries with strong patent systems. None of this would be possible if there was even a shred of logic behind the anti-patent arguments. The reason this occurs is that property rights encourage the creation, investment, and dispersion of new technologies.

[Wanda]

@Dbhaling

"he does not know the difference between property rights and monopoly"

Uh, distinction without a difference. While, technically speaking, there is a legal difference between the two terms, in the informal sense that Posner uses them they are certainly equivalent. A patent gives the holder the right to exclude others from selling a _particular_ product in the market while a monopoly gives the holder a right to exclude others from selling _any_ product in the market - but this distinction is irrelevant in the sense that the terms are being used here (and in the case where no comparable substitutes exist, they are effectively the same anyway). And while Posner may be speaking loosely here, I guarantee that the most-cited living jurist understands the legal differences between monopoly and patent.

"Third, patents are granted for the reason all property rights exists, because the owner created something."

That's not even close to true. There are plenty of things that can be "created" but not patented - to say nothing of not needing to "create" something to have property rights over it. Patents exist because they are economically favorable: they incentivize innovation which creates economic growth. That's the only reason they exist and the only rational argument for their continued existence. If the cost of maintaining a patent system (both direct- and opportunity-costs) ever comes to exceed the benefit it confers, then it should be eliminated.

"There is absolutely no empirical evidence that countries are better off without a patent system."

Actually there's plenty of evidence. Just Google around. You can start with this:

http://www.theatlantic.com/business/archive/2012/09/the-case-for-abolishing-patents-yes-all-of-them/262913/

[JFPuget]

Sure, the US patent system has lots of inconvenient. It is hurting innovation in many ways. But throwing it away may be worse.

For example, would Apple have spent the money they spent on designing the first iphone without patent protection? Android success shows that patenting didn't prevent others from competing, but it certainly slowed them, hence protected some of Apple's investment.

One would say that patenting iphone isn't patenting software. I'd argue that is is all about software. That was the key innovation for iphone: design a device where all behavior is provided by software.

[Terry Bennett]

You can patent a death ray, and you will have the right to exclude others from building it; because of other laws, you probably can't build it yourself either. A government grant of a monopoly would include the right to build it. That is the distinction, and given that most patents do cover legal inventions I agree with Wanda that it is not worth the quibble. The practical effect of a patent is to create a monopoly even if monopoly is not explicitly conferred.

I take issue with Dbhalling's larger assertion, that Judge Posner's whole post is "disqualified". The post addresses the observed economic effects of the patent system, not the niggling intracacies of how the small minds inside the machine accomplish their work. On this topic, I for one am quite interested to hear what he has to say.

[David Snyder]

The cost of pharmaceuticals is part of the burden of excessive healthcare costs in the USA, which is the real driver of the national debt. Most countries let the US invent and then impose price controls, which is one option to restrain this cost. As pointed out above, the main cost to the companies is getting FDA approval, and then marketing afterward (too often for applications for which the pharmaceutical was not designed), and very generous executive salaries. I still hope for a better incentive system than the patent system, but it would be a good beginning to quarantine pharmaceutical/biotech patent law from the rest.

[J_R]

As a 30+year veteran of the SW industry its IMHO that almost all SW patents are invalid. SW patents are supposed to cover a single specific algorythm. What is being patented are business processes intended to be carried out by a computer. The USSC re gently ruled in theMayo Clinic's favor that business processes can not be patented. The claims are far too vague and broad. Posner's distinction seems to make sense, but is flawed in practice.

I would also point out that the current copyright law is even more flawed and damaging. Copyfraud is rife and the arbitrary distinctions against digital media are ridiculious.