Intellectual Property Competition

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Intellectual Property Competition

How do Patent and Copyright Protection restrict Competitors

Both patent and copyright protection, though particularly the former, may be excessive.

To evaluate optimal patent protection for an invention, one has to consider both the cost of inventing and the cost of copying; the higher the ratio of the former to the latter, the greater the optimal patent protection for the inventor. The ratio is very high for pharmaceutical drugs. The cost of inventing a new drug, a cost that includes the extensive testing required for the drug to be approved for sale, is in the hundreds of millions of dollars, yet for most drugs the cost of
copying—or producing an identical substitute—is very low. And so the ratio of the first to the second cost is very high, making it hard for the inventor to recover his costs without patent protection (and for the additional reasons that the present value of the revenue from sale of the drug is depressed because of the length of time it takes to get approval, and that the effective patent term is truncated because the patent is granted, and the period patent
protection begins to run, when the patent is granted rather than, years later, when the drug can begin to be sold).

Pharmaceutical drugs are the poster child for patent protection. Few other products have the characteristics that make patent protection indispensable to the pharmaceutical industry. Most inventions are inexpensive, and even without patent protection, or any other legal protection from competition, the first firm to invent a product usually has significant protection from competition in the near term.

The first firm gets a headstart on moving down his cost curve as experience
demonstrates ways of cutting costs and improving the product. And the public is
likely to identify his brand with the product, and keep buying it even after
there is competition, and at a premium price. Moreover, many new products have
only a short expected life, so that having 20 years of patent protection would
confer no real benefit—except to enable the producer to extract license fees
from firms wanting to make a different product that incorporates his invention.

When patent protection provides an inventor with more insulation from competition than he needed to have an adequate incentive to make the invention, the result is to
increase market prices above efficient levels, causing distortions in the
allocation of resources; to engender wasteful patent races—wasteful because of
duplication of effort and because unnecessary to induce invention (though the
races do increase the pace of invention); to increase the cost of searching the
records of the Patent and Trademark Office in order to make sure one isn’t
going to be infinging someone’s patent with your invention; to encourage the
filing of defensive patents (because of anticipation that someone else will
patent a similar product and accuse you of infringement); and to encourage
patent “trolls,” who buy up large numbers of patents for the sole purpose of
extracting licensee fees by threat of suit, and if necessary sue, for

The problem of excessive patent protection is at present best illustrated by the software industry. This is a progressive, dynamic industry rife with invention. But the
conditions that make patent protection essential in the pharmaceutical industry
are absent. Nowadays most software innovation is incremental, created by teams
of software engineers at modest cost, and also ephemeral—most software
inventions are quickly superseded. Software innovation tends to be piecemeal—not
entire devices, but components, so that a software device (a cellphone, a
tablet, a laptop, etc.) may have tens of thousands, even hundreds of thousands,
of separate components (bits of software code or bits of hardware), each one
arguably patentable. The result is huge patent thickets, creating rich
opportunities for trying to hamstring competitors by suing for infringement—and
also for infringing, and then challenging the validity of the patent when the
patentee sues you.

Further impediments to effective patent policy in the software industry include a shortage of patent examiners with the requisite technical skills, the limited technical competence of judges and jurors, the difficulty of assessing damages for infringement of a component rather than a complete product, and the instability of the software industry because of its technological dynamism, which creates incentives both to patent and to infringe patents and thus increases legal costs.

The pharmaceutical and software industries are the extremes so far as the social benefits and costs of patent protection are concerned, and there are many industries in between. My general sense, however, bolstered by an extensive academic literature, is that patent protection is on the whole excessive and that major reforms are necessary.

Turning to copyright, I note first an interesting contrast with patent law. Although there are some industry-specific differences in patent law, for the most part patents are “one size fits all,” so far as length of protection and criteria and procedures for the grant of a patent are concerned. In contrast, copyright protection tends to vary considerably across different media. For example, when recorded music came into being, instead of providing it with the same copyright regime as already governed books and other printed material, Congress devised a separate regime tailored to what were considered the distinctive characteristics of music as a form of intellectual property. Patent law could learn from that approach.

The problem of copyright law is less acute than the problem of patent law, partly because copyright infringement is limited to deliberate copying; patent infringement does not require proof even that the infringer was aware of the patent that he was infringing. Nevertheless, as in the case of patent law, copyright protection seems on the whole too extensive. Granted, with modern action movies often costing hundreds of millions of dollars to make, yet copiable almost instantanteously and able to be both copied and distributed almost costlessly,
the need for copyright protection is comparable to that in the pharmaceutical industry. At the other extreme is academic books and articles (apart from textbooks), which are produced as a byproduct of academic research that the author must conduct in order to preserve his professional reputation and that would continue to be produced even if not copyrightable at all. It is doubtful  that there is any social benefit to the copyrighting of academic work other than textbooks, which require a lot of work and generally do not enhance the author’s academic reputation and may undermine it.

The most serious problem with copyright law is the length of copyright protection, which for most works is now from the creation of the work to 70 years after the author’s death. Apart from the fact that the present value of income received so far in the future is negligible, obtaining copyright licenses on very old works is difficult because not only is the author in all likelihood dead, but his heirs or other owners of the copyright may be difficult or even impossible to identify or find. The copyright term should be shorter.

The next most serious problem is the courts’ narrow interpretation of “fair use.” The fair use defense to copyright infringement permits the copying of short excerpts from a copyrighted work without a license, since the transaction costs of negotiating a license for a short excerpt would tend to exceed the value of the license. The problem is that the boundaries of fair use are ill defined, and copyright owners try to narrow them as much as possible, insisting for example that even minute excerpts from a film cannot be reproduced without a license.
Intellectual creativity in fact if not in legend is rarely a matter of creation ex nihilo; it is much more often incremental improvement on existing, often copyrighted, work, so that a narrow interpretation of fair use can have very damaging effects on creativity. This is not widely recognized.

The need for reform is less acute in copyright than in patent law, but it is sufficiently acute to warrant serious attention from Congress and the courts.

Author: Posner

Intellectual Property Rights and Competition

As the quantity of patents has increased, patent thickets (i.e. multiple upstream patents, where overlapping rights may impede the commercialisation of a product or process) have emerged, blocking innovation by others. In order to accommodate this, patent pools have been established.

A patent pool is an agreement between two or more patent owners to licence one or more of their patents to one another, or to licence them as a package to third parties. Patent pools create useable bundles that overcome the ‘tragedy of the anti-commons’ while preserving the incentives to innovate. These co-operative arrangements allow the holders of several patents, all of which are necessary for the development of a product or process, to licence or assign their rights at a single price. Patent pools already have a history of helping technological and product development when rights are splintered. Further, patent pools also reduce licence transaction costs, distribute risks among the members of the pool and foster better exchange of information.

However, patent pools do not correct all problems associated with patent thickets. And there’s nothing to stop the ‘outsider problem’ from striking pools, if members of a pool see a more lucrative route, they can simply step out and block the collective endeavour. Moreover, patent pools can be expensive to negotiate, can exclude patent holders with smaller numbers of patents or enable a group of major players to form a cartel that excludes new competitors.

In particular, Lerner and Tirole have built a tractable model which provides the following insights. First, a pool is more likely to be welfare-enhancing if patents are more complementary. That the demand margin binds in the absence of pool is a sufficient, but not a necessary, condition for a pool to be welfare-enhancing. Second, a pool is never affected by the possibility of independent licencing if and only if the pool is welfare-enhancing. Furthermore, with only two patents, independent licencing always yields the same outcome as in the absence of a pool if the pool is welfare-decreasing in the absence of independent licences. With more than two patents and a welfare-decreasing pool, there exists an independent-licencing equilibrium with the same outcome as in the absence of a pool.

Third, the results generalise to a setting where the patents vary in importance. Furthermore, when one patent is dominant (so that the other patents cannot be used without it), a patent pool unambiguously boosts welfare. Fourth, when pool members are also downstream users, two additional concerns may emerge: pool members may be reluctant to create competitors by licencing to third parties, and licensors may seek to raise each others’ cost by charging royalties. Regarding the first possibility, the results can be generalised as long as licencing contracts takes the form of fixed fees and the licenced technology reduces downstream users’ fixed costs. In a setting where there are no third-party licencees, if royalties are not allowed, welfare may be harmed as otherwise-desirable pools are discouraged from being formed. Fifth, allowing a pool encourages innovation. Determining the impact on ex ante social welfare, however, is likely to be much more difficult. But allowing a pool with independent licencing never reduces and may increase ex ante welfare.

In this context, there is a need for the proper balance between the patent-related contracts and their impact on competition. The several uses of patents have been watched by competition authorities. Patent licences can be used for sharing markets by the inclusion of territorial exclusivity, or fixing prices even indirectly. Cross-licences can be regarded as tools for collusion and as barriers to entry. Patent pools are subject to regulatory clearance because they could result in a monopoly. The multiplicity of patents over a single area, with royalty-stacking, can cost so much that it might hamper innovation. The large number of patent holders might result in the tragedy of anti-commons, chronic under-use of patented resources.

Author: Victor Rodriguez


Further Reading

  • Merges R. Institutions for intellectual property transactions: The case for patent pools.
  • Shapiro C. Navigating the patent thicket.
  • Overwalle G, Zimmeren E, Verbeure B, Matthijs G. Models for facilitating access to patents on genetic inventions. Nat Rev Genet. 2006;7:143–54.
  • Clark J. Patent pools: a solution to the problem of access in biotechnology patents?
  • Bessen J. Patent thickets: Strategic patenting of complex technologies.
  • European Patent Office. Scenarios for the future.
  • Lerner J, Tirole J. Efficient patent pools. Am Econ Rev. 2004;94:691–711.
  • Encaoua D, Ulph D. The effects of competition on innovation and growth. Paris: Universit Panthon-Sorbonne: Cahiers de la Maison des Sciences Economiques; 2000. Catching-up or leapfrogging?
  • Guellec D, van Pottelsberghe B, van Zeebruck N. Patent as a market instrument The economics of the European patent system. In: Guellec D, van Pottelsberghe B, editors. IP policy for innovation and competition. Oxford: Oxford University Press; 2007.
  • Wragge and Co. Pharmaceutical patents need a new lease of life. Managing Intellectual Property, December 2008 and January 2009.
  • European Commission. Pharmaceutical sector inquiry: Preliminary report. DG Competition Staff Working Paper. Brussels: European Commission. 2008.
  • Singh T. A bitter pill of sector inquiry for the drug business. New Europe 16, 810 (30 November-6 December) 2008. p. 38.
  • Klepper S. Entry, exit, growth, and innovation over the product life cycle. Am Econ Rev. 1996;86:562–83.
  • Kaniovski S. Product differentiation and competitive selection. J Evol Econ. 2005;15:567–80.
  • Cohen W, Klepper S. Firm size and the nature of innovation within industries: The case of process and product R&D. Rev Econ Stat. 1996;78:232–43.
  • Aghion P, Bloom N, Blundell R, Griffith R, Howitt P. Competition and innovation: an inverted-U relationship. Quart J Econ. 2005;120:701–28.
  • Encaoua D, Hollander A. Cahiers de la Maison des Sciences Economiques. Paris: Universit Panthon-Sorbonne; 2004. Price discrimination, competition and quality selection.
  • Reitzig M. The private values of ‘thickets’ and ‘fences’: towards an updated picture of the use of patents across industries. Econ Innov New Technol. 2004;13:457–76.
  • Roox K, Pike J, Brown A, Becker S. Patent-related barriers to market entry for generic medicines in the European Union: a review of weaknesses in the current European Patent System and their impact on the market access of generic medicines. Brussels: European Generic Medicines Association. 2008.
  • European Commission DG Competition, Pharmaceutical sector overview.

28 thoughts on “Intellectual Property Competition”

  1. Neil

    Let’s not forget the operational triumverate of Intellectual Property Law, “Patent, Copyright, and Trademark”. All three operate in unison to protect not just individuals and companies financial and intellectual investments, but also National Economies and Trade Balances. Without which, huge International Blackmarkets develop piggybacking themselves to open freetrade avenues. Much like that which have developed to date in countries that do not have a legal history of Patent, Copyright and Trademark or the currently developing trade in cheap knockoffs that are now threatening various producers, damaging National productive capacity and National Trade Balances which are increasingly controlled by International Organized Crime Syndicates.

    Perhaps from viewing the problem from this perspective, tighter Legislation is warranted. Not less.

  2. Ralph Koettlitz

    The theory that copyrights giving authors an incentive is a theory but not very good support by history. In many countries they can’t publish their books without signing a total buyout contract. The consequence is, that many authors can’t live from their books even with a good amount of sold books.

    Eckhard Höffner presented in “Geschichte und Wesen des Urheberrechts” a good point, when he compared the history of copyright in England and Germany in the year 1800, when in Germany were every year published more than 4000 new books despite a non existing copyright, while in England the amount of published books was at 700. England had a copyright since 1710. Eckhard Höffner observed that the marked concurrency between the publishing houses were positive for the authors, because they wanted publish the books.

    A future copyright should be a right of the author and not of a publishing house. Every copy is to be paid by a publishing house or a internet customer to the author. In our world of a global internet, this not really a problem. But the huge amount of orphaned books, films and other works of art is a shame for the western civilization. So many art has been forgotten, because of the unsure copyright situation.

  3. It might very well be the case that without patent protection, it would be difficult to attract the various investors to a particular firm aiming to make and market a product. The counter-argument to that, of course, is that once the playing field is level – patents are either wholly eliminated, or eliminated from some fields – investors would have no choice but to invest in firms and products based not on the attractiveness of patents, but based on the marketing expertise and potential of a given firm.

    However, this imposes its own costs on the system as a whole. It would surely create a state of flux, because uncertainty of marketing is still greater than a legal uncertainty of patent protection.

    In sum, I think it’s worth to examine potential costs on all sides of the equation and this is a debate that should be taken seriously not just by scholars, judges and other experts in the field, but by US Congress.

  4. Yegor Jbanov

    In software the problem is reversed. What scares away investment is fear of litigation, not fear of ability to protect your invention. It’s not the idea that’s hard to come up with, it’s executing on that idea. If someone else is able to execute (code, test, deploy) on the same idea without direct copying of source code, kudos to them. You, as an investor, shouldn’t fear that someone else will implement the same idea. It’s hard. As a thought experiment, think of how hard would it be to create iPhone, Google Search, or Microsoft Office. Even with access to all necessary patents. Software startups fail not because someone steals their idea, but because of poor execution, poor quality or simply bad idea.

    In pharmaceutics the hard part is to get the formula for the drug, not producing the drug. In software the formula (i.e. a specific algorithm, idea or technique) is the easy part, but producing a working piece of software is hard (see the ratio discussion in the blog post). Software is already protected by copyrights, trademarks and code obfuscation techniques. So it’s hard to replicate software even without patents. You cannot (or not allowed to) copy source code directly. Yet these protections do not block competition or create entry barriers. Patents, however, take this protection way too far and are primarily used to:

    – Eliminate competition – big monopolies, such as Apple, Microsoft, and Oracle do this to eliminate competitors to their own products.
    – Extract licensing fees – patent trolls buy IP for the sole purpose of extracting licensing fees while not innovating themselves.

    It’s these two things that hurt competition and investment. Not lack of protection. But, patent holders, obviously, have an incentive to argue otherwise.

    Disclaimer: I’ve had a quite successful 10-year software engineering career so far.

  5. When it comes to textbooks you might be ignoring the benefits (“one has to consider both the cost of inventing and the cost of copying”). After all nothing is more important than education,long term.

    About movies that cost hundreds of millions, one can argue that the cost is a direct result of the current rules of the game, in a more reasonable world where nobody gets 20 millions for 3 months of work movies would cost far less.Also such movies are positive from an economic point of view but the tragic lack of quality might be detrimental to society.

    Copyright also feeds a lot of leechers,while that has a positive economic impact,starving them would not harm creativity long term.

    There are also alternative ways to create revenue that should be factored in. Also a fundamental problem with copyright is that it’s a monopoly in itself.

    About patents,while i agree that there is a need for a reform,i will point out that an idea is not worth just what was invested in it, an idea is creativity, an idea generates revenue,those factors should matter.
    Maybe one way to do it is for all patents to to considered essential and force companies to license them at a fair price and/or an expiration after 2 years from first revenue or 5y from filling.Forcing big farma to license at a fair price would not hurt either,after all it’s not only about the money.

    Guess in the end the calibration of the solution depends on one’s humanity or … political orientation.

  6. Jonathan Brown

    The primary purpose of patents is not to protect inventors, corporate or individuals or those who invest in them, but is for the preservation and self interest of the issuing State. Looking at patent law in abstract from the main purpose of them as instruments of state control is where much of the confusion about patents starts.

    In a world that is increasingly technology dependent, global in trade and political influence, national interest and economic survival may have ever widening interpretations and consequences.

    Patent laws remain parochial in form, archaic in structure and are used to underpin protectionism.

  7. Biggest problem of US patent system.

    Nobody measure cost of checking if product infringe any patent.

    This cost can only rise (more patents are being granted not less, and that is goal as patents == innovation in USA legal system 🙁 ).

    But nobody check if cost of checking if your product is on the green side is still affordable!

    So we have all those patent reporting sites who warn readers that in given post they will talk about some patent! So people who my have products that infringe can IGNORE such text, and look other way.

    And those triple damages. If nobody knows if cost of checking is still economical, then how anyone know if triple damages have effect they should have?

    And best of all.

    Triple damages for trying and failing, when succeeding may be bluntly IMPOSSIBLE.

    Please, talk about:

    1) Costs of checking if product infringe
    2) Costs of defending litigation based on invalid patent (defending fees vs license fees on INVALID patents)

    While talking about influence of lifespan of patent on innovation pace in current industry is good. Its not the biggest problem by far.

  8. Globetrotter

    Both copyright and patent laws are being abused by players that specialize in extorting money from consumers and corporations.

    Software Patents exists on scale largely because IBM (which used to be known for strong arm tactics using patents against rivals in the 70s), filed a whole bunch of them before patent officers had any experience of software at all. Later, as software industry matured, it seems like the law was reformed to justify IBM’s patents in hindsight, with the patent lawyers advising. I can’t imagine there were any software developers or entrepreneurs present, so the patent law framework became a jobs program for lawyers.

    Patent protection of drugs make sense, but not to this extent. Recovering 100s of millions of invested R&D is not the same as making 100 Billion from a lucky break. Drug research is mostly about trial and error and gambling, backed up by some clinical grunt work. They should get paid back, but not have 7 years to hold the world hostage if they get lucky and find a cure for cancer. The investors in that company would insist on full Patent protection and then sell the drug for the equivalent of what the patient has in saved assets.
    Let drug companies recover proven R&D expense + a 30% premium and then put drugs in public domain.

    Copyright should be applied to creative artwork where there is an individual or a limited number of defined authors. If there are many, maybe the time length of protection should be divided by number of participants. The law no encourages the media industry to create any kind of industrially engineered garbage concoction in search of a hit, and then when a hit is found then the world is milked and milked and milked for money. To give machine generated output full copyright protection is a biz odd.

    The intellectual property (IP) industry has become an extortion racket where we fist sell people copy tools like the computer and the copy machine (and charge copyright and patent fees) but then sue them when they do copy… It seems like the aims of the IP lobby is to get all of the household budget that people have left after paying for rent and food.

  9. Grobetroter

    The software industry was extremely vibrant and competitive in the period 1983-93 during which there was literally no patent protection. Products adopted ideas from each other left and right, and nobody thought it was unfair. Innovation was thriving and the players all made good amounts of money.

    Then when MS was about to split from the joint venture with IBM around 91-92, I guess the IBM lawyers got involved and as part of the divorce deal wanted a patent swap. We (I was there and reviewed some IBM patents for Word) at MS said “holy shit we don’t even have any”, and MS started a massive filing campaign, filing for every imaginable software feature we could think of.

    Then soon after MS got hit with a $100m jury verdict for patent infringement on STAC’s compression technology for DOS files. The jury and judge were all asleep during the proceedings as lawyers debated the meaning of machine language instructions…but decided that infringement had occurred.

    After this, the patent war was on, and every tech company has been filing for patents on every imaginable line of code they write.

  10. Martin Langhoff

    As a software and hardware practitioner with many years in the industry, thank you for such a clear and succinct exposition of what is wrong with patents in the technology world.

    The current approach of USPTO of defaulting towards approval and letting the courts settle the matter makes the situation much worse; piling a huge uncertainty on anyone working in this industry. Yes, you can be sued anytime, and it will cost millions to sort it out; even if you prevail in court the lawyers’ bill will likely sink your venture.

  11. Anne Barschall

    Here in the USA, we live in an environment where traditionally there have been patents and copyrights. This legal tradition has encouraged a culture where innovation is valued, because innovators have reaped the rewards of innovation. In cultures where innovation was not rewarded, innovation was not valued in the same way. As a result of the culture established here, due to strong intellectual property protection, the USA has traditionally had the best science and engineering in the world.

    Software people cite the early progress in the software industry, when patent protection was either not available or not sought, as evidence that patent protection is not necessary. This is a fallacy.

    First, those software people worked in this culture that had engrained encouragement for innovation that came from our history of intellectual property protection.

    Second, there was quite early on a strong move for at least copyright protection to help out those innovators. Early copyright cases quickly started talking about protecting “structure, sequence, and organization,” to try to extend protection as broadly as possible. This was a bit of a stretch in the law, but it showed a recognition of the importance of rewarding those who created economic benefit to the country.

    Problems with software patents have continued because at first the United States Patent and Trademark Office refused to hire patent examiners with a computer science background, so poor art searches were performed.

    More problems have been created because the original Supreme Court case on this topic, Gottshalk v Benson, has severe logical flaws and a nonsensical result. I encourage people to read my brief in the Bilski case for more discussion of that. My brief is up on my blog.

    The nonsensical opinion in that first case has resulted in extensive legal uncertainty and much litigation, leaving the entire field of patent protection for software unsettled for almost half a decade.

    Have nots always want to take from haves. People who don’t have money want to take money from people who do. People who don’t have houses want to take housing from people who do. People who do not have intellectual property want to take it from those who do. I find this ethos repugnant.

    Patents need to be whole heartedly endorsed by statute and the entire line of cases stemming from Gottshalk v Benson needs to be overturned.

    Moreover, the idea that mathematics is not an invention also needs to be overturned.

  12. John

    I am a software developer from New Zealand, working alone on my project for 3 years, and just prior to release I was sent a patent infringement threat by a US company for technology that is in the public domain since 1998.

    I have consulted an attorney and he tells me their patent would not stand, but I have no funding for such a legal battle. My software is very useful for the scientific community and general data analysis, and contains many improvements over other similar software which I am quite proud of. I now fear 3 years of my work have gone down the drain for nothing, and I feel powerless and desperate. It is very unfair. How am I supposed to start a business at all?

    Perhaps non-US software developers should avoid selling software to US clients at all, I know some researchers in this general area are starting to put up notices that they won’t sell software to US clients, due to fear of patent infringement. Unlike promoting innovation, software patents seem to be preventing innovative solutions from reaching the US.

  13. Although I agree with the general sentiment here, I feel there’s not enough examples of how the current patent system goes wrong on a day-to-day basis. Only the big stuff makes the news, like Apple, Motorola, etc.

    – As a computer programmer, I’m scared to start my own business developing software. You might say, “Oh, but look at Facebook and Google, who got started in the same atmosphere as you.” That’s true, but they’re just outliers. Most software companies don’t make it, and I’m terrified of getting my ass sued.
    – I once worked for a huge corporation that did lots of legal publishing. There were rewards for doing something that led to a patent ($5000 for each patent, IIRC), but we were not allowed to discuss old patents in writing. It was all about plausible deniability, in case the patent went to court. Very sad…
    – It’s not as theoretical as “should patent protections be stronger or weaker?”. There’s a lot of crap patents out there, especially in the tech world. The Apple vs. Motorola, etc. news has kinda hit that point home. But there’s even patents on swinging (think kids on a playground) and on peanut butter and jelly crustless sandwiches; thankfully it was overturned /six years/ after it was granted. Now just imagine what kind of crap a PhD could think of that the USPTO would overlook.

  14. Software patents are pure spam for software developers.

    You cannot tell a software developer what to write and what not to write as software via patents, since his speech is protected by freedom of expression and the first amendment.

    And software developers HAVE TO CONSTRAIN their speech if they want to respect patent law.

    Sorry, this is not consistant.

  15. Russ Nelson

    Four aspects of patents you didn’t touch on are: obviousness, prior art, disclosure, and working models.

    The current interpretation of obviousness is: nothing is obvious and everything is patentable even though it’s painfully obvious to an ordinary practitioner of the art. This is a consequence of something you DID touch on: the inexperience of patent examiners in the software field.

    If I were a patent examiner (and I doubt the USPTO’s salary range overlaps mine, so that ain’t gonna happen), then anything I could google for would be obvious. Anything taught in colleges would be obvious. Anything you can find in a textbook would be obvious. This is not currently the case.

    The next is prior art. There are several patents which were issued that overlap with previously issued patents. If the patent system cannot even find prior in its own database of ideas, how can it possibly keep up with the entire world? Basically, prior art is ignored as a criteria for unpatentability. That means that you can write a program, publish it as open source software, and somebody can use it to write a proprietary program, and patent your prior art. This is not a hypothetical — it happened to me.

    In addition, there is also the issue of disclosure. The patent system rewards disclosure with a temporary monopoly. And yet software can be both patented and copyrighted. This makes no sense. How do we allow people to claim a copyright on something which must be disclosed, and disclosed so that after the patent expires, people can reuse the idea.

    And then we also have working models. People used to have to submit a working model, illustrating the operation of the patented device. It’s possible to get a software patent which doesn’t even work! A software patent MUST include a working stand-alone implementation which is in the public domain.

    All of these problems should be fixed, or, better yet, just make software unpatentable.

  16. There are laws which protect people from actual harm and of course these should be enforced. Then there are laws which setup rules with the intent of balancing the mechanics of various activities and these laws are utterly amoral. IP law is supposed to strike a balance, but as it currently stands it fails to achieve its intent and needs to be scrapped.

    In fact, as Judge Posner clearly understands, there is zero evidence that patent law promotes innovation at all outside of the pharmaceutical industry. It is human nature to innovate, we don’t need pieces of paper from the government to encourage it.

  17. Lorenzo

    While digging into these so called “inventions” by Samsung ( and undoubtedly many many others) I can only conclude it does not concern inventions at all. Like their description of signaling in a mobile communications device. I mean comon guys, EVERY university student in ICT or communications technology has done the same thing YEARS before Samsung or any other company did it. These are not even inventions but simple ways of getting things done. It is how every graduate would do it if you asked him to write software for a cell phone. If I look at what is patented, I might as well patent “the technique and apparatus to connect two or more electrical devices by means of a medium that transports electricity above or sub terrane” In other words patent the way you would dig a frakkin hole in the ground to throw in a damn electricity cable to get light in your wooden cabin in the back yard! Is that truly an invention?

  18. One way to distinguish software from pharmaceuticals is that it’s much easier for pharmaceutical patents to have a clear boundary, as noted by Bessen and Meurer. Indeed, it seems to me that the boundaries of software patents are problematic even in theory: it is a corollary of Rice’s theorem[1] that there is no general mechanical way of checking that a given piece of software fulfills a given set of criteria, such as those represented by a patent claim.

  19. Ben Tilly

    I would challenge the notion that the current patent system is a particularly good fit for the pharmaceutical industry. I grant that it is a better fit than patents are for software. But I think that we can do better.

    The great expense that the pharmaceutical industry needs to defray is not research, but the cost of getting FDA approval for treatments. On average this costs hundreds of millions, and success is far from guaranteed. In the event of success, the patent system provides protection allowing those costs to be recouped.

    But patent protection is only available for novel discoveries. What happens if the treatment that needs to be evaluated is not a novel discovery? In that case nobody can possibly recover the cost of getting FDA approval. That ends all possibility of commercialization, and typically also blocks research into that treatment.

    As an example I offer Helminthic therapy. For example preliminary research and anecdotal evidence suggests that hookworm is the most effective known treatment for hundreds of thousands of sufferers from Crohn’s disease. But the FDA has ruled that this treatment would need FDA approval. Hookworm is not patentable, and therefore this line of research has dead ended and the treatment is not legally available within the USA.

    The Hatch-Waxman Act provides an example of Congress providing a temporary monopoly to a non-discoverer for having been willing to undertake an expensive and necessary action that benefits the public good. (In that case for having sued a patent holder to demonstrate that an available generic is a valid substitute.) Offering temporary protection for companies that pay for FDA evaluation of new treatments could serve the same need for the pharmaceutical industry that patents do now, but without leaving the current gap that causes unpatentable treatments to be overlooked and ignored.

  20. There is a case for thinking what happens when you remove patent protection- what are the full consequences. In the case of a patent I hold (and I am working to bring a consequent product to market)the consequence is clear. Those with deeper pockets and established routes to market become the beneficiaries of my creativity. Is that the outcome you desire?

    BTW if you socialised your medicine maybe the whole world would benefit – because then it would be in your interests to validate lower cost and more effective treatments rather than ones produced for profit.

  21. Emel

    One way to view patents is that the period of exclusivity is “payment” for the fact that you have revealed your secrets in the patent filing process.

    Certainly, this is an advantage to the public in teaching them how to make a cotton gin. However, is there any value in teaching them how to do one-click checkouts? Once the innovation is introduced the ‘secrets’ are obvious in this latter case.

  22. First of all, the patent statue states that patents are personal property. Second of all, a monopoly is a right to a market. All property rights give you the right to exclude. A patent does not even give you the right to make or sell something, so it cannot be a monopoly. Clearly Posner does not understand the basics of patent law. He is not a patent attorney and many non-patent attorneys fail to actually study the law in this area. Third, patents are granted for the reason all property rights exists, because the owner created something. Since Posner does not understand this simple fact, all his conclusions are suspect.

    There is absolutely no empirical evidence that countries are better off without a patent system. If you look at the Fraser Institute or the Wall Street Journal/Heritage Foundation surveys of economic freedom, you will see the richest countries and the most economically free countries have the strongest patent systems. Those countries in the lowest 20% do not innovate, and do not have a wide dispersion of technology and live on the edge of starvation. The fact is the most innovative countries and those with the widest dispersion of new technologies and the wealthiest are those countries with strong patent systems. None of this would be possible if there was even a shred of logic behind the anti-patent arguments. The reason this occurs is that property rights encourage the creation, investment, and dispersion of new technologies

  23. Wanda

    While, technically speaking, there is a legal difference between the two terms, in the informal sense that Posner uses them they are certainly equivalent. A patent gives the holder the right to exclude others from selling a _particular_ product in the market while a monopoly gives the holder a right to exclude others from selling _any_ product in the market – but this distinction is irrelevant in the sense that the terms are being used here (and in the case where no comparable substitutes exist, they are effectively the same anyway). And while Posner may be speaking loosely here, I guarantee that the most-cited living jurist understands the legal differences between monopoly and patent.

    “Third, patents are granted for the reason all property rights exists, because the owner created something.”

    That’s not even close to true. There are plenty of things that can be “created” but not patented – to say nothing of not needing to “create” something to have property rights over it. Patents exist because they are economically favorable: they incentivize innovation which creates economic growth. That’s the only reason they exist and the only rational argument for their continued existence. If the cost of maintaining a patent system (both direct- and opportunity-costs) ever comes to exceed the benefit it confers, then it should be eliminated.

  24. Puget

    Sure, the US patent system has lots of inconvenient. It is hurting innovation in many ways. But throwing it away may be worse.

    For example, would Apple have spent the money they spent on designing the first iphone without patent protection? Android success shows that patenting didn’t prevent others from competing, but it certainly slowed them, hence protected some of Apple’s investment.

    One would say that patenting iphone isn’t patenting software. I’d argue that is is all about software. That was the key innovation for iphone: design a device where all behavior is provided by software.

  25. Terry Bennett

    You can patent a death ray, and you will have the right to exclude others from building it; because of other laws, you probably can’t build it yourself either. A government grant of a monopoly would include the right to build it. That is the distinction, and given that most patents do cover legal inventions I agree with Wanda that it is not worth the quibble. The practical effect of a patent is to create a monopoly even if monopoly is not explicitly conferred.

    I take issue with Dbhalling’s larger assertion, that Judge Posner’s whole post is “disqualified”. The post addresses the observed economic effects of the patent system, not the niggling intracacies of how the small minds inside the machine accomplish their work. On this topic, I for one am quite interested to hear what he has to say.

  26. David Snyder

    The cost of pharmaceuticals is part of the burden of excessive healthcare costs in the USA, which is the real driver of the national debt. Most countries let the US invent and then impose price controls, which is one option to restrain this cost. As pointed out above, the main cost to the companies is getting FDA approval, and then marketing afterward (too often for applications for which the pharmaceutical was not designed), and very generous executive salaries. I still hope for a better incentive system than the patent system, but it would be a good beginning to quarantine pharmaceutical/biotech patent law from the rest.

  27. J.R.

    As a 30+year veteran of the SW industry its IMHO that almost all SW patents are invalid. SW patents are supposed to cover a single specific algorythm. What is being patented are business processes intended to be carried out by a computer. The USSC re gently ruled in theMayo Clinic’s favor that business processes can not be patented. The claims are far too vague and broad. Posner’s distinction seems to make sense, but is flawed in practice.

    I would also point out that the current copyright law is even more flawed and damaging. Copyfraud is rife and the arbitrary distinctions against digital media are ridiculious.

  28. How does a patent restrict competitors?. I think the question on how does a patent restrict competitors is the most pertinent issue in this entry of the global legal encyclopedia.

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