NOTES
2. The economic theory of IPRs (patents and trademarks)
2.2 THE ECONOMICS OF PATENTS
2.2.6 Problematic Aspects of the Patent System
This section focuses on two major aspects. First it assesses some of the difficulties concerned with setting criteria for patentability. Secondly, it considers to what extent the concentration of patents increases the misallocation of resources in the inventive field
The difficulties of setting criteria for patentability
Any patent system requires specific criteria in order to have a clear mechanism with regard to the decision on the patentability of inventions. However, setting criteria for patentability is far from trivial and can lead to increased inefficiencies in the inventive realm.
Suppose that patentability criteria are too loose to effectively allow the patenting to any slight improvement to or modification of an existing invention.
Here, inefficiencies in the allocation of resources in the inventive sphere may occur mainly due to problems such as inventing around and blocking.76 Moreover, loose criteria for the granting of patents also increase administrative costs resulting from the examination of patent applications, the registration of patents, the enforcement of patent rights, and so on.77 Excess costs are particularly severe when patents are useless in terms of their ability to contribute to society, especially when similar or even identical patents already exist.78
If, however, the conditions and criteria for the grant of patents are too strict and patent rights are too broad, there is always a risk that future inventive activities will be discouraged.79 When patent criteria are too strict, society may forego the opportunity to have new inventions, or improvements to inventions, that may be considered economically significant yet legally irrelevant. When criteria are too broad, a patentee would be uncertain of his ability to exploit his own patent as he may face accusations of infringement from other patentees.80 Scherer argues that ʻinventors like Lee de Forest and Edwin Armstrong were forced to sell out their rights in key patents because, as Armstrong later lamented, he was in danger of being litigated to deathʼ.81
Facing such difficulties, a government can adopt a system based on the granting of patents either upon registration or upon examination.82 Neither is satisfactory. The administrative costs of a registration system, under which patent applications receive a rather superficial review, are cheaper than those of an examination system, which reviews patent applications much more carefully.83 On the other hand, a registration system is likely to increase the number of patentable inventions which, upon examination, would not have been found to be ʻpatent-worthyʼ.84 Indeed, the attempt to enforce patent rights could lead to a mass of lengthy and expensive litigation, the social costs of which negate, and may even surpass, the benefits of adopting a registration system.85 In contrast, an examination system, though costlier, can reduce the likelihood of non-valid patents. According to Machlup, such a system would reduce the ʻmass of worthless, conflicting, and probably invalid patentsʼ, as it is likely to prevent the ʻfraudulent practice of registration and selling patents similar to the claims being patented by othersʼ.86 Thus, it is far from clear which system is superior in terms of its ability to administer and to enforce patent rights.
Establishing criteria for the granting of patents may be subject to serious economic, legislative and technical difficulties. The entire effectiveness of a given patent system may come into question if, as a result of these difficulties, the administration and enforcement of patent rights increases the misallocation of resources in the inventive sphere.
Patent concentration
It is unclear whether the tendency towards the concentration of patents increases or reduces patent inefficiencies. The phenomenon of patent concentration may occur in two instances. First, it can be the outcome of a natural and genuine attempt made by firms to test several inventions, while patenting them all, in order to achieve the most desirable and cost-effective result. Second, and as previously argued, it may be the result of a strategic decision of those firms wishing to preserve their market monopoly by patenting all substitutes for their original inventions.87
Whether it is a result of a natural process or of a well-planned corporate strategy, patent concentration is likely to increase both the monopolistic position of patentees and their ability to behave in an arbitrary manner.
Consider a case in which two firms were able to develop and to patent similar inventions, and that these inventions vary in their capability to reduce production costs. Theoretically speaking, the owner of the more cost-effective patent can charge a price that is equal to the price of the economically inferior process plus the added value of his superior invention.88 His ability to set a price for his invention is much more limited compared to a situation in which he was the only patentee.
Moreover, firms are more likely to be able to exploit the monopoly embodied in their patents under a state of patent concentration.89 Patent pooling agreements, which essentially allow firms to use each otherʼs patents either through cross- licensing or by deciding upon royalties in advance, have been known to create patent cartels, such as that achieved and led by AT&T in the 1930s.90
However, it is also plausible that firms will have more incentive to invest in future inventive activities if they are able to control the majority of patents in a given class of inventions. Consider a case in which one firm owns an entire class of patents. Suppose now that a different firm was able to come up with a related invention, yet does not have the capabilities to exploit it commercially.91 Since in this case the smaller firm will have little choice but to negotiate with the controlling firm, it will naturally be interested in any positive price for its invention.92 If both parties are willing to negotiate, it is plausible that they will agree on a price (P) that ranges between the minimum price (Pmin) that the owner of the improved invention is willing to accept, and the maximum price (Pmax) that the controlling firm is willing to offer. However, if and when P is smaller than Pmax there is a disincentive, in terms of commercial returns, for the production of improved or related inventions by those other than the firm controlling them.93 Thus, a patent system acts as a commercial incentive mostly to those who already own and control a large quantity of patents in a given industry.94
Finally, there may be cases in which firms will find it in their own interests to share, rather than control, different types of research findings that is to create conditions of non-patent concentration. Current R&D ventures are very risky in terms of their high expenditure costs and the uncertainty of their outcome.
The average R&D costs for the production of new medicines are estimated at
$500–$800 millions and the average period for turning a newly-synthesized active substance into a marketable product is about 10–12 years.95 Furthermore, according to EFPIA, only one or two out of 10 000 synthesized substances will pass every test to become a marketable drug.96
As a result, some firms may find it more cost-effective to enter into joint R&D ventures, be it with other companies or with academia, hence giving up the opportunity to obtain commercially valuable patents. This may be particularly relevant in the realm of basic research in which R&D findings, although not commercially applicable in the present, may become extremely important to firms in the future.97 For instance, according to the FT there is growing cooperation between pharmaceutical giants and academic institutions in the area of DNA mapping.98 The data obtained from this type of research is designed to create a genetic ʻroad mapʼ that, in addition to its availability to all researchers, would not encounter the moral dilemma of ʻpatenting lifeʼ.99
It is not clear whether the tendency towards patent concentration would reduce or increase inefficiencies in the patent system. The concentration of
patents in a given industry will increase the monopolistic powers of patentees and increase their non-competitive and discretionary behaviour. However, it will also increase their incentive to invest in future inventive activities. Furthermore, there may be cases in which firms would prefer to enter joint R&D ventures, given the high level of risk of such ventures, thereby creating conditions for non-patent concentration.