Abstract :

• The primary role of a patent is to protect an innovation by granting its holder a temporary monopoly on its use. Patents also encourage the dissemination of knowledge but have negative effects in terms of competition.

• The sharp increase in the number of patents granted in recent years and the increasing complexity of products have led to new strategic behaviors on the part of companies. Thus, the emergence of patent trolls, patent pools, and the race for patents require us to reflect on the future of the patent system.

• Many voices are criticizing the current patent system and proposing reforms that could involve reorganizing national patent offices or changing the duration and scope of patents. Some are even calling for the outright abolition of intellectual property protection through patents.

Innovation is one of the drivers of economic growth in developed countries and a key factor in access to new technologies in emerging countries. Patents are one of the tools used to protect the intellectual property of innovations. This article reviews the role of patents and their origins and summarizes the various challenges facing patent systems in the 21st century.

In 2014, American entrepreneur Elon Musk decided to make his company Tesla’s patents available to everyone, pledging not to sue companies wishing to use the patented technologies. With this announcement, Elon Musk hopes to encourage the emergence of new rivals and stimulate demand for electric cars. The company also wants to encourage its competitors to adopt its technological standards. While this decision may seem surprising, it raises the question of the role of patents and their usefulness in stimulating innovation in the face of new strategic behaviors on the part of companies and in a context where innovation is cumulative.

Developed countries have intellectual property protection systems that offer inventors protection in various forms, such as patents. A patent gives its holder the exclusive right to exploit (manufacture, use, sell, or import) an invention for a period generally limited to 20 years from the date of filing the patent application. A patent filed with a national office is accepted if it meets two criteria: the invention must be innovative on a global scale, and it must be useful, i.e., it must have industrial application.

The links between patents and innovation are difficult to identify empirically, and the results of economic theory are relatively ambiguous on this subject. More recently, many voices have been raised in criticism of the patent system, highlighting in particular the fact that it is no longer adapted to the changes in the economy of the 21st century.

1. The patent system: advantages and disadvantages

The modern version of the patent emerged following the first industrial revolution to ensure that creators retained ownership of their inventions and to encourage the dissemination of technology. France passed its first patent law in 1791. Most industrialized countries introduced similar laws between 1780 and 1850.

a) Patents protect innovation

The primary role of patents is to promote innovation by granting their holders a temporary monopoly. Patents are often described as having positive effects thanks to mechanisms that encourage innovation and the dissemination of knowledge, but they also have negative effects on competition. From an economic point of view, patents are justified to protect innovations because they have the characteristics of public goods, namely non-rivalry and non-exclusivity. In the absence of patents, innovators have very little incentive to disclose their inventions and exploit them for fear of losing the benefits. Patents resolve this dilemma by offering a monopoly on the exploitation of an innovation, which ensures that innovators receive a return on their research and development investment, while promoting the dissemination of new techniques.

Numerous empirical studies conclude that the patent system is widely used and effective in encouraging innovation in certain technology-intensive sectors (Berkeley Patent Survey, 2008). Conversely, manufacturing companies seem to prefer strategies other than patents, such as technological advancement or trade secrets[1]. Coca-Cola, for example, kept the formula for its drink secret for over a hundred years, even though a patent would have guaranteed it exclusivity for only 17 years. This led Manfield (1986) to conclude that abolishing the patent system would not affect R&D investment by manufacturing companies, with the exception of the pharmaceutical and chemical industries.

As the description of the protected technology is made public, patents also play a role in the dissemination of knowledge. In France, patents are published 18 months after filing, and five years in the case of pharmaceutical molecules. Furthermore, it is possible for a third party to use an innovation by paying a license fee to the holder, if the latter authorizes it. Finally, patents are also used by companies as a sign of their expertise and quality. A study conducted by the Ecole des Mines for France Brevet shows that startups with patents find it easier to obtain financing when raising funds.

b) Patents can be a barrier to innovation

The downside of the incentive to innovate provided by patents is the creation of a temporary monopoly, which leads to underuse of the technology and potentially higher prices than in a competitive situation in the short term.

Numerous studies show that patents can hinder innovation, particularly when it is cumulative—i.e., when inventions build on each other—and when patents protect fundamental inventions. In this context, a second-generation innovator must wait for the first-generation patent to expire or obtain a license, usually at a higher cost, which effectively reduces the incentive to develop second-generation innovations. For example, the Wright brothers filed a patent after their first flight in an airplane. Glen Curtiss, one of their competitors at the time who had developed a lower-cost prototype airplane, was unable to exploit it immediately because the Wright brothers refused to grant him a license for their patent. This deadlock is believed to have slowed down the development of aeronautics in the United States. Scotchmer (1991), who studied cumulative innovation, concluded that there is no perfect patent system to address these sequential innovation problems.

The challenge for the patent system is to find the right balance between protecting and disseminating innovations in order to maximize social welfare. This trade-off has been well known in economic literature since at least the work of Nordhaus (1969). Nevertheless, it is difficult to predict the net effect of a patent system.

2. New challenges for patents

a) Dematerialization and complexity of products

The dematerialization of certain products and processes and their increasing complexity raise new questions for invention patents. The scope of patents is constantly evolving, and some countries use different definitions. In general, natural phenomena and abstract ideas are not patentable. Nevertheless, the patentability of genetically modified organisms was introduced by the 2004 bioethics law in France, whereas it had already been accepted in the United States since 1980. Similarly, computer programs and algorithms cannot be patented[2] as such in Europe, but have been patentable in the United States since 1994.

Products are becoming increasingly complex and are mostly based on several intertwined patents known as a » patent thicket. » As a result, certain technological products, particularly in the electronics sector, consist of several hundred or thousand components, each of which may be patented. In this case, an innovator wishing to enter the market must obtain permission from the patent holders for each component, which introduces a problem of « royalty stacking »: the sum of the license fees to be paid can make the innovation unprofitable. To get around this problem, large companies develop patent portfolios and sign cross-licensing and pooling agreements. Patents are thus used defensively, for example by filing patent applications in order to mark territory.

b) Strategic behaviors that can be detrimental to innovation

The number of patents filed has increased significantly in recent years. The European Patent Office recorded a 10% increase between 2010 and 2017, reaching 170,000 patents, while patent filings in China rose from 500,000 to 1.5 million over the same period. More and more companies have turned their attention to exploiting patent portfolios. In recent years, this has led to the emergence of new companies known as patent trolls or NPEs ( non-practicing entities ). These companies have no productive activity and hold patents for the sole purpose of generating revenue through lucrative licensing agreements or litigation. These companies try to conceal their patents and accuse other companies of infringement when they have already made significant and irrecoverable investments. In fact, patent trolls are in a position of strength when negotiating licenses. The most striking example is that of the patent troll NTP, which obtained a license payment of $612.5 million from RIM, the manufacturer of Blackberry, for the manufacture of Blackberry in 2006. The patent was eventually invalidated, but RIM never obtained compensation.

According to a 2004 OECD report, the emergence of patent trolls can be partly explained by the fact that many low-value patents with poorly defined boundaries have been granted in recent decades. The OECD points in particular to certain sectors where patent offices have the most difficulty in assessing the state of the art and establishing appropriate standards for the scope of patents. According to the June 2013 White House Patent Report, patent trolls were involved in 62% of litigation in 2013, compared with 29% in 2011 in the United States. The patent troll strategy is particularly profitable in the United States because legal costs are high and are not generally reimbursed by the losing party.

Patent pools and cross-licensing agreements allow competing companies to pool patents and licenses. These strategies are particularly relevant in sectors characterized by cumulative technological progress and complex multi-component products, such as the electronics sector. These pools benefit members and consumers by reducing the risk of litigation over patent infringements and facilitating the commercialization of inventions for which companies hold overlapping patents. In addition, pool members no longer have to negotiate with a large number of players to obtain a license, which reduces transaction costs and facilitates access to first-generation innovations. However, pools can discourage the creation of new technologies by allowing companies to create cartel situations rather than competing with each other. The existence of pools also makes it difficult for outside companies to enter the market and encourages companies to accumulate large numbers of patents to protect themselves.

3. The need to change the system

a) From simple reforms to abolition of the system

Many voices are calling for reform of the patent system. Boldrin and Levin (2012) define the criteria for an effective patent system. It must allow a limited number of patents to be granted for innovations for which:

• The fixed costs of innovation are high;
• The costs of imitation are low; and
• Demand for the product is inelastic.

Recently, many authors have taken an interest in the functioning of patent offices. The significant increase in the number of patent applications has led to congestion in the patent examination process. These slowdowns are linked to the increase in the number of patents, but also to their greater complexity, which is reflected in an increase in the number ofclaims. Guellec and Van Pottelsberghe de la Potterie (2007) note that the number of patent applications filed with the European Patent Office increased tenfold between 1980 and 2006, while the number of examiners only doubled. Frakes and Wasserman (2014) suggest that examiners are forced to reduce evaluation times, which leads to patents being granted for innovations that do not meet the criteria of novelty and inventive step.

One possibility would be to increase the price of patents to reduce demand. De Rassenfosse (2013) shows that the behavior of applicants depends on the price of the patent and renewal fees, but that the elasticity of demand remains low. A sharp increase in the price of patents is therefore needed to reduce the number of patent applications.

Boldrin and Levin, in a highly critical and controversial article on patents, call for the abolition of the patent system. One argument they put forward is that all major discoveries have been made by scientists who were not concerned with the rents conferred by patents. Thus, according to these authors, pure and perfect competition[3] is sufficient to encourage innovation, and the patent system only creates additional monopolistic distortion. They therefore advocate the outright abolition of the patent system and the introduction of legislative instruments thatare lessdependent on lobbyists and rent-seeking. They also propose a first step towards abolishing the system by introducing partial reforms to reduce the harmful effects of patents. For example, they suggest modulating the cost and duration of patents according to sector to take into account differences in product life cycles between sectors. Moser’s (2012) work supports this view. She studies patent systems over a longer period and finds that countries without intellectual property protection produce as many innovations and of similar quality as countries with patents. Nevertheless, she notes that the patent system encourages innovation through the dissemination of knowledge.

b) The international role of patents

The globalization of innovation processes is helping to increase the international role of patents. With this in mind, in 1994, WTO member countries signed the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which introduced minimum intellectual property standards for all WTO member countries. Countries thus committed to respecting intellectual property rights and ensuring a 20-year patent term. The scope of patentability was also extended to include biotechnology, for example. This agreement does not address the issue of the dissemination of innovations in developing countries, particularly pharmaceutical innovations. Strengthening intellectual property legislation generally has limited effects on innovation in these countries, some of which have based their development on the counterfeiting of foreign patents.

A patent is only valid in the country where it was issued and is therefore subject to the laws and regulations in force in that country. The European patent with unitary effect will be an exception, as it will allow the holder to obtain protection in all European countries that are members of the system (26 countries) through a single procedure and with a single patent renewal fee. The Agreement on a Unified Patent Court (UPC), which includes the unitary patent, also provides for the creation of a common court for all countries to deal with disputes. The implementation of the Agreement depends on ratification by Germany. This has been delayed by the examination of a complaint against the Agreement on the Unified Court before the German Constitutional Court. Nevertheless, Germany is expected to ratify the agreement quickly and the European Patent with Unitary Effect is expected to be introduced by 2019. This new patent should considerably simplify the procedure for obtaining and renewing patents in Europe and ensure greater legal certainty through the creation of the Unified Patent Court.

Conclusion

Patents are a powerful tool for encouraging innovation. However, they can have negative effects on the dissemination of innovation due to the behavior of companies and the cumulative nature of innovation. The system therefore needs to be adapted so that patents truly protect high-quality innovations and take into account the specific characteristics of certain sectors. Furthermore, patents are not always the best tool for protecting innovation, and sometimes it is preferable to have no protection at all. The FLOSS (free and open source software) community shows that it is possible for innovation and collaboration between actors to flourish without a patent system that introduces temporary monopolies.

References:

Patents and innovation: trends and challenges for public authorities.

Patents and innovation: how can the dynamic efficiency of patents be restored?

Patents and innovation: old issues, new challenges Jean-François Sattin, Professor at Maximilien-Sorre High School in Cachan, associate researcher at the ATOM center (University of Paris-I)

Patents and Innovation: An Empirical Study, Manfield 1986

Can patent data predict the success of start-ups? Mines ParisTech, June 2014

Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, Scotchmer, Journal of Economic Perspectives, 1991

Invention, growth and welfare: a theoretical treatment of technological change. Nordhaus, 1969.

The Case Against Patents, Boldrin and Levine, 2012.

The Economics of the European Patent System, Guellec and Van Pottelsberghe de la Potterie, 2007.

Is the Time Allocated to Review Patent Applications Inducing Examiners to Grant Invalid Patents?: Evidence from Micro-Level Application Data, Frakes and Wasserman, 2014.

The Worldwide Count of Priority Patents: A New Indicator of Inventive Activity, De Rassenfosse, 2013.

Patent Laws and Innovation: Evidence from Economic History, Moser, 2012.