What is a Patent?

The patent system is bursting at the seams. In many areas, if not in all, the patent system no longer accomplishes what it is designed to do, mainly, to to promote the "Progress of Science and useful Arts" For evidence of this fact, look no further than the crumbling music industry or the broken pharmaceutical system. Given that the system is breaking down, other than dismantling it in its entirety, is there a way to fix it? This is the question I'd like to explore.¹

The current system gives patent holders many of the same rights a real property owner would have. Patent holders have the right of possession, right to sell, and the right to exclude. In addition, similar to property rights, the government has a right the right to use a patent as long as it gives the owner just compensation. In regards to real property, Kelo ruled that a government takings of private land for economic development constitutes “public use” and is therefore constitutional. Patents may or may not be real property and in any case are not governed by the same principles that real property (federal vs. state). Nevertheless, the majority's rationale in interpreting “public use” can be helpful—and instructive—in interpreting the similar “for the United States” provision in USC 28 S 1498.

The Constitution doesn’t mandate the creation of patents or even the promotion of progress in science, but grants power to the federal government to enact laws to that effect if it wants to. So, patents are optional.

Agreed, and, having read the position in your paper I wholeheartedly agree. Nevertheless, the concept of intellectual property rights may not be encoded in the Constitution because they pre-existed the Constitution . Such rights did not come, generally, from the common law but from statute ("creatures of statute" as it was said). In English history, copyright law goes back to the early 18th century (Statute of Anne). In American history, before the Constitution passed (after the Revolution), some "states" created patent systems of their own. One of the first pieces of major legislation Congress passed (1790) was the Patent Act. All of this goes to show two things. First, patents/intellectual property may have some historical cultural grounding with people and human nature to have enterprise in their work. Personally, I don't reject this view today (clearly)--but I think that the system persists in its current form to maintain power structures and in some cases to actively inhibit human happiness (expounded upon later). Second, and more important, I think your position misinterprets what the Constitutional provision is in effect. Technically, your comment is spot on. However, in view of historical circumstances, the provision is clearly an allocation of a power (patent making) that was presumed to have existed and would subsequently result in the creation of patents.

Second, if patents are personal property, rather than real property, extending real property doctrines to them seems risky, formally (real or personal, pick) and logically. Real property is tangible, while patents have no physical existence. When trespassers occupy real property, the land’s utility to the owner decreases. No reduction in the utility of a patented innovation results from the infringer’s use of it. The knowledge contained in a patent cannot be exhausted, and is therefore a public good. The “taking” of a patent is, then, the making of a public good out of that which already was a public good. This illogicality is latent in the statutory scheme of § 1498, and I’m not sure why we would want to extend it further, by exercising the statutory taking power widely, without a strong need to do so. Also, for a taking, compensation must be paid, which might be very costly depending on the pricing scheme chosen.

Not entirely sure what you are getting at here but a couple comments. First, Kelo is in regards to real property, however, it by no means extends or limits my argument. The power to repossess the patent is statutory and needs no Constitutional justification. However, I mention it only to point out what a "public good" may be. Also, there is a legitimate counter argument that there is a reduction in the utility when infringers use patents, a so-called field reduction. When an infringer uses one patent, it reduces the value of existing and future patents (perhaps, this is the classic argument). I feel this is too big of an elephant to ignore. Of course, I think the better question to ask is whether the costs (to society, to enforce) here exceed the benefits (innovation, research).

Why do we have Patents?

The principal argument for a patent system is that patents incentivize inventors to invent. Generally speaking, the logic proceeds as follows: We want law to make life more efficient (to increase happiness) and increased knowledge and new technological processes make life more efficient. Therefore, we want to increase our knowledge and improve existing processes. People only (or primarily) produce for pecuniary gain and therefore people will not produce / invest time or money in new processes unless they see a future payoff. A huge number of great inventions have sprung from the zeal of inventors committed to science or the sheer enjoyment of tinkering in a lab or shop. Similarly, most drug discoveries occur not in pursuit of compensation from pharmaceutical companies, but from competition for NIH and NSA grants to university research labs. Most inventors never realize much profit from their inventions, but invent compulsively anyways, due to curiosity and the chance of being someone who matters. I do recognize, however, that some inventions occur in a corporate context where patents allow higher profits. So, to maximize our knowledge and improve existing processes we must protect investments and guarantee future payoffs. Many of these suppositions are questionable, but the bottom line should be clear: patents increase well being by incentivizing authors to invest time and money in their enterprise

There are many historical and emerging arguments against patent systems. For one, patents can be quite obstructive and create gridlock. Michael Heller calls this effect the “anti-commons”: too many people have too many rights. An “anti-commons” prevents the holders of these rights from assembling them, which decreases social-welfare. His most contemporarily relevant example is in biotechnology. To develop new drugs, companies often require the license of patents that belong to other companies. However, as more and more licenses are required, the bargaining and transaction costs may become excessive and outweigh the future financial expected value of a marketable drug. Here, Heller argues, the patent system works backwards and consequently produces the opposite goal of what it is designed to do: increase social welfare. Accordingly, the latest and greatest Viagra may be stuck in the labs because the costs of developing it are too prohibitive.

“Patent thickets” are a major problem preventing innovation in industries that require the coordinated use technologies owned by competing market participants. These problems are especially urgent in software and pharmaceuticals, but that is because those are the areas in which patents are most prominent. Patents are the problem. Also, perhaps mentioning a drug other than Viagra might do more justice to the gravity of the situation.

"Latest and greatest" Viagra was a stab at some sardonic humor. I still like it.

You could talk about the (recent) impossibility of bringing to market a second test for breast cancer, because patents on the BRCA-1 and 2 genes prevented it. The ACLU and PubPat? overturned the patent in court, but that solution was not so much an overcoming of a patent thicket as an elimination of the patent itself.

How are we fixing the the System?

Various methods of curing these defect have been employed. One such solution are patent pools where companies agree to cross-license their patents. The key in any solution is to strike a balance between the “patent” framework and the “no patent” framework. Patents are designed to protect the gains an inventor will receive in order to incentivize investment. Perhaps, patents aren’t supposed to protect profits, primarily. Patents should, in theory, only do so insofar as is necessary to promote innovation. Such a justification is rooted in the fact that there is a social gain from new and better iPads (pick your favorite gizmo). But, clearly, at some point we tread into the realm of the “anti-commons” where we are protecting too many rights and social welfare declines due to obstruction. On this side of the continuum, the patent system mainly functions to line the pockets of the elite. In many areas, this consequence is unfortunate but not tragic. However, in health care, the consequence is absurd—people are dying because companies want to get rich. This must change.

This seems like a restatement of the problem, or an expansion of its scope. People are dying, true, but how can this be changed? It would be cool to hear an explanation of the administration of a patent pool, or the mechanisms it provides for overcoming blockages. The way I understand it, a patent pool has the goal of mediating autonomy (patent rights and associated profits) with collaboration (licensing and sharing technology). I’d be interested in hearing how this works in practice.

Also, according to Heller, a patent pool must control entry and exit to guarantee fair play. I’m not sure how one includes all those who wish to make use of the technologies in a patent pool, while also excluding those who will not contribute to the welfare of the pool. Isn’t a patent pool like an illegal trust, fundamentally anti-competitive? And yet, if no one is excluded, the patents lose meaning. The idea of a patent pool seems self-contradictory.

Another way to change the System

Let me suggest an alternative tactic that is being bandied about by academics but is rarely used by the holder of the tactic. Take or threaten to take people's patents back. Patents are only good if they are being used. Pharmaceutical drug patents are only good if the drugs they produce are affordable to the people that need them. Patents for drugs that are in production are being used. Just not enough. As the profit margins of drug companies expand to appalling levels, the government should threaten to take the lifeblood out of these companies' balance sheet: their patents. This would be real health care reform. Because the root problem has never actually been coverage but the fact that people need coverage because health care is so damn expensive.

Doctor visits, hospital procedures, and outpatient care are all very expensive, and these costs do not turn on drug prices. Legislation to create public insurance has always been needed for these reasons, too.

True enough. This comment prompted me to look up data on health care expenditures and see that drugs were only ~30% of health care expenditures. Perhaps my above statement was made in a bit of ignorance. Drug prices may or may not be, however, more inflated than the above mentions. There are, indeed, other problems with our health system. I do not know (and I don't think it can be stated) if public insurance is the solution.

Another point to consider is that patent monopolies in healthcare allow a patent holder to set the supply curve for a drug wherever the patent holder wants. In seeking to maximize price times quantity, the patent holder distorts the intersection point of the supply curve with the (socially and medically determined) demand curve, raising prices. A taking would not solve this pricing problem, but would make the public foot the bill. Competition between drug makers would, however, solve the pricing problem, and this is possible if patents are eliminated.

Employing such a tactic could bring about a revolution in health care practices. The Government could (but realistically will not) strong arm Merck, Pfizer, and the like into affordable drugs. The decree would be as follows: lower the price on Drug X or I will own drug X. Equally important, the Government could broker cross-licensing agreements and avoid the gridlock Heller deplores. The decree would be as follows: license your patent to company X or I will do it for you. Both of these decrees seem to be well within the Constitutional definition of “public use.” Is there anything more important and more used by the public use than health care? These intrusions would also be well protected by statutory language as use for the “United States.”

This forced price reduction did actually occur with AIDS drugs in the early 2000s, but only with respect to Africa and developing countries. The way that this was accomplished was not through takings, but through Clinton’s promise that the US would not enforce US patents against African countries that chose to infringe by buying generic drugs. The solution was not a taking, but the abolition of the right through abolition of the remedy. This abolition of patents could be accomplished generally, provided that the government creates a mechanism to pay for clinical trials for drugs. As I mentioned above, the basic research is done at universities, and is government funded. Also, Switzerland’s pharmaceutical industry flourished without patents on pharmaceutical products, only processes, until 1978. Also, other mechanisms besides patents exist can yield profits for innovation. The cost of copying a technology through reverse-engineering is estimated to be somewhere around 50%, on average, resulting in a partial advantage for innovators. A significant further advantage accrues to first-movers in a marketplace. I’m not sure that these mechanisms are enough to cover the cost of clinical trials, but with government funding for that, they would suffice to make almost all patented technologies producible, and the innovations profitable, including information technology.

These are very interesting and pertinent points and have sparked a new thought and direction for where I want this to go. A much longer, more controversial direction I might add.

For a number of political reasons this revolution will probably be deferred to another generation's future. Nevertheless, such a vision would be consistent with the Constitution's decree to protect the “general welfare.” It would strike that delicate balance between protecting the inventor's enterprise and ensuring public benefit.

It sounds almost like you’re admitting that inventors “deserve” to profit, a common misinterpretation. Inventors should have profit only so far as that increase in profit incentivizes innovation whose benefit exceeds the harm of increased prices. Patents are often used quite openly for rent-seeking by patent holding companies, as well as corporations that want to show off their financial strength to investors.

With regard to anti-commons, Bill Gates once said, “If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Even today, his company evaluates strategic decisions based on how incompatibilities and technological barriers will be created with its software releases. Patents make the financial winners those who prevent innovation, not those who create it. I think the best solution may be the elimination of patents altogether. This only requires a congressional majority.

I just want to mention that I really enjoyed reading and commenting on your paper. Having thought about the Heller article and your other points, including the takings idea, I have some new ideas for how the patent system could be improved if it can't be eliminated. I hope my suggestions haven’t been too disheartening. Thanks for writing a new second paper that’s easy to comment on. Best of luck with revisions.

Sam Wells - 26 April 2010

Still wading through some of the comments, but, I like them so far. They have provoked a number of thoughts. Just some stuff on the paper as a whole.

I'm not sure that the abolition of a patent system in its entirety is desirable. I read your paper, some of Eben's stuff, and a number of articles and I'm just not convinced. I'm okay with this position of uncertainty--I don't know if it is the right position, but I also don't know how it would ever be possible to have a right position (of course, I could say this on about practically any issue, legal or otherwise). I think we may agree that a person's position on the matter seems to be predetermined by their perception of societal good and how it is created. I think this is evident with Eben and your criticisms. Personally, I think I have views that slightly diverge from those articulated in this paper. However, the goal of this paper was to try and find a middle ground that is possible to enact, tailored to various goals, and not to bound by rules and procedures. I think some areas need more patent protection than others and that part of the problem is that we have a system which is applied across the board, regardless of the community/area involved (a different patent system may be needed in pharma/tech than inventing post-it-notes). I'd like to find a solution that allows discretion.

In sum, (1) I do not think the abolition of the patent system is politically possible. (2) I'm not convinced that abolition is desirable, either. (3) If the existing structure has potential, I'd like to exploit that potential. (4) If some system is necessary, I want to advocate for a patent system that is human nature oriented. I think, using "eminent domain" practices on patents may alter the human calculus of pharma companies in their other practices. This will create more social good and rebalance the equation (between social good and profit).

Finally, I apologize that this paper did not receive as much attention as it probably should have. And I want to thank you for putting such extensive thought into the paper. I am genuinely interested in the issue and your specific comments and paper (regarding clinical trials, marketing) have helped spark a new idea regarding pharmaceutical companies, patents, and controlled substance policy: the place where I think this idea is going. Unfortunately, I think I need to put the brakes on it for a few weeks.