The major theme of my new book is that we need better incentive schemes for every segment of society: congressmen and presidents, firefighters and police officers, judges and juries, prosecutors and defense attorneys, philanderers and promisekeepers. The book offers dozens of proposals for radical reform; this week I'll blog about a few of my favorites.
One of the very best ideas comes from Harvard's Michael Kremer, who proposes to overhaul the patent system. The problem with patents is that they reward good behavior (that is, inventiveness) with a license for bad behavior (that is, monopoly pricing). It's rather like rewarding good samaritans with licenses to drive drunk. Surely there's a better way.
Kremer's proposal is essentially this: When you design a better mousetrap, we grant you a patent. The next day, the government purchases the patent for a fair market price and puts it in the public domain. The inventor gets his reward, and the rest of us get to buy goods at competitive prices. We pay through the tax system only what the inventor would have extracted from us anyway, and we get the additional benefits of competition: more mousetraps are built, and more inventors can start piggybacking on the idea.
The sticking point is determining that "fair market price". But Kremer has solved that problem: First we grant the patent. Then we auction the patent to the highest bidder. As soon as the auction ends, the man from the government arrives and flips a coin. If the coin comes up heads, the auction winner completes his purchase; if it comes up tails, the government buys the patent for the amount of the winning bid. Bidders have every incentive to bid judiciously because the coin sometimes comes up heads. But this way, half of all patents end up in the public domain, which is halfway toward solving the problem.
That's the naive version of the plan. In the sophisticated version, the man from the government flips a weighted coin, so that he wins 90% of the time. (You can't go all the way to 100% or bidders will have no incentive to perform their due diligence.)
What about collusion in the auctions? Kremer's solved that too. Read his paper or my book for the details.
The benefits from Kremer's plan would be so phenomenally huge (think about having 90% of all prescription drugs sold at competitive prices) that I cannot imagine why it wasn't adopted the day he proposed it. I just don't see the downside.
So much for the patent system. Tomorrow I'll tell you how to reform politics.
Under the proposed mechanism, that wouldn't happen, which could negatively impact new company formation.
Real patent reform will bring a patent within reach of an inventor with a working gadget and not much else. Sadly, Mr. Kremer's proposal does nothing to achieve this.
I think this is a good thing. Assuming my ideas are in fact novel, they would do more contributing to the general set of knowledge than just sitting in my head.
"We pay through the tax system only what the inventor would have extracted from us anyway"
This would spread the costs of the patent across all of society based on the income tax, so people would be paying for the invention based on their incomes, not on whether they consume the invention. I think the current system, where people bear the costs of their own use of an invention sold in the market, is better.
Thus R&D will be driven by two types of organizations, small time starts ups/backyard inventors and firms that now dedicate themselves to R&D exclusively. Due to how R&D is very much cyclical boom/bust, this may pose some problems and advantages.
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Furthermore by removing R&D, and now making 90% of patents disappear you change how large businesses will run. Businesses will focus on three things, producing the most stuff, packaging and shipping it to distribuitors/sellers, and advertising. Effectively you would turn almost every large company into a Wal-Mart organization. It matter's less how smart your organization is, it matters more on how much you organization can make. By doing so you alter the creative/destruction principle of large companies. Microsoft probably wouldn't have risen to the behemoth it became if in the 80s IBM can have access to 90% of the tech/IP and just could dedicate more 10 to 100 times the workers in the area compared to what Microsoft had.
Also, considering the magnification of damages for willful infringement, why would companies start paying attention to the patent auction any more than they pay attention to issued patents now? Alternatively, it seems plausible to me that the instant there's a forced auction, there's an incentive for everyone to look and no one to bid, thereby driving the value to zero whether the government gets it or not. That is, unless you're going to allow for a reserve price, but if you do that, how do you prevent the grantee from setting their reserve so high that they get to keep the patent for failure of bidders to meet it?
The problem with the patent system isn't the monopoly per se (the libertarian in me cringes at writing this); the problem is the definition of what is patentable, the patent term, and/or the abilit of the examiners to review applications for patentability. There's no reason, for example, to allow software to be patented, but if we do, the application should come with an actual (read: source code) implmentation like mechanical patents do. Additionally, since they're already protected by copyright, if we're going to keep software patents, we should at least force authors to chose either the patent or copyright, but not allow them to keep both. For drug patents, we should develop a germaneness criterion so that telescopic patents are prevented (where one part of the process is patented, and then years later another is, and so on).
Finally, if you really want to adjust incentives, the government can change the patent maintenance fee schedule to one that starts at some nominal value and grows geometrically at some rate (say, at the extreme, start at $100 and double that every year). That will firmly plant the idea that the patent needs to be implemented and making money for its holder, and those patents that are used between companies to club each others' legal departments (ending, often, in cross licensing) will simply fall into the public domain before they become legal cudgels.
This approach would turn patents into an explicit system of government subsidies. It would then become an outright political football; today there's at least a pretense that "intellectual property" is what's being protected. Once it's an arbitrary system of subsidies, then the concentrated-benefit, diffuse-hurt effect will take hold, allowing patent lobbyists to push for the maximum revenue they could get. No one would be sued for patent violations in this system, thus almost completely wiping out the incentive to fight back against ridiculously trivial patents.
Please tell me what the UPside of this proposal is.
The underlying theme is an attempt to to place honest market value on items for which there are no markets or illiquid markets.
2. As I believe some of the commenters have pointed out, the value of a "good" patent often isn't known for a while.
As I understand it, there are a certain number of patents for things with very similar uses -- i.e., I patent a drug to cure bone-itis; the rival drug company, Company X, can't sell my drug, so it comes up with a different drug to cure bone-itis. That might interfere with my incentive to invent the drug in the first place even as things are now, but I think I can out-compete Company X, or at least not entirely lose out to it, so I'll keep on developing new drugs (or buying patents from people who do). Under this proposed system, though, someone develops a drug to cure bone-itis; if I win the auction, even if I get lucky and actually buy the patent, someone comes up with a different drug to cure bone-itis, and that one probably ends up in the public domain. I can compete with Company X, and maybe Companies Y and Z, but I don't think I can compete with everybody. So I probably won't bother buying the patent in the first place; which means there will be less incentive to invent the drug.
That's how it seems to me, anyway; but maybe people who know more about economics can explain that I'm wrong.
First of all, if a company invests considerable time and energy into developing a product that's patentable, its expertise in that patent puts it in the best position to develop it. But, if somebody else wins the auction for that patent, they have to develop that experise again, resulting in a deadweight loss. If you allow that company to bid on its own patent, then there's nothing stopping it from bidding $100B for each patent: if it loses the auction, the government pays $100B; if it wins, it's not out anything.
Second of all, it ignores products (like many drugs) which have many patented technologies incorporated in them. If 90% of those technologies are in the public domain, but the other 10% are owned by a company, that company can still charge monopoly pricing for the entire product.
Third, especially in the drug arena, recognize that the monopoly pricing protects the developer's ability to recoup both its development costs of the invention, but also its very significant post-development costs. Once you have a drug, patented or not, actually getting it approved by the FDA involves significant time and expense. What company is going to undertake that cost if somebody else can freeride off of it?
Forth, do you really want the government buying the patent for, say, a new "adult" toy that could make a lot of money in the market? Shouldn't those purchasers pay for the patent and not you and me?
Which is also a poor idea -- people would be forced to vastly inflate the assessment of their own property in order to avoid having to worry about being abruptly uprooted by some speculator. Prices would only approach the fair market value when the owner's looking to sell, and frankly we do a pretty good job of that already. The only winner here would be the government, which would be able to extract a 'stability tax' from the inflated property values of people who can't or don't want to move. I'm sure there'd be interesting pricing fluctuations, as well, since the 'assessed value' of a property is going to plummet the instant the owner wants to sell.
What was the merit of this proposal?
"We pay through the tax system only what the inventor would have extracted from us anyway..."
Yep, the gov't is always so much more efficient than the private sector.
That (and all other practical concerns, such as magic pre-knowledge of successful drugs) aside, we'll still end up paying the same amount out, just through taxes instead of drug prices.
Assuming that the incentive to innovate is unaffected, the total spent on R&D will be the same as it is now
=> those same costs will be recouped with the same risk premiums (including making up for the failures), return on investment, etc.
=> still gotta get just as much money out of the customers aka taxpayers.
TANSTAAFL.
Also, Latinist, if that was indeed a Futurama reference -- thank you for reminding me of one of the funniest shows on television again.
Essentially, this plan amounts to efficient takings of private property (the patents) in order to get around this problem. If somehow we could magically figure out the present discounted value of profits from any given patent, this system would work almost perfectly. Grab every patent as it is granted and pay this amount to the owner. If the amount is correct, why should he care? (As one commenter above said, there is a distributional issue here if the patent only helps a small portion of the taxpayers).
So those commenters who rail against the ivory towerness of this, will you at least recognize there is a problem with selling something that costs nickels to produce for lots of money?
I think his post is itself an incentive scheme: put a poor idea out there and you incentivize 25+ comments on how to improve the idea. Tomorrow he'll talk about how his scheme generated this good commentary he got for free. Maybe similar schemes could be used for legislative drafting.
Frankly, I agree with the others who think that this idea sounds like it's coming from someone without a lot of real-world experience with patents.
Also, as someone who is in the process of filing a patent through my university, I don't like this idea, and it would serve as a disincentive to me. The reason is that part of what drives me is the belief that I can anticipate what the useful problems are before the rest of the industry. Paradoxically, the better I am at this, the more my patents would be undervalued by this very same industry under this system.
The problem with this scheme is the absurd effort that would have to be put into auctioning every single patent, especially given that there wouldn't usually be a winner. Maybe Landsburg could figure out some test to discriminate between patents and identify those that would benefit society most if released into the public domain.
Or maybe create an Intellectual Property tax, with the assessment made by the market. If Company A has a patent, and Company B offers to buy it for $100, then as long as Company A retained the patent it would pay 5 bucks (if the tax rate was 5%) in tax per year.
I haven't read the paper yet, but I assume the author expects that bidders (especially large institutional bidders, who are participating in multiple auctions) will bid 2x what they think the patent is actually worth. Because they only have to pay on half of the auctions they win, it averages out over time to FMV on their portfolio of bids and acquisitions. I suppose their acquisitions, viewed alone, have immediately lost half their value since they were bought for twice their FMV... I'm not sure how an economist or accountant would treat that.
This problem can be solved by using a second-price auction, whereby the high bidder pays only the amount of the second-highest bid.
Still, that does not mean that the method described will produce FMV in the real world. If the patent is of a type that is valuable to lots of bidders you will get a "winner's curse" effect, so that the winning bid will overvalue the patent. If it's of a sort that is much more valuable to the inventor than to others the second price will often be so low as to be unfair to the inventor.
It is also impossible to argue with Chris Fulmer's fourth point. The scheme seems designed for inventions like pharmaceuticals, which have widespread benefits, and the potential to benefit, in the future, those who do not use them right away. But why should the government buy up a patent for an improved razor, or a cell phone that plays MP3's?
That the patent office has taken to patenting discoveries and obvious computer widgets is a separate problem, and in any case, would not be solved by this scheme. In fact, there would be little incentive, and no standing, for any private party to challenge a patent when a stupid one is issued.
Colin:
It wouldn't work that way. It makes no sense to bid $2 for a patent that's only worth $1, on the theory that you'll only have to pay 50% of the time. Half the time the buyer wouldn't have to pay anything; the other half the time the buyer would take a $1 loss. On average, the buyer would always lose.
No, if it wins it's out $100B.
100% are sold at competitive prices today....
The author seems to think that patent costs dominate. They don't. The testing and regulatory costs do. The "exclusivity period" is when that money gets recovered.
As proposed, the scheme will significantly reduce the number of drugs that become available. Let's look at the process to see why.
Under the proposal, the patent for an untested drug becomes public domain. If, as with generics today, the approval is for the drug and not the firm that paid to get regulatory approval, any firm (or combination thereof) that paid for approval would be at a significant economic disadvantage. So, no sane organization will pay. That drug, no matter what its benefits, will not reach patients.
If we change things so approval is for the firm that pays the costs, the generic-like market disappears unless we put a time-limit on that exclusivity. And, if we do that, we're back where we are now, only it's a regulatory monopoly and not a patent monopoly.
The patent office generates a huge amount of money that they don't get to spend. Congress insists on not letting the patent office operate on its own because they want to use the money on other things, so the fees being paid by users of the patent system don't even end up benefiting the system. That's a gigantic problem that needs to be fixed -- more money means more examiners, and if they paid examiners better they might be able to keep some better ones around. Right now, the good ones go to better paying jobs in private practice. Better pay for the examiners might keep some of them around (as examiner hours are better than an associate at a firm). More examiners might allow them to reduce quotas for how many cases an examiner has to clear, which can result in sloppy work at times.
Fixing the patent office and tweaking the law (for example, the law on obviousness is somewhat muddled and results in a lot of things being patented that shouldn't be, especially in the business method area) would go a long way to fixing the other issues. That would be addressing the problem at its source, not just treating the symptoms.
(2) also, under the current regime those who consume the inventive asset, directly or in downstream products, pay for it. now, it seems that everyone pays for it. i'm not sympathetic to those going into chapter and verse about how a patent is inherently property (that's not what the constitution says), but it does redistribute the burden of those who pay for the R&D.
(3) this would do little to alleviate any problem in the most high-value patent cases that involve patent pools. each patent in a pool can block the technology, so the marginal value of each patent is the value of the technology itself. it would accomplish little to put only a fraction of these patents into the public domain.
A better system would be to have a continuously running auction system for properties with a right of refusal to the owner and binding bids for the bidders. Under such a system, anyone could place a bid with, say (in Texas where I live), the local county appriasal district for the property. The highest bid (or second highest, or some fraction of the highest, or some other effective measure of value) at the time of valuation would set the value of the house for tax purposes, but the owner would have the right to call the bid and force a sale rather than pay the tax with the tax being paid by the bidder/buyer. This, of course, would have to be coupled with the usual caps on increase in tax paid or increase in valuation year-to-year, as well as caps for senior citizens, those living on fixed incomes, etc. I'd imagine that the vast majority of properties wouldn't see bids, though, so you'd probably have to continue to have the state assessment as a floor on the value.
Of course, the current system more or less works, so why bother changing it? Does anyone know what Heinlein's motivation for his proposal was?
Forget the whole "government" thing, because it's purely illusory. Imagine that we have a Drug Company, and the Public, which is everyone in America formed into one big mob.
Public: "Hi there, Drug Company, that's a great invention you have there. We want it at a low cost."
Drug Company: "No way! I invented this, I have a patent on it, and I'm going to charge a monopoly price for it."
Public: "What's it going to take to get you to charge the equilibrium price in a perfectly competitive market?"
Drug Company: "Why, that's easy! Pay me the difference between my profits at the monopoly price and my profits at the perfectly competitive price."
Public: "But that's what we were doing anyway!"
Drug Company: "Tough break, Public."
Not if it's the inventor. It owes the $100B to itself. Though again, this particular problem can be solved by the auction mechanism chosen.
No, no, no. This is not a gamble. You can't do standard expected-value analysis on it. Well, you can, but you have to plug in the right numbers.
There are two possible results for the high bidder: winning and losing the coin toss. If you win the coin toss, you get the patent, which has value V. If you lose the coin toss, you get nothing, and pay nothing. With a fair coin and bidding 2V what happens?
Win the coin toss: Pay 2V, get V. You lose V on the deal.
Lose the coin toss: Pay 0, recieve 0. You win/lose 0 on the deal.
50% of the time you lose V; 50% of the time you win/lose 0. Your expected value is -V. You would never do that.
You make the inventor pay the $100B to the government to keep the patent if it comes up heads, and you pay him $100B to take the patent from him if it comes up tails.
er... -V/2
The inventor may not have the cash to buy his own patent, but he is sure it will work. Let's say that the inventor is a software or computer engineer and he invents a great piece of technology. His dream is to create and market his product and run his own business, building it from the ground up. Under this proposal he has to out bid Apple and Google for the right to win his own patent. What motivation does he now have to innovate, if he will never be able to market his own patent? This could be devastating to small start up companies and their new patents, as the vultures at Microsoft simply outbid them for their own patents.
In this system, there is no guarentee that the inventor will even get back what was spent on R&D of the patent, and without the opportunity to market it, they will take a loss.
You make the inventor pay the $100B to the government to keep the patent if it comes up heads, and you pay him $100B to take the patent from him if it comes up tails.
This is not the system described, and it's sort of silly, since it would require the inventor to pay the government on top of what has already been spent.
Fair market price? But that's not a constant. While the market price at any given point in time might be knowable by an open market bidding, why would anyone settle for the price at some arbitrary point in time, when the value of that patent can be expected to change over time.
Current levels of government involvment in policing the patent process are quite sufficient. As it stands, too much drivel passes though the patent office and is granted patent protection. Problem is that the path of least resistance for the patent office is to grant patents freely rather than functioning as a meaninfully high hurdle to weed out the good stuff from the crap. Just examine any number of cheap plastic items around your kitchen, from soda containers to can openers. Do you really believe that any of these items are so strikingly novel that some element of their design or construction merits monopoly protection?
Indeed.
And auctioning a patent the day after it is granted could easily short-change the inventor as the payment would be based on the market understanding that very day while in fact it might take years for the market to recognize the value of the patent.
Yeah, because other schemes in which "the government gives you a fair market price for your property" have worked out so wonderfully for property holders.
A patent is not property. The government is authorized to he grant of patents (and copyrights) as instruments to achieve progress in science and the useful arts. Article 1, section 8. This is not a controversial point. Patents and copyrights are treated as "property" more frequently in europe, but US institutions, including the framers and the courts, have rejected that position.
Pay 2V, get 2V, get V, lose V: no profit.
Assuming no independent agent is willing to pay more than V for the invention, his opportunity cost is also 0; he still has the patent of value V.
BUT, if the government "wins" the coin toss, they're stuck paying 2V, and the inventor
Get 2V, lose V: make a profit of V.
Thus, the inventor has an incentive to inflate the price during the auction.
This is, of course, on top of the other problems of imperfect information and shifted cost.
It's a constant at any given point in time, andthat constant reflects judgments about future events. Sure it might change. But the same is true of all assets. The FMV of a stock is some known value right now, but will usually be different in a few minutes. Similarly, the FMV of a large proportion of the houses in the country is different today than what it was a year ago. That doesn't make it irrational to buy or sell stocks or houses.
It's also not the way Landsburg describes it.
Of course, both systems run up against the imperfect information problem.
Over its lifetime the patent supported his family in a manner to which they were quite happy to become accustomed; put his child through kindergarten and college; and otherwise yielded sufficient wealth that made the patent effort worthwhile.
It was his first patent. He wrote the bulk of the application himself, with advice from a first rate patent attorney for a very reasonable fee.
I think many independent inventors misperceive patents' values and costs considerations. The misperception is that obtaining patents is akin to firing a shotgun. This underestimates the value of precise targeting, both technologically and in terms of the potential market and pricing.
Shotgunning may be worthwhile for those who can afford countless losing shots for the one that pays off. For the individual inventor, making patents pay off economically is more akin to firing a rifle with as precise targeting as one can muster. One may fire many times with many patents, but precise targeting of technology and market is the key to every shot.
Devices carrying my friend's patent (now expired I believe) are ubiquitous within a fairly populous, but relatively narrow, market which ranges from the most outstanding established professionals to beginning amateurs and even children.
To me, the most interesting aspect of his patent are first, the actually novel technology and the perspicacity with which he wrote the patent disclosure, which by itself eliminated later courtroom effort to enforce the patent; and second, the fact that every American company he approached to license his technology turned him down flat.
So for "plan B" he booked a flight to Japan, which yielded his small fortune and also revolutionized a small but longstanding market and industry. The companies that turned him down took at least a decade to regain any significant footing in that technological market niche.
If gun control means hitting your intended target, patent success means picking the right technological and market target, then hitting it.
The other problem is what is meant by the public domain? Like foreign countries too? The public may benefit by lower prices, but it would deal a crippling blow to many industries.
And, Kovarsky, I don't know what definition of "property" you're working from, but US individuals and companies invest in patents, they have them as assets on their balance sheets, they buy and sell them. What are we missing here?
In the govt auction system, given 10 competitors with 10 related patents, the 1 guy who won the auction that the govt didn't keep would be able to run the other 9 out of business. The govt would have succeeded in confiscating the very defenses that prevent a monopoly from emerging.
That's not to mention that taxpayers shouldn't be on the hook for improvements to say rendering engines or force feedback.
In addition, R&D projects often take five years or more to payoff (even longer for drugs), and a large proportion fail (especially for drugs). Being attached to a larger corporation gives them a much better chance of being financially able to stay in business and to complete a long, difficult project to the point that a pay-off is in sight.
BillB's last paragraph is a better idea. (Geometrically increasing annual patent maintenance fees.) It should be applied to copyrights, too. The only caveat is that it should be very difficult for Congress to get hold of that money for the general fund without ensuring first that the PTO is adequately funded - IIRC, right now a large part of the one-time application fees are diverted to the general fund, and the PTO seems to be underfunded, with patent examiners working too many portfolios and sometimes not knowing enough about the applicable fields.
But I think there's a better way to improve the process of checking the validity of patents than hiring more and higher-paid PTO employees: Post patent applications on the web for the public to see and pay bounties for proving prior art and otherwise invalidating a patent in whole or in part for the first two years. That is, if it claims A, B, and C, where only A is actually a new invention, knocking B and C out of the patent will each get a bounty. In the now-typical case where a corporation is behind the patent, require a $50,000 bond be deposited to cover possible bounties. After two years with no challenges, or after all challenges received within the two years have been tried and the patent upheld, the patent is officially issued upon paying a $100 fee, the bond returned, and the patent holder can sue infringers, including retroactively to 3 months after the posting went up.
Next year, (year 3) the annual fee is $200, and so on up to $26,214,400 for year twenty. Or maybe we should stop the progression at year 15 (say), and hold the fee at $409,600 for the rest of the patent term.
Allow individual inventors, if truly individual (no assignments of rights to a corporation) to swear poverty and avoid the bond, with the bounties being paid out of the surplus from those later-year maintenance fees - but if their application is challenged successfully, their ability to pay will be investigated and they might face perjury charges as well as having to pay the bounties.
Finally, the working-model requirement should be re-instated - especially for software and business method patents - and courts established specializing in patent and trademark cases, with a jury pool restricted to well-educated people competent in some aspect of technology.
Well, the "system described" has the problem that you originally pointed out, so it's not a good idea, either. My idea keeps the inventor from bidding, which wouldn't be a problem as long as there were enough other bidders.
Add to that the likely problems of properly managing an auction (sufficient number of bidders, advance warning and information, ease of participating, etc.) and it seems like the practical effect will be undervaluing of the patents sold.
Because it is an astonishlingly bad idea.
I immediately went to the amazon page for this book before I read the post. I was excited about the new book all the way through the first paragraph of the post. But then it takes a turn for the ugly.
Many of my problems with this idea have already been covered, but the worst one has barely been touched on. Only Byomtov seems to understand anything about auction theory suggesting a second-price auction. Auctions tend to grant rights to the bidders who most over-value a product. The true market value of a product is usually somewhere below what the highest bidder is willing to pay for it. Many large companies have realized this basic tenet of game theory and consequently devalue their bids accordingly. When several of these companies compete against each other in an auction, the sale price generally ends up near the market value, but only if all the bidders adjust their valuations based on somewhat complex economic theory.
If the auction system was open to all (how is this accomplished again?) the people/organizations without much economic knowledge would be the ones who make the highest bids (probably over market value). 50% of the time, people pay too much for the patent and 50% of the time the government (i.e. all the taxpayers) pay too much for the patent.
Sounds like a terrible idea to me.
For example, what if the patent was for a shorter period than it is now? Say a 3 or 5 year monopoly and then have the auction? There were be better time to determine fair market value and the company has a bit of time to sell its product.
Yes, it does, but that's not necessarily a good idea. A second-price auction will avoid at least the problem of an exorbitant bid by the inventor without shutting the inventor out.
Shutting the inventor out will in some cases shut out the person to whom the patent has the highest value. That seems unreasonable, and unfair to the inventor.
As I recall the proposal, property owners had the right to refuse buyout offers by retroactively raising their valuation and paying X years (I think it was 3 years) of back-taxes on the revised valuation.
Well, that's exactly the problem, isn't it? Where does that hundreds of millions of dollars come from?
"No reason to withhold", well... except for repaying the huge testing and regulatory investment, and paying for all the testing, R+D, and the like for all the drugs that never made it to market because they failed somewhere along the line (something like/over 99% of them).
Government paying the bill by paying the monopoly-pricing price as a lump-sum is probably less efficient than government just subsidizing medication costs.
(Or simply leaving it all alone until the patent runs out; I don't even see that there's a problem here, given that without patent protection no private party could possibly afford modern drug development in the first place - perhaps a better proposal would be to have the State do its own drug development?
Better, but still not good, I mean.)
To really reduce this with life saving drugs you have effectively two options. 1) Have adjustable patent periods where the length of the patent is determine by the utility of the drug, and the fact the drug costs have been recouped.
2) Since its a lifesaving drug the government offers to pay the research cost plus a little interest to the company and then allow all companies to make the drug. Effectively a government buy out. Note this can't really be done with all drugs, all patents, just the important ones.
chrismn,Sure, but you still can't produce that second pill until you produce the first, very expensive one. Your subsequent discussion did nothing to explain to me why having
governmentthe public at large pay that first-pill cost is better than spreading it among the purchasers for the first n years of pills, especially given that the patent-holder can't realistically price it above the price of any existing alternative or else nobody would buy it.Shake-N-Bake, as a practioner in patents, what do you think about completely removing business-process and software patents entirely--i.e. have Congress just abolish the whole mess? (FWIW, I'm a software developer, and would be overjoyed if this were done.)
This is deeply flawed reasoning. If people only have to pay nickels for the second and all later pills, do you also assume that some fool out there is going to pay a hundred million for that first pill? If not, then the creators of the pill won't make their investment back by selling pills for a nickel each. And if the don't make their money back, they won't be making any more pills of any kind.
I believe this is called the Goose That Laid The Golden Egg fallacy. Gut the goose, no more eggs. I know, the goose eats and craps and generally makes a mess, but we still need it.
Why not extend this model to the idea that all private property should, at any time, be subject to government seizure and auction? After all, I enjoy "monopoly" rights on my home (for one example).
Perhaps the inventor has ideas for the patent which would enhance its market value? Perhaps it's useful only in conjunction with other patents? Perhaps the inventor wants to put her name on the product?
You make a good point, but also one you may not have intended--if all those "cheap plastic items around your kitchen" indeed include patented ideas, and yet they are still cheap...then what is the problem? Much lamented monopoly pricing has produced cheap products. That is the goal of the patent system. It is not working perfectly by any means, but it does work.
So I ask again: how does the USPTO fulfill its constitutionally defined function when its services have been priced out of reach of most people? I suspect that it doesn't.
And Fub... someone who flies to Japan to float a business venture possesses something more than a "a very ordinary middle class income," at least as I understand the term.
The problem with patents is one that many originalists and textualists in this forum are intimately familiar in other contexts. It is the problem of the reconstructing the context at the time a legal document is memorialized. Lawyers shape the reconstruction so that the adopted text is changed/interpreted by shoehorning a different context by extrapolation, interpolation or presuming a suitable context if faced with lack of knowledge of the true context. It is a problem that defines Justice Scalia (keep the text true to the original understanding- except extrapolation and interpolations are allowed generously) distinct from other jurists who are comfortable to allow later developed understanding of phrases and words (often different from the original language) to be used. This has been the Achilles heel of many faulty decisions, the most glaring of which was probably the Dred Scott decision. Most jurists stick to the text the same unless equity requires otherwise.
In the Constitutional arena, too rigid an interpretation restricts the Constitution to the society as it existed in the eighteenth century—a clearly impractical solution. This, however, may not be impractical for interpreting patents, which differ crucially from the Constitution in having a limited lifetime-being more like contracts.
In most patent cases, the patent as issued appears to cover one type of innovation but is applied in a different context. Take a hypothetical patent- say directed to a TV on which ASCII text instructions and pictures can be displayed at the same time (which may be inventive at or before 1987—not in the idea but in the implementation). Now that patent may be applied (twenty years later) to allege infringement by users of Windows based computer displays displaying text as an image while seamlessly allowing the text to be treated as text (for manipulation, e.g., by a word processing program) with underlying software.
Is such an application of the patent claims reasonable?
Usually no. Is it successful -- probably not, but the cost of finding out is about half a million dollars or more- a cost that is not reimbursed to the target of the patent suit.
Herein lies the problem. The patent claims as issued typically do not include all the 'limitations' a reasonable person would understand/infer as being included in the claims. For instance, in the hypothetical here, the meaning attached to the term text may not be clarified to distinguish between text- readable by the eye, or as handled by the hardware/software, or whether handled distinctly from the image data. Some of the nuances that become significant are not readily apparent at the time the application is filed. In the specification of the hypothetical patent, the term 'text' may be as 'ASCII text' and term 'image' may refer to a scanned photograph or a television transmission mapped to pixels. If the issued hypothetical claims use only the term 'text' (as opposed to 'ASCII text'), this may possibly result in a broader scope than that likely understood by the Examiner or most technically savvy readers of the patent (who will imagine it to be a variant of ASCII or similar system for representing and communicating text).
This niche between later developed understanding and the original hazy context has been long exploited by patentees in the manner illustrated by late Mr. Lemelson, who was paid over a billion dollars, mostly for his efforts at nibbling at the edges as they became better defined over time.
One solution tries to ensure that the examination of the patent applications includes providing definitions for terms included therein to ensure claims have relatively clear meaning. Presently, this is not done routinely. This reticence persists although the ambiguity in the meaning attached to the terms in patent claims is the overwhelming source of uncertainty in patent litigation. Patent Examination guidelines require that the broadest meaning be attached to a term. They should instead require that the Examiner provide a table of definition for the terms employed in the claims.
The Courts have instituted Markman hearings to establish the scope of the claims, but these hearings are procedurally skewed because by the time they are held, most of the costs have been incurred upfront. A better solution will be to move up the Markman hearings to the front before discovery or other expensive hurdles have been overcome to force the parties to take a stand instead to fighting jello for years while conducting discovery and trying to exhaust the resources of the other party.
With early Markman hearings, the litigation dynamic will change and the cost of challenging a patent will drop. Establishing interpretations for as many claim terms as possible early (by the patent office or the court) will also focus and reduce the cost of search for prior art and other evidence. This should make possible relatively early motions for summary judgment or settlement based on the merits (as opposed to the cost of futile procedures).
Thus, it is not so much the monopoly pricing that needs to be tackled, but the overall present scheme of issuing and adjudicating patent claims while maintaining as much uncertainty as possible.
Another possible idea is to make patents AND copyrights expire at the earlier of the end of the dramatically shorter than current law protection period OR upon the date the inventor stops marketing or stops supporting the product/invention. Sort of a, once you stop selling it or once you stop supporting it with parts, upgrades, the like then that's the day you lose your copyright or patent.
Says the "Dog"
The first problem with dumping software patents is that the dividing line between software and hardware is always moving. You have a black box and know how it operates from the outside, but not from the inside. So, dumping software patents would require that you open up that box and see if the invention is (currently) implemented as software or hardware. But then, that can and does often change over time. Besides, what is software? FPGAs? Indeed, computers have long been microprogrammed to interpret instructions (which was part of the philosophy that made IBM so powerful through its 360 series of computers). But those microcoded instructions can also be implemented in silicon. But do you draw the line between gates and a general purpose processor executing instructions in ROM?
Indeed, when I first started writing software patents maybe 16 years ago, I would write the applications as electronic, showing a schematic that would conceivably work. And then I would mention that it could also be implemented in software. I usually threw in the code too, to get around any Best Mode problems.
Secondly, there is little difference between software and elctronic engineering. Much of EE, esp. in the semiconductor area that I am most familiar with, revolves around essentially programming in silicon. Not strictly, but at a high enough level of abstraction. In any case, electrical patents were suspect for a long time for very similar reasons to those used against software patents.
The thing that must be remembered is that much of software development is very similar to engineering in other areas. And tens, if not hundreds, of billions of dollars are spent on software R&D. Just like electrical, etc. engineering, this R&D needs to be recoupled, either through monopoly pricing or licensing.
And on along this line, the current structure of the software market is not always condusive to software development. For example, I have a client whose software products are ripped off almost as quickly as he releases them. Partially, this is a result of his programs being cracked, and partially it is a result of the bigger players running with his ideas, knowing that he doesn't have patent protection (yet).
Finally, when someone is trying to sell their company, one of the first things that the buyers seem to want to see are his patents and patent applications. I can't count the number of times that I have been involved this way.
Remember, copyright doesn't protect the actual idea or concept, but rather just the expression of it. So, in the case of software, you can prohibit someone from copying your code, but not your concept or methodology.
Which brings up the obvious point - if drug returns were so outrageously high, then there would be a lot more companies in the market trying to invent the next blockbuster drug. That is part of the beauty of capitalism, that when there are excess profits, others see them and jump into the market. And, ultimately, the returns are going to drop enough that the excess profits disappear.
We are likely facing new rules that would eliminate much of prosecution (at a time when much of the prosecution bottleneck is a direct function of examiners cutting corners in the first place) over the screams of almost the entire patent community, practitioners, inventors, and patent holders alike. So, we are likely to be filing vastly more appeals as our option of filing RCEs and Continuations are gutted, esp. in view of routine abuse by examiners of their discretion, most often in direct violation of the patent rules (from the MPEP, 37 CFR, and 35 USC).
The proposed solution above is, IMHO, addressing the symptoms of the problem, and not the problem itself, which is that the agency granting patents, the USPTO, has become highly disfunctional.
And why should I engage in R&D? Suppose half of my R&D projects are failures. I have to use the exclusive rights to the successful half to pay for the failed half. Under the proposal, I would eat all that R&D because I couldn't exploit the winners to pay for the losers.
There is no reason to expect the high bidder will place the same value on my patent as I do, and there is no reason to expect he will be in the position to exploit it to the extent I could. The monopoly is the incentive for the R&D. Without it, the return from R&D can never justify the risk.
Does Landsburg intend to respond?
Furthermore, the biggest problem with the patent system isn't monopoly grants, it's the fact that too many junk patents are being issued.
Of course, this all depends on the technology - which is one more reason to question an One Size Fits All approach. The proposal would seem to do much better with some technologies than others.
As a more general matter, though, I'm skeptical of any plan that would (essentially) completely supplant any big, economically important system (like the patent system) in one fell swoop. Things that seem like little problems during planning can cause huge troubles.
But, to fight academics with other academics, John Duffy wrote a good article about something similar to this (maybe even this exact paper - I don't remember) in the Chicago Law Review in 2004.
We also had an article submitted to our law review this year which I think is also on point: http://law.bepress.com/expresso/eps/1963/
It talks about Kremer some. It also takes a more gradualist approach and talks about the tax issue more.
And Nate F:
I was so busy being an '80s guy, I forgot to get it cured!
Why does anyone believe that the Federal Government can more efficiently place a value on a patent than the market can? In my opinion, with years of patent experience behind me, patent valuation is the most difficult area in the IP field. Nearly all patent disputes could be settled easily if the value of the patent were known.
Responses:
Landsburg -“Think about having 90% of all prescription drugs sold at competitive prices.” Better yet think about never having a new drug developed by a private entity. Government intervention and price controls have pretty much killed drug R&D outside the United States.
Porlock- “There's a clubby disconnect in all these comments, as though the patent system exists solely to serve an Establishment of lawyers, businesses and the USPTO rather than the inventors who are its prescribed beneficiaries under the Constitution.” The patent system does not exist to benefit inventors –it exists to benefit society as a whole. It does so by bringing inventions and knowledge to the public. It may reward inventors with a period of exclusivity but that is not the reason for the existence of the system.
1) Raise the standard of patentability, specifically obviousness. This would result in fewer patents being issued and reduced barriers to entry into a technology.
2) Stop issuing business method and software patents.
3) Go to a pure first to file standard. This would eliminate patent interferences (a long and costly process). It would also encourage prompt disclosure of new inventions.
4) Lower the case or controversy standard for bringing a patent case. It often takes a threat of infringement before suit can be brought to invalidate a patent.
5) Allow the Patent Office to preside over two parties disputing the patentability of a patent application in a fair and evenhanded way.
6) Ban jury trials for patent disputes.
7) Create a patent court of first resort. A number of federal judges hate patent cases and kick them down their docket as often as they can in hopes that the delay will result in a settlement. A single patent court with a rocket docket would bring order to the patent system and lower costs for all involved.
* Note that I said “changing” rather than improving. Each of these has a cost associated (I think some of these are good ideas and others are phenomenally bad). The patent system has evolved over 200 years to become what we have today. It is naïve to think that there are changes with benefits so huge that can be made the day they are proposed without any dispute.
Also, more and/or better patent reviewers need to be hired.
Am I the only person who is bothered by the fact that the patent process seems to be almost entirely driven by lawyers and not, you know, inventors?
EI