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Thursday, 5 May 2016

The Economist is at it again (when it comes to patents)


Last August, The Economist attracted wide-spread attention with its cover story, "Set Innovation Free", here and here, in which it aggressively attacked the patent system as too often inimical to innovation. This Kat took issue with the overall thrust of the arguments being made. In this Kat’s view, The Economist had cobbled together bits and pieces of economic history and empirical analysis to promote a broad patent-hostile narrative, in line with the fashion among some IP thought leaders.

The Economist is at it again. This time the issue is not innovation but the decline in market competiveness and the increase in industry concentration, both as embodied in the stickiness of oversized corporate profits. Companies are making too much money and displaying too little competitive instincts, preferring to consolidate their positions, to the detriment of the economy writ-large.

Kat readers wishing to consider these the arguments in full are invited to read the two companion pieces(“The problem with profits” and “Too much of a good thing”). In light of last August’s attack on patents, what is of interest to this Kat is the attention given to intellectual property, and particular to patents, as contributing to the twin problems of lack of market competitiveness and industrial over-concentration.

Let’s allow The Economist to speak for itself. This Kat has identified in the two companion pieces where patents/IP are mentioned. We can arrange these quotations into three principal categories--

I. Companies are gaming the patent system for their own business ends rather than using it to support genuine innovation
“A mastery of patent rules has become essential in health care and technology, America’s two most profitable industries.”
“The rising importance of intangible assets, particularly patents, has meant that an ability to manage industry regulators and the challenges of litigation is more valuable than ever.”
II. Regulation of the abusive aspects of the patent system is inadequate
“It [FTC] has … fought ‘pay-for-delay’ deals in which pharmaceutical firms try to stop generic competitors from launching rival products when patents expire.”
“Lots of important subjects are beyond their [DOJ and FTC] purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important."
III. The patent system supports incumbency rather than innovation and competition
“But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries.”
“The industry [health care] is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions.”
“It [an alternative approach] would examine a loosening of the rules that give too much protection to some intellectual property rights.”
These IP-related claims are short on empirical support and long on rhetorical broad-strokes. In an age where sound-bites predominate, that is perhaps not surprising. Against this background, permit this Kat to make several observations:

1. The Economist seeks to indict the patent system both coming and going. On the one hand, the patent system is too backward-looking because it allows patent owners [and, Merpel adds, according to The Economist,copyright owners as well] “to milk” their “old discoveries.” On the other hand, the "patent rules … allow firms temporary monopolies on innovative new drugs and inventions.” It would seem that the patent system cannot win. If one’s invention is successful and meets the test of commercial time, then it confers the inventor with supra-competitive profits over the life of the patent. But current innovation is also distorted by the patent system, because the advances in innovation are due to a "temporary monopoly". The upshot is that patent protection is problematic, whatever point of time we take.

2. In fact, we may not have enough patent protection in what The Economist calls “technology”, where market share (think Alphabet/Google) is being driven principally by network effects and accumulation of data (as The Economist itself recognizes). But perhaps the market strength of companies in these industries is because patents are simply of lesser importance, with the result that the dynamic process of invention and design around is not sufficiently present. Maybe we need more patent activity, not less.

3. The patent narrative needs to be more nuanced. Too often, the narrative takes on a Manichean quality, portrayed as the forces of patent light in battle with the forces of patent darkness. How the patent system impacts innovation, market competitiveness and industrial concentration is far from straightforward and it does not lend itself to simple binary conclusions. Because of the complexity and nuances of these relationships, more humility in discussing these issues is warranted, even at the cost of less rhetorical certitude.

7 comments:

Interested said...

The Economist attack on patents mentions a number of legitimate problems with the patent system, including reducing the number of unenforced or weak patents. However, some of the proposed solutions, e.g. reducing patent terms and expanding the options for challenging patents without a full blown court case, seem to be unrealistic.

Reducing patent terms is virtually impossible since nearly every country in the world is a party to the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, which mandates a 20 year patent term. Amending TRIPS would be far more difficult than amending the US Constitution. Forget it. An alternative solution would be to tinker with maintenance fees payable by patent holders. Before the European Patent Office, maintenance (renewal) fees are payable every year, start the third year after filing an application and reach €2000 by around year 10. If the US adopted a similar system, rather than only charging fees after grant of a patent and making them payable every 4 years, it could have a helpful effect.

As for out-of court options for challenging patents, these may already go too far. Witness the recent activity of Kyle Bass, a well known hedge fund manager, in using Inter Partes Reviews (IPR) before the USPTO to challenge key pharmaceutical patents in order to take advantage of the effects of the challenges on the stock prices of the companies holding the patents. Another way to reduce the number of weak patents would be to raise the quality of examination by making a job as a US Patent Examiner more attractive. This could be achieved by increasing the compensation of Examiners, particularly senior Examiners. The compensation of US Examiners is significantly less than their counterparts at the European Patent Office (EPO). In fact, partners at European law firms have been known to leave their jobs to become Examiners at the EPO. This would be unheard of in the US.

Regrettably, any changes to maintenance fees or significantly impacting the compensation of Examiners would require the most unproductive Congress in history to stir itself from lethargy, which could be an unrealistic proposition.

Enquirier said...

"partners at European law firms have been known to leave their jobs to become Examiners at the EPO"

I have not heard of this at all in recent times.

Anonymous said...

I haven't read "The Economist" recently, but in points I and II it is absolutely correct, certainly in the fields in which I work. The gaming of the system by big companies is especially egregious. Thankfully the EPO has realised to some extent what's going on and the Examiners involved (I've spoken with some of them) do their limited best to restrict some of the more outrageous cons. However, they are always playing catch-up.

On the far side of the Atlantic, where it sometimes seems that the USPTO selects examiners on the basis of a rather unique blend of incompetence, laziness, stupidity, sheer bloody-mindedness and downright dishonesty, things are often much worse, and these obstructive patents, filed purely for that purpose, block off whole areas of legitimate research and actually impede progress.

The patent system may not be broken, but it is certainly badly distorted and rigged against the little guy.

Ashley Roughton said...

Dear Neil

Nice piece.

With an economist's hat on, may I make a comment on the I, II and III?

I - if it is a bad system (no real insight here) then what they are really saying is that somehow it is industry's fault that the government has designed that system. Wood, trees and so on.

II - in any system of laws (including the laws governing or protecting freedom of speech and of the press)there will be abuses. If you don't like it then go to heaven - I hear (but don't personally believe) that it is quite nice there.

III - these statements are either unsupported by any evidence (I can see anyway) or are so wide and general that ontological meaning is lost. Whichever case applies my impression is that what they are really saying is that "we don't really understand it ... it must be bad."

Please don't get me wrong. I have plenty of criticisms of how the system works (as I do of merger control) but the idea of the system at all is not something I have a problem with. There is plenty of evidence that patents are welfare enhancing.

Ashley

Anonymous said...

" ... “technology”, where market share (think Alphabet/Google) is being driven principally by network effects and accumulation of data ... "

Adding software patents as yet a further mechanism for concentration on top of that makes for a landscape that looks even more worrying.

Anonymous said...

The patent system is a representation of society´s wish to encourage and reward those who make significant contributions to the quality of life by innovation; so that technological progress is not brought to a halt. The tendency of the modern global economy to reduce everyone´s profit margins to the point where going bankrupt is just one cancelled order away, forces technology companies to obtain protection for their products to escape the price competition forces that are so stringent that they could otherwise not afford any expenditure on R&D because it provides no return or promise thereof: and focus merely on manufacturing/producing/selling the same product/service as cheaply as possible as long possible and then going belly-up. The mantra of price competition being a source of human well-being, as promoted by The Economist, is actually totally flawed. The quest for a decent profit margin is not a sign of immoral exploitation: it is a sign one is doing something that someone actually really needs/wants. If these profits in any way partly arise from the granting of patent protection for significantly inventive inventions, particularly in health care, then in fact the patent system is the only thing between economic "Global Mad Max" propounded by The Economist, and the continuing technological progress is the bedrock of our quality of life.

Anonymous said...

I have to admit that I was expecting a more persuasive counter-argument from the Kats. This amounts to a rebuttal yes, but it is a rebuttal with equally empty sound-bites as those of the opposition. The truth is that on parts of the patent system, in particular those that are indifferent to whether we are patenting "slide to open" or viagra, do certainly need an overhaul for the benefit of society at large. We should not rush to the defense of the patent system every time it is attacked, especially by those from the outside. Rather, we should listen, take note of the critique and see if we can make improvements.

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