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April 24, 2005

Patent Economics: Part 5 - Theories

There are several different interrelated theories about patents. Some consider a patent as a natural right, to be able to own and profit from one's invention. In securing a property right, a patent solves the inventor's dilemma, providing a commercial platform for promoting technological innovation, even though some see patents as an obstacle to innovation. Certainly a patent is a business tool, as it offers potential for profit through licensing, and the prospect of a defensive shield against patent assertion by others (countersuit).

(1) A Natural Right

Chief Justice John Marshall wrote that patents fulfill one of the "great fundamental principles of right, and of property." As a natural right, when a new, useful invention is created, its ownership belongs to its inventor.

On this theory, an invention's creator has a natural right to control the destiny of her invention, to use and profit, even after disclosing the technological innovation to others. The theory of natural rights of free people is the foundation of political constitutions for democracies around the world.

(2) The Fruit of Labor

Should a person possess and profit from the fruits of their own labor? If one does not believe that slavery is justified, there is no socially acceptable basis to reject the notion that those people are entitled to their own creations. The labor theory underpins rationale for all intellectual property protection, especially copyrights and patents.

As part of the French revolution at the end of the 18th century, patent law was established as protection for the people against their their rulers. Patents are rightly viewed as ownership of the result of inventor's creative labor.

(3) A Property Right

The essence of a property right is the right of exclusion - to prevent trespassing. Intellectual property law extends the concept of property to the outcomes of intellectual endeavors. Patents create a property from information.

Nominally, information is a public good. A patent restrains knowledge from becoming a public good, as least for a time. A patent solves what economists call an appropriability problem - that without patent law, once disclosed, inventions are free for the taking.

A central issue with regard to patents as a property right is determining the size of a patent property - legally, the doctrine of equivalents. Where is the line properly drawn for establishing a property right for an invention? Should an inventor be granted rights to similar inventions, or be limited only to what he knew at the time of the invention? If there were no doctrine of equivalents, it could be quite easy to work around a patent claim, and it could be even more difficult to draft an acceptable patent claim than it already is, or have a claim interpreted as a property right. Without a doctrine a equivalents, the value of patents could become meager, and the inventor's dilemma might still exist.

(4) Monopoly

In its ability to exclude, a patent exists with the power of a quasi-monopoly. That itself provides the economic value of a patent. As described earlier, product monopolies impose a cost, but a patent represents a monopoly of a unique sort: something that did not exist before the grant of monopoly.

(5) Social Benefit

Prosperity rides the horse of technological innovation. If you accept the premise that patents add economic incentive to allocate resources to invention, patents benefit the societies in which they exist. Patents promote innovation, to the benefit of society as whole.

This theory of social benefit hangs upon consistency in the treatment of patents as a right. Diminishing the scope and/or enforceability of patents destabilizes the economic incentives that patents provide. Congress should keep that in mind as it ponders limiting the injunctive power to stop patent infringement, the fundamental patent right - the right to exclude.

(6) Market Regulation

A patent is a form of market regulation, a legislative remedy to a market failure. If left to the market, information as a public good, inventors would not have control over the benefits of their own inventions. So the government regulates, creates a property right to solve an otherwise intractable problem of fostering innovation (the inventor's dilemma).

(7) Investment Incentive

The dominant effect on the economy of patents is reducing the risk of committing resources to innovation.

Imitation is the sincerest form of flattery. Without patent protection, successful innovative products would quickly be copied. There wouldn't be investment in research & development of innovative technology if the cost could not be recouped through exclusivity. A patent assures confidence that risking capital on research can pay off with exclusive rights to the results. Reducing this risk improves the equation for calculating the profitability potential of research projects, resulting in greater investment in invention. Here is another theory where stability in the scope and interpretation of patents is an intrinsic factor relating to investment risk assessment.

As an example, the Plant Variety Protection Act of 1970 provided patent protection for sexually reproducing plants. In the 1960s, about 150 new plant varieties were developed in the U.S. In the 1970's, after providing patent protection, over 3000 new plant varieties were developed. Truly, patents provide the seeds for innovation.

(8) Seeking Rent

In economics, rent describes a situation where return on investment exceeds the opportunity costs. Rent comes to a patent-holding company by allowing the company to reduce costs and/or increase profits through the patented feature copy protection that patents afford. Economists characterize the patent system as a "rent seeking" environment because it results in allocating resources to generate growth-promoting technology. Patents inspire invention because companies can hope to recoup the cost of investing in research.

(9) A Prospect

A patent creates a tangible asset from invention. If an investor feels assured that a patent would confer a lucrative commercial right, that is, that the envisioned patented product would be successful, this adds incentive to initiate the invention process. Successful invention in an area leads to further innovations in the same area, allowing greater scope for claims, and enhanced protection.

The prospect theory emphasizes the point of early disclosure to stake a claim. A first-to-file patent system meshes with the prospect theory - as with gold prospecting, stake claims as early as possible.

(10) A Reward

The idea of treating a patent as a reward for invention is both simple and hoary. The reward is a right to exclude. In economic terms, an inventor appropriates the social returns to innovation.

Though appealing in its simplicity, the reward theory owns the blame for historical misunderstandings of the nature of patents. The judiciary has at time allowed attacks on patents based on the reasoning that if an invention did not technologically merit a reward, the patent should be invalidated. The Supreme Court has held that the issue of validity should be decided in litigation cases, even if the assertion is mooted by non-infringement, so as to snuff meritless patents.

Under the reward theory, there is a presumption that technological innovation is inevitable, and that the patent reward of exclusivity is merited only if by dent of meritorious technological achievement. Adherence to the reward theory supports the notions of a threshold of innovation to merit patent protection, and a patent grant commensurate with a measure of innovation claimed.

Arising from the reward theory, there have been proposals at times that software patents do not merit the protection afforded other patents, owing to the way by which software innovation occurs: as a product of mental insight, with no physical manipulations. One suggestion has been to limit the term of software patents to some duration less than other patents. That something done electronically in hardware may often be done in software makes this a facile proposal. Moreover, deriding a software patent as merely the outcome of a thought experiment only belittles software innovation. It is worth pondering that innovation in software has accelerated in the time since software patents have been allowed (the early 1980s), and that the largest software companies hold the most patents, and devote the greatest resources to R&D. This is not a statement of stasis, but of the the dynamics of the software business. In software, more than any other industry, failure to continually innovate leads to a company's demise.

Both the prospect theory and the reward theory emphasize the importance of the patent office as arbitrator of obviousness in granting patents.

(11) A Contract

The concept of social contract is that of an agreement between citizenry and its government, as opposed to the feudal concept of the divine right of kings, upon which the power of the Catholic church was built.

Ideas about the social contract date back to Greek philosophical writings in the 5th century. Beginning in the 17th century, the theory of social contract was linked with the concept of natural law. In this regard, a patent as a contract corresponds with the theory of a patent as a grant of natural right. John Locke was an influential writer about the social contract and natural rights.

The courts find the concept of a patent as part of social contract appealing, relying upon the theory in decisions about enablement and description requirements.

Much information published in patents would not otherwise be disclosed in absence of a patent grant. Without an opportunity for patenting, the inventor's dilemma augers for secrecy.

The contract theory flies in the face of publication prior to allowance, which has become endemic in the U.S., but is insensible - an applicant cannot recover lost secrecy if a patent is not granted. Better to keep the secret unless patent protection is afforded. 35 U.S.C. §122 covers publication of patent applications, with 35 U.S.C. §122(b) allowing non-publication.

(12) Inventing Around

As described foregoing, the monopolistic effect of a patent is confined to the availability of substitutes. Given the power of a patent to exclude, the patent system promotes the development of substitutes, fostering an environment of innovation. Particularly powerful patents with broad scope stimulate leapfrogging: jumping to the next generation of technology. Thus patents encourage technical advance, a greater diversity of products, and competition. The result is a more productive economy.

The series concludes in the next installment with perspectives in evaluating the patent system.

Part 1 - Monopoly
Part 2 - Substitution
Part 3 - The Inventor's Dilemma
Part 4 - Incentives
Part 5 - Theories
Part 6 - Perspectives

Posted by Patent Hawk at April 24, 2005 12:02 AM | The Patent System