[Tim Lee]
In my last post, I suggested that effective property systems have two important chracteristics: clear boundaries and positive incentives for productive activity. I showed a graph from Bessen and Meurer's Patent Failure suggesting that patents on chemical and pharmaceutical products appear to be behaving as a well-designed property system ought to. Now, the bad news. Here's the same graph for the rest of the patent system:
Again, the dashed line is total profits attributed to patents, while the solid line is the cost of patent litigation to potential infringers. As you can see, the situation is very different in non-chemical industries: in the late 1990s, the costs of litigation from non-chemical patents were several times as large as the profits those patents generated for their owners.
These statistics, if accurate, are quite extraordinary. If real property worked this way, we'd see $4000/month in litigation costs arising out of trespassing allegations for every $1000/month rental property. Needless to say, there wouldn't be much real estate development in such a legal environment.
The obvious response is that we shouldn't be overly concerned with "trespassers" (alleged patent infringers) because they shouldn't have trespassed in the first place. But this is where the point about unclear boundaries come in. What we're seeing here is not that some companies are deliberately infringing on other companies' patents as an alternative to investing in R&D. Rather, the problem is that there are now so many patents on the books, many of them quite broad, that it is effectively impossible to develop almost any kind of technology without infringing numerous patents. Even worse, because the boundaries of patents are so fuzzy, it's generally not even possible to predict which patents will apply to which technologies. Even an innovator who earnestly tried to avoid infringing, by licensing or inventing around all the relevant patents, is likely to run afoul of a patent his lawyers didn't find, or to face litigation over a patent his lawyer thought didn't cover that invention. What this means is that the patent holders and the alleged infringers are largely the same companies. Microsoft, for example, holds close to 9000 patents, yet it faces dozens of patent lawsuits every year from smaller companies.
How seriously should we take Bessen and Meurer's numbers? Their book just came out so I have yet to see serious criticism of their findings. And I don't know this area well enough to have a strong opinion about how seriously we should take their specific methodology. But to my non-statistician's eye, they appear to have done their homework. On the profit side, they survey a lot of different estimates of patent values and tend to accept the highest reasonable estimates, giving the patent system the benefit of the doubt. On the cost side, their results may be more open to challenge. It's important to note that the litigation costs they estimate are not limited to direct expenses like attorney's fees and expert witnesses. Rather, recognizing that litigation imposes significant costs beyond attorney's fees, they attempted to estimate costs by observing changes in stock price in response to the announcement of lawsuits. If the efficient market hypothesis is correct, this should give a reasonable estimate of the total costs of patent lawsuits to defendants. However, the error bars are likely to be large, so the numbers should be taken with a few grains of salt.
Another important caveat is that their methodology is focused on publicly-traded companies. Their methodology doesn't work for non-public firms or individuals because they don't have stock prices that can be used as a basis for calculations. And indeed, it's likely that things are less grim for smaller inventors because they tend not to get sued as often. However, it's important to keep in mind that the bulk of research and development is done by publicly traded companies, and large companies tend to hold the most valuable patents. So even if the patent system works better for smaller companies than larger ones, the net effect of non-chemical patents is still likely to be negative.
A final point to keep in mind here is that the bar Bessen and Meurer are setting for the patent system here is incredibly low. In a well-functioning property system, litigation shouldn't simply be lower than associated profits, it should be a small fraction of profits. We can see this in the rates for title insurance, which costs a fraction of a percent of the value of the house. Likewise, movie studios typically obtain errors and omissions insurance to cover themselves in case someone discovers that they've inadvertently used copyrighted material without getting the necessary permissions. In contrast, it's virtually impossible to get insurance that will cover inadvertent patent infringement, because there's no reliable way to verify that the necessary patent rights have been obtained the way insurance companies do with copyrights and real property.
So even if Bessen and Meurer's litigation cost estimates were off by an order of magnitude—if litigation consumed a half of patent profits, rather than four times their value—that would still be strong evidence that the patent system was in desperate need of reform. (As reader Rolf Andreassen points out, even the pharmaceutical graph I showed in the previous post wasn't stellar—litigation costs were eating up about a quarter of patent profits at the end of the period, and they were rising rapidly) A well-designed property system is one in which the costs are not just lower than the profits, but are a small fraction of them. Unless there are really massive flaws in their numbers, which seems unlikely, the patent system needs an overhaul.
In my final installment I'll talk about how things got so bad, and discuss some possible reforms.
I think you've missed a major aspect of this issue, namely, that infringement oftentimes is not inadvertent at all, but a matter of strategy.
Certainly in pharma, at least, many generic companies intentionally infringe as a pure and entirely rational business decision. The Hatch-Waxman Act even encourages it, by offering 180 day exclusivity to an infringer who successfully invalidates a patent.
Consider Pfizer's suit against Ranbaxy over Lipitor. Ranbaxy probably spent, say, $20 MM for a 1% shot at Lipitor, a $12 BN/y drug, several years before patent expiration. The numbers work, so companies infringe, and patent holders sue (for the same reason). Infringers can hope to invalidate even apparently sound patents on a deus ex machina basis, e.g., a finding of inequitable conduct based on some obscure internal memo that turns up in discovery and can be portrayed as the intentional withholding of material information from the PTO.
This happens in pharma every day. I bet it happens in other industries, too. It's all part of the game.
I would be interested in seeing a breakdown by the other patent categories, i.e., mechanical, electrical, and software/business methods. Infringement is a much fuzzier area in these arts, whereas the inventions in the chemical/pharma arts are more defined.
I also think that a closer look at the individual years from about 1990 would be fruitful, and maybe trace certain costs in litigation to changes in the laws or litigation practices. My personal view is that Markman hearings have increased the average cost of patent litigation. I also think that we will be seeing another increase in costs due to the Supreme Court's guidance in KSR--how exactly are we supposed to use "common sense" in determining whether an invention is obviousness?
Patent litigators like fuzziness, because it lets them try out all sorts of theories on the courts, which all increase the litigation costs. Patent prosecutors like black and white, because we are all at heart engineers, with an engineer's view of the world, unlike the litigators who don't have to be registered patent attorneys.
Very interesting. Thanks all. :)
Still another problem with patents as properties is that an owner can indefinitely hold a patent which, if it were a real property, might fall into public use under common law, or blighting under zoning ordinances. Then, at any strategically convenient time prior to expiration, s/he can bring full rights of that property to bear without having put it to any use whatsoever.
Hence, cases like the one against RIM and its Blackberry network, in which a lawyer -- acting on behalf of a dead man for a property that the dead man did not develop and which said lawyer is not interested in developing -- comes within hours of shutting down a company whose product enhances the lifestyles and productivity of millions of other people and businesses by capricious fiat, then ultimately gets a settlement in excess of a half-billion dollars merely for existing.
I have difficulty believing that this was the original purpose of patent law.
Mouse, patent terms are limited, so no one can hold them indefinitely.
Turn your RIM scenario around. Shouldn't someone who invents something have the right to decide (for a while) what is done with it? Perhaps the invention isn't commercialized immediately because the inventor is negotiating with potential licensees. So if the inventor, say, holds out for a better deal, one could then expropriate the invention from him? That hardly seems fair.
The scenario that led to the big license fee (threat of imminent injunction) probably won't recur for non-practicing patentees after eBay.
Mouse, patent terms are limited, so no one can hold them indefinitely.
All I've got to say to that is that if you don't defend your property and someone is using it as a road, you can lose claim to that portion of your property in a lot less than twenty years.
I always liked the quote from the radical anti-patent crazies (I don't think they are crazy but everyone else does).
"Monopoly corrupts, absolute monopoly corrupts absolutely."
And before I get taken to task. I know Lord Acton, in the tradition of most brilliant thinkers and very much not in the tradition of most brilliant politicians, put a "tends" in his original quote.
From your two graphs, chemicals & pharma account for $15B in patent profits, while all others only account for $3B? Qualcomm, TI, and Intel combined for $13Bln in profit in 2007, and that is just 3 semiconductor companies.
Having vague and overlapping boundaries between patent rights certainly makes the system more complex but such complexity also may have a positive effect for innovation. For example, the comparison can be made between the development of a particular technology and the development of a biological species. In order for a biological species to successfully adapt to random environmental changes it requires a certain degree of genetic diversity which may be obtained by cross-breeding among different groups. However these cross-breeding groups require sufficient overlapping genes to be suitable for mating. In a similar manner a combination of elements from diverse inventions may result in an invention creating a new and nonobvious technological advantage over prior techniques but in order to be effectively implemented there needs to be sufficient similarity between the "parent" inventions. See John Koza's books on genetic programming for more info. about the analogy between biological evolution and invention.
While overlapping patent claim language clearly does lead to more litigation and patent disputes the root problem is more likely to be that too many lawyers and not enough inventors are involved in the patent process. If each inventor applying for a patent were required to actually review patent application of competing inventors in their field (such as in a peer review system) then maybe the quality of patents would increase and the distribution of new technological information would become more efficient with broader patent claims being more effectively dealt with. There is some initial attempt to do this with a "Peer to Patent" pilot program. Unfortunately most corporate inventors are given little incentive to peer review others patents and very few engineering schools give any in depth instruction about patents so there is no knowledge base among enginners about what to look for in such efforts.
What if we;
1. Dramatically increase the cost of a patent to make sure that there's intent to use it and it's not just 'defensive.' Allow a 1 or 2 year patent pending period to accomodate dealmaking and acquisition of venture capital.
2. Publicly display the patent prior to approval and offer some of that money as a reward if anyone can demonstrate prior art.
Of course, there are probably huge political barriers to these things
Dramatically increase the cost of a patent
If you get your patent for less than $15k you've gotten a really good deal; some of the big tech companies get them for less but those patents are usually badly drafted and not likely to do much good if sued on. Patent office fees are only a fraction of that; raising them will hurt the little guy more than the big guys.
Publicly display the patent prior to approval
This is done already, although there is no reward money.
The big barrier is the sheer volume of applications; your competitors could get a sort of monetary reward by stopping you before the patent is issued, but they'd have to invest in reading all the applications as they're published, and that's just not feasible.
you can lose claim to that portion of your property in a lot less than twenty years.
At common law, 20 years was the adverse possession period. It's 10 years in most places now, but I've heard of 7 in some.
One suggestion I have for dealing with some of the problems would be to explicitly give alleged infringers the affirmative defense of abandonment to avoid injunctive relief. In other words, if the defendant can show that P has not used or worked towards developing use of the patented material in the last year, P can at most get some mandatory royalty. This would stop situations like the Blackberry case and eliminate a lot of patent troll leverage, where people acquire patents without any intention of developing them, and can hold the sword of Damocles of a permanent injunction over defendants' heads to crank up settlement. Get rid of the threat of a permanent injunction, and, for example, RIM wouldn't have had to fight tooth and nail to avoid getting effectively enjoined out of business.
Brian: most people assume that eBay did exactly what you suggest. At any rate, it certainly eliminated the almost-mandatory injunction rule from before.
As the defense side patent firm I work at would tell you, the fact that people assume eBay moved in that direction doesn't mean that the courts have actually adopted such a rule, and more importantly, it doesn't mean that potential infringers can rely on it.