Emotion and anecdotes unfortunately drive the debate on IP policy, particularly patent policy, because most people are suspicious and predisposed against monopolies. That is certainly understandable, at least in a vacuum. Who among us likes monopolies? Monopolies charge super competitive prices and consumers have no leverage, which leads frequently to inferior goods or services that consumers are forced to accept. This aversion to monopolies has been ingrained in American culture and heritage since the founding of the Nation, and was taken to new extremes during President Theodore Roosevelt’s Administration. Roosevelt stood up for the little guy and became known as a trust buster, what today we might refer to as a monopoly killer.
Unfortunately for those who seek to leverage the appropriate suspicion against monopolies, a patent is not a monopoly. A patent does confer exclusive rights, but as every inventor knows the fact that you have a patent does not guarantee that anyone will be interested in the good or service associated with the patent grant. Without interest there is no market, without a market there can be no monopoly. So patents are not equivalent to creating a monopoly.
Of course, patents can result in economic power through exclusion of competitors, and it is this fundamental aspect of the patent right granted by the government that attracts investors to companies that have acquired patent rights. But does the fact that a patent right comes with exclusivity mean that it is a monopoly that must be busted? Of course not! We have long understood that in order to acquire the level of innovation desired those who would create and those who would fund such creation need incentive. So a balance has been struck that seeks to provide enough exclusive rights to incentivize innovation.
An debate and and should be had with respect to the current one-size-fits-all patent system. That debate is ongoing at the USPTO regarding patent applications and processing speed, and we ought to have that debate on the patent term front as well to ensure we strike the proper balance. The unfortunate reality for haters of the patent system is that when we finally get around to having that debate much of the innovation they want to fall into the public domain sooner will likely have patent term extended, so they don’t want the debate. The fact is that it takes $500 million to $1 billion to bring a new drug to market. Many hundreds never make it to market and out of those that do only 1 in 10 is a blockbuster drug. So perhaps 1 in 1000 result in riches, and the investments necessary are extraordinary.
Thus, a compelling argument can be made that pharma patents need to be longer. On the other extreme are most technology gadgets. Is 20 years from the filing date a reasonable time to wait for them to fall into the public domain? With a half life measured sometimes in months for certain technologies the patent term seems unnecessarily long. None of this, however, means that patents are evil, or that they provide monopolies, or that if a company is well run enough to turn a patent portfolio into a monopoly position that it is bad or undesirable. I simply means that in some cases patent term is too short and in other cases it is too long.
At the end of the day all innovation falls into the public domain. In the case where no patent is applied for it is instantaneous. In the case where a patent is granted it is after about half a generation. So as Thomas Jefferson put it we suffer the indignity of exclusive rights for a limited period in exchange for innovation. The hope is the innovation will benefit society by making available many things that would not otherwise have been made available, all of which will be free to be used by anyone for the vastness of forever, but only once the patent expires. A pretty good deal really.
Those who argue the point explain that researchers innovate without seeking patents, but what they choose to ignore is that those researchers universally only take innovation to a certain point; and that point falls far short of commercialization and usefulness in the marketplace or to society. Universities and Federal Laboratories, for example, are great at basic research, but simply are not equipped to take their discoveries to market. They are even ill equipped to do the translational research (a term of art in the industry) necessary to transition from basic scientific discovery and usable innovation capable of being mined by start-up companies. See In Search of Tech Transfer Best Practices. So don’t fool yourself, without private investment and private industry there would be little, if any, useful innovation reach the public at large.
In some areas patents do not matter as much, and in some areas, such as the biotechnology industry, patents are the only thing that matters. For this reason focusing on anecdotes is not helpful. There will be an anecdote to support every position. We then become mired in the ridiculous debate that no one can win because everyone thinks their narrow view of the world or industry can be extrapolated far beyond what is intellectually reasonable.
Full consideration of the totality of the circumstances is necessary, and like it or not, those who provide the funding to start-up companies overwhelmingly want to see patents and understand what your patent strategy is and why it will provide a competitive advantage. This was the conclusion reached by a study recently done by the United States Patent and Trademark Office when they were trying to figure out how many jobs were being lost as a result of their own ineptitude over the last decade or so. The result was that 76% of VCs say that patents matter. This is confirmed by the collective experiences of numerous inventors, including Dean Kamen, one of the preeminent inventors of our time. This should hardly be surprising since it is only logical that no one would want to spend $2-5 million on a first VC round only to learn that others will compete without the need to recoup development costs. The fact that logic is supported by facts and what actually occurs in the industry really at some point needs to matter more than emotion and anecdotes.
VCs are always looking for exist strategies, and without a patent portfolio you eliminate many exit strategies, and also eliminate many opportunities for revenue, not things that are high on the VC goals list. For example, if everything turns south with a funded company that has a patent portfolio at least you have assets to sell to recoup something. With a patent portfolio you can also focus on core and license non-core to generate additional revenue, which many companies have found to be more lucrative than their core business. With a patent portfolio you have insurance against being sued for patent infringement (i.e., the counterclaim). With a patent portfolio you can make it difficult for competitors to compete without crossing the bridge and accepting the risk and perhaps inevitability of a patent infringement lawsuit. And perhaps most attractive to VCs is the fact that a growing tech company with a patent portfolio can be the target of acquisition by a much larger firm who wants the technology. Simply stated, there will be no buyout without patents because the solution would be to copy and put the smaller company out of business.
A patent portfolio is very important to those who do the funding. Those who choose to ignore the facts and reality and instead make unsupported and irrational comparisons to monopolies are simply living a lie. If it makes them feel good then I say GO FOR IT! But it is critical that those with innovations understand that there is a proper path to pursue, and that path includes patents. The major corporate tech giants have patents, so why shouldn’t you? If patents were not necessary then why would they be spending many tens of millions of dollars (or even more) a year on their patent portfolio? If patents are not necessary then they are admitting to abusing their position and unnecessarily eroding shareholder value through meaningless expenditure.
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4 comments so far.
Gena777June 22, 2010 09:51 pm
Thank you for noting that different patent applications should be treated differently; implementing this concept could contribute to increased efficiency at the USPTO. Thank goodness Kappos seems to be listening to such suggestions.
American CowboyJune 17, 2010 09:46 am
The patent incentive is the incentive to build the factory to make the production quantity of the invention, not just the prototype.
You correctly point out how monopolies are bad and correctly point out that patents are rarely monopolies.
One institution that is always a monopoly is GOVERNMENT. We need to get it into the public consciousness that all of the bad things we associate with monopolies are true of government. The closest thing we have to competition in government is contested elections, where the candidates compete for the opportunity to be the ones wielding monopoly power. The Founders attempted to thwart the monopoly effect with separation of powers and checks and balances. But, the continuing growth of Federal domination over the states is a continuing concentration of monopoly power.
Gene QuinnJune 16, 2010 05:21 pm
Thanks for your comment. It is astonishing that there is no consideration given to post-grant investments. It is pure fiction that a patent provides incentives by allowing for compensation, at least in the overwhelming majority of cases. How many inventors actually invent, patent and then sell the patent? The whole value creation proposition is to provide the incentive to invent by granting a patent that can then be used for some purpose thereafter.
I would love to hear more. The more we understand about how and why so many incorrectly come to erroneous conclusions the better we can articulate our points.
Ron KatznelsonJune 16, 2010 04:55 pm
Well said Gene!
The major impact and benefits of the patent system arise due to the post-grant investment incentives created by exclusive patent rights rather than merely incentives for inventors’ pre-grant invention activities. These two incentive types are often conflated by academic scholars who hold the view that the patent system must only compensate inventors for efforts and experimentation taking place prior to the grant of the patent. They often dismiss the post-grant ‘prospect’ power of patents, ignoring fundamental technology development and investment realities. This is what they teach in their patent law & economic classes.
Some academic scholars do so based on a mischaracterization of the ‘prospect’ analogy advanced by Kitch (1977), which they choose to call the “prospect theory.” Several of Kitch’s critics challenged his paper by publishing articles showing that not all aspects of his examples and analogies carry through to patent law and therefore they claim to have “disproved the prospect theory.” Because a “theory” falls or stands as a whole based on its ability to adequately account for EVERY evidentiary observation within its realm; it can be either correct or incorrect. For example, one solar eclipse observation could either prove or disprove Einstein’s general theory of relativity. Einstein’s THEORY would have been dismissed in its totality had the 1919 observation been inconsistent with its predictions. In contrast, an ANALOGY is not a theory and thus cannot be “disproved.” Read correctly, Kitch’s paper is an analogy and not a patenting “theory.” Yet, these academic scholars, having “disproved” what they call a “prospect theory,” leap to the incredible conclusion that patents do not actually have a post-grant ‘prospect’ role.
They apparently succeeded in propagating this false notion. Ask any of their school’s graduates what in their view is the purpose of the exclusive rights granted by patents. In the overwhelming majority of cases, you will receive an answer along the lines that “it provides incentives to inventors to invent and it compensates them for their inventive efforts.” You will seldom hear any mention of incentives for post-grant investments.