Katonomics 11: Patent harmonisation and a little romance

Many people do love
harmonisation --
especially when it's
on their own terms

Following last week's foray into the football transfer market, our very own Katonomist Dr Nicola Searle continues her mission to make IP enthusiasts more familiar with the principles of economics -- and to make the principles of economics more accessible at the point where they affect intellectual property rights and interests -- by taking a look at one of the hottest potatoes of recent years: the harmonisation of patents in Europe.  At this point the IPKat can almost hear readers gasp, "You mean it's not just about politics?"  Indeed, it isn't, so read on:

"In anticipation of Saint Valentine’s Day, readers will be delighted to know that this post concerns e-harmony.  No, not the dating website, but the harmonisation of European patenting.  Nothing says romance like the economics of the EU unitary patent ...

Changes to patent law and harmonisation in general have long been popular topics for economic analysis.  There are decades of scholarship examining international discrepancies in law such as the U.S. first-to-invent system and the lack of a European unitary patent.  These studies typically examine the interaction of policy, firm behaviour and innovation, and evaluate competing policies in terms of their effects on social welfare (often using cost-benefit analysis).   

Economic analysis of the unitary patent follows this tradition. The main economic argument in favour of a European unitary patent is the relatively high cost of patenting in Europe.  As commenters on this IPKat post noted, this has been the focus of commissioned reports by Harhoff  (here), Danguy and van Pottelsberghe (here and here). 

First, the patenting process itself is relatively expensive in Europe. Van Pottelsberghe and Danguy calculate the per-million-inhabitants cost for the first ten years of patent protection as €26 for Japan and €12 for the U.S.  This compares to €55 for six EU countries and €76 for 13.  Patenting in Europe is more expensive as filing in multiple jurisdictions entails significant fees, resources and translation costs.  Unlike the comparable economies of Japan and the U.S., there is no one-stop shop for European patenting. 

A second costly part of EU patent protection is that of litigation.  The lack of a central court means that litigation can occur in multiple jurisdictions.  This is wasteful as multiple courts may try the same case.  It is also creates uncertainty for all parties as cases in different jurisdictions may result in conflicting infringement or invalidation outcomes. 

If patents encourage innovation, then cheaper patenting should encourage innovation more.    Patent protection under a unitary patent system would cost roughly €26 per-million-inhabitants and be on par with Japan (van Pottelsberghe and Danguy).  The unified system, complete with a unified litigation system, should reduce the uncertainty associated with patenting in Europe.  A central repository should improve dissemination of knowledge associated with innovation and therefore encourage further innovation. A cheaper, less fragmented patenting system should do a better job of encouraging innovation than the current system.  

The distribution of the benefits of cheaper patenting is also important.   The cost of patenting is relatively high for smaller firms.  For larger firms with more resources and in-house counsel, patenting costs are relatively low.  Cheaper patenting could provide more incentives to innovate for smaller firms.  As van Pottelsberghe and Danguy note, the U.S. and Japanese patent systems offer discounted fees for small-to-medium enterprises.  

However, the costs associated with patenting don’t simply disappear into a black hole.  Patenting fees fund national IP offices and pay wages.  Translation and procedural costs support the translating and legal service industries.  The Commission’s 2011 Impact Assessment notes that the proposed changes will have transitional and long-term negative impact on translators and patent attorneys.   Unfortunately for those in favour of the unitary patent, the stakeholders most likely to lose out from the system are those well equipped to fight it. 

Another consideration is that cheaper isn’t necessarily better for innovation policy.  Patent fees constitute an important policy tool.  In the social contract, the patent represents a temporary monopoly.  If that monopoly is too cheap, you invite frivolous patenting and patent backlogs.  It gets particularly interesting when look at application versus renewal fees.  Cornelli and Schankerman argue here that patent renewal fees should be more expensive, and rise sharply over the course of the patent.   Only the most valuable patents would be maintained (the interaction of fees and patentees’ behaviour is summarised on page 11 of van Pottelsberghe and Danguy. 

At a practical level, questions remain as to the setting of fees, the distribution of those fees and the litigation system.  The patent system is often expected to pay for itself, thus the question of sustainability of the system and the distribution of fees amongst member nations are key.  Planning will also have to consider the demand for patents and litigation.  In the U.S., Jaffe and Lerner devoted a book to arguing that creation of the patent-specific Court of Appeals for the Federal Circuit (CAFC) led to the weakening of patent standards and helped foster tro…, ahem, non-practicing entities (NPEs).  Harhoff’s report also argues that the system should be NPE-proofed.  The debate continues. 

However, these arguments must consider the international competitive context of patenting.  A relatively more expensive patenting system potentially puts Europe at a comparative disadvantage to cheaper systems.  Unless we want to run an international IP cartel, cheaper may be a better strategy. 

As Pitkethly has noted in 1999, European history and cultural diversity have contributed to the lack of progress on a unitary patent.   Given the competing economic interests and national differences of the patent system, we can look forward to more lively debates.    

How do you think fees should be set?  Is the cost-benefit analysis a compelling argument in favour of the EU unitary patent? 

P.S. My apologies to lawmakers who hoped this article would lead them to love; I couldn’t find an international dating site for legal professionals, I only found national ones".