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August 24, 2007

Bifurcate the Patent System?

Patent Hawk and I both believe in the value of the patent system for the United States. More specifically, I don't think it absurd to suggest that the phenomenal industrial growth we've seen in the United States since the 19th century has been due in part to the incentives created by the patent system. Where Patent Hawk and I may disagree, however, is on the question of whether uniformly stronger patents are good for our economy. In particular, I believe that the recent Supreme Court cases and PTO rulemaking cutting back at the scope of patent protection may be beneficial for some high-growth markets in our economy.

It is a rule of law under our constitution that Congress shall have the power to "promote the progress" of science and technology by granting patents to inventors. To paraphrase in economic terminology, Congress can, as necessary, grant patents as an incentive to develop new technology.

The main reason I support patent reform is this: Some new technologies get developed without the extra incentive of patents. For these "fully-incented" technologies, the patent system can be more like a tax than a credit. In the worst case scenario, the inventor who already had incentives to develop new technology does not apply for patents, but then has to pay the other later inventors or copyists whose only incentive was patents.

The messes of the patent system can thus be tied to the system's lack of economic sophistication. For the most part (Hatch-Waxman is an important exception), it treats all technologies the same. Perhaps the most important and effective step we could take in patent reform is to recognize that inventors have different incentives in different technological markets.

Having identified the mess, it's easy to spot the problem that created it: technology markets are as diverse as technology itself. It's tough to distinguish a "fully-incented" technology market from one that would benefit from the added incentive of patents. We have one patent system for all technology because we're unable to draw the line.

Notice how this helps explain why patent reform legislation has been so difficult to pass. You're either for the patent system or against depending on what side of the line you're on. Pharmaceutical companies are generally on one side; consumer-Internet companies are generally on the other. If we were able to reliably divide the "fully-incented" technologies from the rest, we'd make almost everybody happy. Pharmaceutical companies get stronger patents; consumer-Internet companies get weaker ones.

How to draw the line? In economic terms, I think the venture capital market defines reasonably well the "fully-incented" technologies. If an inventor is able to go out and get funding for her idea on the private market, then additional government incentives to invent are generally irrelevant. It's true that some VCs like to see their portfolio companies apply for patents, but this is because in a world with the patent system it's a tax you have to pay (see above). Patent protection is at best a high-order term in the expansion that VCs use to decide whether to invest in a new company.

But although precise economically, "subject to possible venture capital investment" is not a great legal category. As an imperfect substitute, I suggest the following: reverse-engineerability.

Technologies that are easy to reverse-engineer need patent protection in the sense that without it, copyists are far too likely to encompass part or all of the value created by the inventor. Technologies that are difficult to reverse-engineer, by contrast, may be marketed and sold for some time before a trade secret theft or independent invention permits others to enter in competition.

Readers, what are your thoughts? Could a patent system that denied patentability to technology that could not be reverse-engineered ever work? As a practical matter, this could be implemented simply by amending 35 U.S.C. ยง 101.

An earlier post on a related note, from July 30.

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Thanks in part to his entry on Entrepreneurship on August 17, Patent Hawk has invited me to guest blog at the Patent Prospector. As a longtime fan of his blog, I'm honored to have the chance to share some thoughts with him and you, his readers.

- Michael Martin

Posted by Michael Martin at August 24, 2007 10:08 AM | The Patent System

Comments

BS...

Patents are granted in exchange for public disclosure of new and useful inventions.
If something cannot be reverse-engineered and that something is important for technological progress patent grant is warranted to prevent potential loss of invention or, in the least case, a duplication of effort to come up with the same invention.
Remember Middle Ages when some inventions died with their inventors ?
Patents are supposed to be a public repository of all new and important ideas so those ideas are preserved forever and become a public domain after a relatively short period of exclusivity.
of course, I am talking about real inventions, not the kind of garbage coming out of MS and IBMs of the world

Posted by: small inventor at August 24, 2007 1:05 PM

small inventor, if something cannot be reverse engineered then a wise inventor is not going to obtain a patent unless there was good reason to believe someone else was going to do it first. So I don't really understand that point.

That said, I'm not sure that this is a helpful division for exactly that reason. The number of patents that are excluded will be few and far between. It would not help in the software arena or the biotech area.

The only place it is likely to see much effect is areas like nanotechnology or certain composite materials in which inventions are likely destroyed upon examination.

Posted by: mmm at August 24, 2007 1:58 PM

Mike, good to see you're doing well. Agree with your basic economic premise that a patent is a waste if independent invention would occur without the patent incentive (in fact I have an article coming out soon about it, email me if you're interested), but not sure about your solution.

First, a good many patents in a patent-thicket are probably easily reverse-engineered. A business method patent (e.g. online auctions per eBay) is often self-disclosing upon actual use. Technologies that can be protected as trade secrets have less need of patent protection (since there is a trade secret alternative), but it does not follow that patent protection is undesirable in such cases. In fact, the patent system affirmatively seeks to force trade-secret holders to enter the system to facilitate public domain entry in 20 years.

Second, from a legislative public choice perspective, integrating the patent system across technologies serves a very useful balancing role. Pharma and IT kind of balance each other out and we end up with a middle-ground 20 year term for all patents. On the other hand, in copyright arena where right-holders are concentrated and consumers dispersed, we have a consistent expansion of copyright. Slicing up patent rights for various technologies poses the risk of undoing this balance.

Posted by: TJ at August 24, 2007 2:00 PM

small inventor,

We don't have to worry about trade secrets dying with their inventors anymore because we have something now that those inventors didn't during the middle ages: corporations. An inventor of a technology that is difficult to reverse-engineer can found a company (e.g., using venture capital), assign the trade secret rights to that company, and the corporation can then provide the benefit of that invention to the public forever (or for as long as the public is buying). It's true that the public derives benefits from the disclosure of trade secrets in patents. But what I'm arguing is that _for technology that is difficult to copy_ those benefits might not be greater than the costs of patent system.


mmm,

I'm not sure I agree that software technology is easy to copy. Without seeing the source code, it's pretty hard to figure out what's going on at the backend of websites like Amazon, PayPal, or Facebook. In patent litigation, you often can't tell whether software is infringing without seeing source code. I think I agree with you more about biotech. Fewer biotech patents would be denied because biotech inventions are often easier to copy. But it also seems like patent thickets are less of a problem for biotech startups.


TJ,

Glad you found me. I'd definitely be interested in seeing the article.

On point 1, I agree that the "reverse-engineerability" line is both under- and overinclusive. But it's hard for me to think of a better category as an alternative. The business method patents (like Amazon one-click or online auctions per eBay) can be dealt with through anticipation or obviousness standards.

The argument for granting patents on technology that could be protected with trade secrets has made much more sense since Lord Mansfield made enabling disclosures a patentability requirement, but outside a few niche markets (optical engineering?) the enabling value of patent specifications is diminishing small -- especially since the earliest that others will see the disclosure is 18 months after filing. There is still something to the argument in the sense that patenting trade secrets may inoculate one corporation from trade secret theft risk in dealing with another corporation in a joint venture; but those types of issues can usually be dealt with just as easily through contract and tort.

On point 2, I get how decoupling IT from Pharma could upset the balance of power within government. But I'm not certain that we're better off with the status quo, which I take it you're agreeing is not ideal for either IT or Pharma. In particular, assuming we decoupled the two, and granted patents only to Pharma, it's not clear that Pharma would successfully be able to continue lobbying government for longer and longer patent terms the same way that copyright holders have. There are plenty of political challenges to anyone who proposes to raise health care costs at this point.

Posted by: Michael Martin at August 24, 2007 2:42 PM

The lynchpin premise is that patents are unnecessary: inventions occur without a patent incentive. Well, yes, in time, that may be true of many technology areas, except perhaps for those discoveries that take concerted effort for development, 'concerted' being a code word for uneconomic without some guaranteed payback. But inevitability is a non-issue.

The incentive of patents always has been to hasten full disclosure, in return for a limited duration monopoly. Looking at patents as singular inventions misses the primary economic point: patents create a dynamic of innovation. By full disclosure, creative boffins can quickly absorb others' inventions and take the next step. Patents increase the rate of invention, which translates in economic terms to improvement in productivity rate, not just productivity itself. Hence, patents offer a multiplier effect on productivity.

The built-in irony of patents is that, while supposedly granting exclusivity power, the value of patented technology is in its adoption. Strict monopoly enforcement of patents, where the patent holder does not practice the invention, does nothing but retard progress. That's the economic argument against injunctions, particularly for non-practitioners, and for forced licensing. On that same note, injunctions between competitors, prima facie at least, lessens competition. But there is a sophomoric aspect to this analysis, as economics does not describe the whole terrain: there is the issue of equity to consider. But the issue of adoption is an aside to that of invention itself.

Economic sophistication is practically a buzzword for legal impracticality. Apportionment of damages is a concept solidly grounded in economic theory, but it has been tried, and it was ruinous; see: http://www.patenthawk.com/blog/2007/05/damaging_damages.html.

The concept of reverse engineering as a patentability metric is obtuse: how would such legal language be crafted, and afterward predictably interpreted? More than anything, The Patent Reform Acts of 2005 to 2007 are recent demonstrations of Congressional incompetence and craven subjugation to special interests.

Michael Martin makes a good point that seemingly natural incremental developments don't merit patent protection, or at least not the "full monty." The concept is that of obviousness, and that issue has been thoroughly and radically disposed by SCOTUS KSR, as well as further demonstrating the dangers in how even somewhat careful statutory language with longstanding precedent can be wildly reinterpreted.

KSR has unleashed a dynamic that will in time provide existence proof of the value of patents for incremental innovation. It is inevitable that the economic force of the KSR usurpation will be to strengthen the hand of large corporations at the expense of smaller companies, and to a large exclusion of individual inventors.

Posted by: Patent Hawk at August 25, 2007 7:25 PM