[Tim Lee]
The phrase "intellectual property" to describe the patent and copyright systems has become so commonplace that few people give it a second thought. Superficially, the copyright and patent systems are structured like traditional property systems, and this has become the dominant way we think about these legal regimes.
But determining whether a legal regime is a well-behaved property system is an empirical question, not merely a matter of semantics or tradition. For example, I'm sure that New York cabbies consider their taxi medalions to be their property—and valuable property at that—but few economists would characterize the creation of such a scheme as "strengthening property rights." Effective property rights systems have two important characteristics. First, they enhance certainty and promote efficiency by establishing clear boundaries to contested resources. Real property, for example, has a system of surveying and claim recording that allows any interested person to determine who owns each plot of land and what its precise boundaries are. Second, property rights create positive incentives for productive activities by rewarding people who produce new assets or enhance existing ones.
The first consideration cannot be an argument for treating patents as property because ideas are non-rivalrous. Once an idea has been created, it can be used freely by anyone. Hence, the analogy between patents and traditional property rights rests entirely on that second characteristic: that patents, like real property, creates incentives for productive behavior by giving inventors exclusive rights over the use of their inventions. Indeed, patents can be considered an effective property system only to the extent that it performs this function. If the existence of the patent system, on average, makes invention a more profitable activity than it would be otherwise, then it makes sense to consider patents a kind of property right. If, in contrast, the patent system creates no net incentives for innovative activity, or worse if it creates a net disincentive, then the usual incentive-based arguments for property rights simply don't apply to the patent system.
And indeed, the second characteristic (positive incentives for innovation) depends crucially on the first (clear and predictable boundaries). As we learned from Hernando de Soto, "property" systems without clear boundaries and predictable rules are an impediment, not an aid, to economic growth. A system in which boundary lines are unclear—if, say, a given plot of land is claimed by a dozen surrounding residents with no clear process for determining who is the rightful owner—the resulting uncertainty and the costs of litigation will swamp the positive incentive effects of the legal regime.
That insight is the starting point for Patent Failure, an important new book by James Bessen and Michael J. Meurer. A well-functioning patent system should look like this graph, lifted from page 139 of their book:
This shows how the patent system affects the chemical and pharmaceutical industries. The dashed line at the top shows the profits from all chemical and pharmaceutical patents, while the solid line on the bottom shows the costs to alleged infringers of patent disputes—some of which, we should remember, are innocent. As we would hope, the top line is significantly above the bottom line. The net incentive for innovation created by the patent system is the different between these lines—the profits to patent holders minus the costs to alleged infringers from patent lawsuits. While the uptick in litigation in the late 1990s is worrisome, the patent system seems to be working the way it's supposed to in these industries. The positive incentive effects of patents appear to be significantly larger than the deadweight costs of patent litigation.
In my next post, I'll show you what the graph looks like for the rest of the patent system, and discuss the implications of this for patent policy.
I can't wait to see the next post on this--I'm usually mired down in patent prosecution as opposed to patent litigation, so I don't get to see the business side very much.
What I want to do here is quickly explain what a patent is and what patents do for the patent owner. Simply put, a patent is a contract between the owner and the government for a limited monopoly in exchange for full disclosure of the invention.
A patent acts as a shield, permitting the patent owner to prevent others from making, using, or selling the defined invention in the country which grants the patent. Patents exist country by country, and a patent granted by the U.S. has no effect on someone in India, but if someone in India makes a product covered by a U.S. patent, that product can't be sold or used in the U.S.
The usual process for preventing infringement is for the patentee to notify the alleged infringer of the infringement. The alleged infringer then has a patent attorney do an analysis to see if they think infringment is actually occurring. If so, the alleged infringer will either stop infringing or try to license the patent. If not, a war of words between attorneys begins, and the issue will likely end up in Federal District Court.
Patent litigation is expensive, with estimates of $500K to $1M (minimum) for the patent owner. This makes it much easier for the big guys to beat the little guys into submission.
The contract of a "Letters Patent" (as it's formally named) only lasts in the U.S. for 20 years from date of filing the patent application. Due to the length of time it takes to obtain a patent (2-8 years, depending on the field of the invention), pharmas, who also have to go through the extensive regulatory process, frequently don't get the exclusivity granted by the patent for more than about 6 years. That's one reason for the high prices of new drugs--the time allotted within which to recoup the costs of the drug is not really very long. If the regulatory process could be sped up, or a longer life given to certain new drug patents, the costs could be recouped over more years, thus lowering new drug prices.
> I can't wait to see the next post on this
Indeed! As I scrolled down in Google Reader I was anxious to see how the graph would look for other industries, only to find a cliffhanger for the next post. Please, don't make us wait too long, Tim!
It does seem to me that even this graph for a well-functioning patent system shows a problem developing after 1995. Costs are rising much faster than profits; before 1995, costs are steady (except for the weird bump in 1990 - some particularly big case?) while profits rise slowly.
a problem developing after 1995.
From Markman in 1996 maybe? It's not clear to me that arguing claim interpretation to the judge is more expensive than arguing it to the jury, but appeal costs would probably be higher. And State Street Bank, blessing business method patents, was 1998; I note that this graph is for firms, not products, so there could possibly be some business method issues.
I'm just speculating. But not in the good, get-rich-quick sense, just in the bad, I-have-no-real-idea sense.
I suggest, although entirely without basis, that the lawsuits started getting hairy once the money started getting really good. The graph, though, contradicts that assertion.
The graph, though, contradicts that assertion.
Not necessarly. Just because there was money in the market, didn't mean that it was easy to get a chunk of it via litigation. The IP landgrab of the late 1990s (and worse, the sanctioning of business process and software patents by the US) opened the doors to a goldmine.
There they go again.
The base lacking bashers of patents are creating yet another fictitious base from which to launch their attacks.
Since when is real property law clear and unambiguous?
A few simple examples can make it all illuminated as to why the premise is invalid:
1) Landowner B notes an obnoxious odor wafting over onto his property from adjacent Landhold A. In fact his good neighbor of 10 years, Landowner A, has just decided to take up pig farming as a hobby. What are B's rights? Discuss.
2) Landowner B has recently gone "green" and erected solar panels on the Southern edge of his property. However, his good neighbor of 10 years, Landowner A, has just decided to also go "green" and plant fast growing evergreen trees on the Northern edge of his property. The trees will soon obstruct B's solar panels from ever seeing the sun. What are B's rights? Discuss.
We can go on and on. The point is that real estate rights are no more clear and unambiguous than other legal rights. So the argument about patent rights not being absolutely meted down to micro inch precision are based on a fictitious mythology about the clarity of real property law. The patent bashers try to take advantage of those who have never studied real property law (land usage law). Think there there are clear "property" rights elsewhere in the law? Think again.