7 Sep 2012

How Patents Stifle Innovation

By Ben Heslop
Although patents were once necessary to protect innovation, in a globalised world they're doing the opposite. We need to free up intellectual property to save it, argues Ben Heslop

Although it may not seem it, filing a patent is a dangerous game best suited to professionals. A patent filed first can be beaten by one already in existence, and a patent approved is no guarantee of a win in court. Objectively superior patents can be beaten by prolonged legal tactics that drain the funds of smaller players.

It's a cut-throat, ruthless business. Among all this, the lone inventor tinkering in the shed or laboratory for years before filing a patent faces significant obstacles — and a change to the system is about to make things much harder.

The US is on the verge of introducing reforms that standardise its system with the rest of world. The current system, "first to invent", relies on examining notebooks, records and prototypes to establish the true date of invention. That system will be replaced by "first to file" — who puts in their paperwork to the office first. 

The argument for changing the standard is that "first to invent" increases the cost of administering the patent system; not only of patent examiners having to look through the inventor's records and notebooks, but of court cases including this evidence in addition to the patent itself.

But the real issue of cost is the lost earnings of world-wide technology patent infringement, seen in the billion-dollar ruling for Apple against Samsung. Here defensive patent walls are flung together in titanic legal battles that neither party can afford to lose — but in Apple's win the public will lose regardless.

Loss of competition in the market means higher costs for consumers, but as innovators strain to avoid infringement, areas where technology should be simple and standardised become fragmented.

For example, the internet "browser wars" of the 1990s have made web design more expensive for professional services and inaccessible to the novice. Unique environments must be created for Chrome, Internet Explorer, Firefox and Safari. "Browser-proofing" websites takes a majority of the time for web design, which reduces the flexibility and stability of template software, like Wordpress. The difficulty that app designers will have in adapting their software to differing platforms repeats this expensive counter-innovation problem with the patent system.

While "first to invent" imposes costs, the underlying problem is the high value of patents themselves. Open Innovation is a relatively new academic field that responds by making the case for large corporations to create spaces for innovation inside enclosed patent walls — this means collaborating formally with suppliers and customers. But smaller businesses (and lone inventors) will be unable to afford patents and lawyers, or to influence suppliers and customers.

Such inequality of participation justifies changes to the current patent system. Originally, patents gave inventors time to recoup capital investment by providing a monopoly period, but the world has changed greatly since the 17th century when an anti-fouling patent gave England a critical advantage against French warships.

Patents were also a permanent record that preserved knowledge in case of inventor's death. Before university and corporate research and development were commonplace, lone inventors were valuable sources of technology. As a result of this philosophy, patents today can be viewed online for free, and patent "walls" are necessary to fully protect ideas.

Regardless, China and similar nations illegally and systematically copy patented inventions. At the same time, they use their economic power to buy patents that suppress innovation elsewhere; a practise on a smaller scale known as "patent trolling". Modern telecommunications, in addition to aiding abuse of patent law, have also made invention disclosure through a centralised office or regulator obsolete.

The solution is not in changing disclosure rules or using "first to invent," but reducing the value of patents — and the incentive for their abuse. When few inventions were sold internationally a 20 year monopoly could be justified. But today it's unjustifiably lucrative. Rapid prototyping, computerised design and highly integrated production systems reduce time and cost to market. Patents today undermine innovation by warranting huge legal and administrative costs to protect the monopoly rights they grant; reducing the monopoly term to five years or so would be a vast improvement.

At the moment, governments receive a fee in the realm of thousands of dollars per year for each patent. Research grants to university academics are also tied to the patent system. The upkeep of patents is then funded by universities — and therefore the taxpayer. In a huge waste of potential, many patents are "warehoused" by academics and never actually commercialised. Yet the illusion of quantifiable innovation represented by measurable patent numbers continues to attract financial investment from the taxpayer.

Innovation has become the arena of large corporations who benefit from the status quo.

Open Innovation will strengthen these corporations at the price of smaller players and eventually innovation itself. With their patents impeding competition, corporations can shrink their operations to maximise profits. As the global financial crisis has shown, large businesses survive when the economy is moribund. In a very real sense, patent law is a kind of feudalism — wealth gets concentrated, innovation gets prevented and everyone suffers.

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Posted Saturday, September 8, 2012 - 11:18

The link to the New York Times article (First to file changes) does not seem to be valid.

Thanks for the article, having worked at an IP firm myself it was refreshingly honest to read.

Posted Sunday, September 9, 2012 - 08:28

A very interesting article as far as it goes. I would suggest that any meaningful discussion on patents should include what to do about the corporate abuse. Such issues like big phama's 'me too' patents, and the bogus arguments for vertical marketing as an argument for development cost recovery as the “Life science” (sic) corporations indulge in. Likewise the patenting of genes and particularly someone else's.
The restrictions these impose on improvements to public health. In and of it's self should be out weighed by public interest over corporate profit. The innovation should be on the drug (end result) not someone else's use of the gene to make perhaps a better drug or seed.
It seems to me that until we can isolate the patenting, and copy right from the clear perversions (abuse?) of the principals theories of innovation etc are functionally moot.

I'm not impressed by the arguments over 'feel'/'look' and rounded app corners as grounds for a patent and the monopolistic exclusivity it implies (Apple V Samsung) . To me it has the same effect as the move from 3 wheel cars in the 1890-1900 to 4 wheels etc. The issue to me that is patentable is the method to achieve the result (chip design, circuits, unique programming)
I would further suggest that the focus should be on the innovation not a *guarantee * for extraordinary wealth, much less on consumerist nick nacks. After all the theory of capitalism is based on risk as defined by demand not a right to immunity from that risk.

Consumerism/corporatism has is distorting/subsuming the interests of humans and as such I find it less that productive to try an isolate issues in some sort of theoretical bubble without any realistic appreciation of how it effects the real world and particularly humans....

Posted Sunday, September 9, 2012 - 09:03

Perhaps It might be appropriate to consider different lengths of patent times based on the benefit to the wider community and standard turnover.
i.e. a patent on a cure for say malaria would be longer than the copy right on a pop song or a new consumerist nick nack.

Posted Sunday, September 9, 2012 - 10:56

Nice comment Examinator, and the complaints of inappropriate patenting of genes etc. might have been added to my original piece.

Where I differ from you (and The Economist) is in more 'up front' assessment criteria. Who is to say whether a certain invention will have more or less social impact - such things will ultimately be argued by highly-paid lawyers as they appeal the patent office decision.

To change the 'focus' to 'innovation' rather than 'guarantee of wealth' I stand by my original recommendation of reduced patent terms. As it stands, pharma product cycles the longest, and so the patent term can begin only once regulatory approvals have been given.

At the moment, any exclusions (pharma often extend patents on slightly different drug applications) are abused by those able to pay for court cases and lawyers.

Truly innovative people and companies will innovate regardless, since innovation delivers its own reward in terms of enjoyment, skills and motivation. Innovation is change, and being at the forefront of change is exciting and ultimately financially lucrative (as Apple have found).

Long monopoly periods are generally not needed to allow inventors to recoup their investment since investors become part of a success story that provides further opportunity. In today's connected world, long patents prevent the renewed, collaborative innovation that would otherwise occur after a shorter period had expired (as original inventors seek new avenues).

In addition, reducing the period will reduce the incentive for abuse in all the cases you mention.

Ben Heslop

Dallas Beaufort
Posted Sunday, September 9, 2012 - 16:38

If I a small Australian business developed new base load power generation technology at a fifth of the cost of windmills or half the cost of coal and gas generation and did not blight our amenity or deliver fumes into the atmosphere would the university sector and its CSIRO praise and support this new technology or just copy it and rebrand it for themselves as previous experience shows. So if this is the case why would someone with the talent want to produce anything here in Australia if authority competes with the private sector and steals their talent and leaves them broken men.

Dallas Beaufort
Posted Sunday, September 9, 2012 - 22:10

Ben, in this environment where Australian government enterprise empire builders use regulation to cover their theft of innovation produced in the private sector, this market destroying/breakthrough technology is destined to abound overseas in the USA, Germany, Japan and China and lets not mention South Korea as well, at this stage unless this country gets their act together quickly, no bullshit, now we are down to tin tacks. Alas, technology base on pure science, encompassing many disciplines, No Green Labor man made global warming feed the universities nonsense free kicks anymore here, for the pondering left who want to sucker off the private sector teat any more. Bitter and not happy with the local outfits, you bet you next set of low payed jobs we are.

Posted Monday, September 10, 2012 - 09:25

Thank you for your response and yes I was aware of the facts you stated .
I did browse and read parts of your thesis. It is on my reading list to read it all.
My impression was as is that of the article....Interesting as far as it goes.

One needs to consider the impacts (efficacy) of Pharming ( where they trawl through indigenous knowledge of plants and medicines). Once this has been done and a plant and or a cure is indicated they then go to out of the country of origin pay a minute fee to a botanical garden for the rights to develop a medicine from its active ingredient. This deprives the indigenous peoples of a fair share of royalties.

In one Sth African case 'the San' ("The god's must be Crazy" fame, the world's genetically oldest race)were paid a pittance for the knowledge about a succulent (that only grows in parts of the Kalahari) as an appetite/thirst suppressant. However, the Uni in the joint venture received more because they isolated the active ingredient.
The British pharmaceutical conglomerate synthesized that ingredient and made Billions.
In the above case there are as I understand it 3 separate levels of ownerships only two are subject to patent.

Note too there is a thriving black market in the raw material and drugs....
*Only peripherally relevant* the San are now a dying race of trinket road side venders. They have been thrown off their ancestral lands because of Diamonds.

I guess the point I was trying to make is that I think that your stated motivations for innovators is far too narrow there are a plethora of human factors ( Behavioural and neuro psychological)

In 'the San case' the only altruistic motive was that of the San the rest are simply money/ power and Group(corporate) dynamics .....

In my mind, for what it's worth, probably little in context of your PhD is that any theory of 'innovation needs to consider more than the context of an Aussie Uni team in a 'from the ground up ' development between Commercial and institution theory to under pin government encouragement.

From what I have read it is for a very narrow context. As is the article.
Notwithstanding, it does seem to deal well, within that context.
I simply have issues with the entertainment ' bubble nature' of most discussions.

Posted Monday, September 10, 2012 - 17:37

silly me Pharming is what they do with animals when they are using the animals as factories i.e. genetically altered milk that contains a desired enzyme etc.
I think the term should have been botanical prospecting.

Posted Tuesday, September 11, 2012 - 07:05

Examinator, please look at chapters 4 and 5. The thesis goes way beyond university commercialisation. I also discuss the role of money at the start of chapter 6.

Ben Heslop

Ken Fabos
Posted Tuesday, September 11, 2012 - 09:58

Are patents a way to disseminate innovation widely or prevent it? How many good ideas are locked up in patents that have gone nowhere due to poor funding or management, or more disturbingly, are close held to prevent competition to an existing profitable business? Not a worry if it's a new kitchen gadget for the shopping channel, but when it's a superior energy storage technology, or a drug treatment for debilitating disease, the 'right' to exclusive ownership can itself inhibit rather than foster the dissemination of innovation.

Examinator suggests those with the greatest benefit should have the longest patent rights; I'd go the other way. I don't want to see rights to royalties from the use by others of an innovation curtailed but when it comes to developments that can help solve acknowledged problems <i>the right to exclusivity</i> needs shorter time limits.

Probably impractical but I think short exclusivity (5-10 years) combined some kind of schedule of standard royalty payment that can operate in the absence of specific negotiated and agreed use would see the right to reward for innovation maintained but prevent innovative ideas with potential end up on dusty shelves. Our society and planet are facing significant challenges and I don't believe we can afford to see potential solutions going to waste.

Posted Tuesday, September 11, 2012 - 13:04

Insightful analysis Ken.

The comment on practicality is important. Making a subjective evaluation is highly problematic, reducing the exclusive monopoly period is not. It can even be applied retroactively to reduce terms of existing patents. The question of royalties should remain a negotiation, but government can help by subsidising administration costs of parties. A corporate, university and inventor in negotiation for patent purchase or license can become a vehicle I call a 'collaboration' with certain tax advantages offsetting relative power imbalances. Please see ch.7 of my thesis for a full description.

Ben Heslop

Posted Tuesday, September 11, 2012 - 15:16

Very interesting article Ben. It reminds me of a great book I read on development economics by Ha-Joon Chang - Kicking Away The Ladder. Have you read it by any chance?

Ken Fabos
Posted Wednesday, September 12, 2012 - 10:26

In case I wasn't clear, I wasn't advocating that the period of time that patent <i>rights to royalties</i> be reduced, only the period the holders can claim exclusivity. I see a need for a better, more standardised way that 'unapproved' use of patented innovation can be dealt with outside the courts - some standard fee or percentage of sales, higher than might be expected with an agreement. But I know that evidence of prior invention rather than first in patent applications is necessary to ensure some natural justice for inventors and innovators who haven't or are late in applying for patents - getting that sorted out outside the legal system looks like a very gnarly problem that won't be sorted out by naive suggestions from people like me.

Clearly negotiated licensing is all round advantageous - licensees get access to a lot larger body of knowledge around the idea/invention than what's in the patent and are more likely to reach commercial success and feed more royalties back to the patent owners. Innovation and invention deserves reward. Yet I still think it ought to be able to be used as the starting point for innovation by others in a shorter time period than present, with or without agreement - but with the obligation to pay royalties intact. Like I said, probably impractical and naive to boot.

Posted Wednesday, September 12, 2012 - 15:26

No I understand, but don't courts award damages for patent breach based? upon lost royalties? How is imposing a percentage going to avoid any trouble when the breach itself has to be proven in court regardless?

Reducing patent terms will help inventors who haven't claimed because their knowledge and collaboration becomes more valuable relative to the value of stealing their invention.

Ben Heslop

Posted Friday, September 14, 2012 - 15:12

...he basically says that rich countries have historically ignored international patent law during their development phase and that it's somewhat hypocritical for them to enforce them on developing nations nowadays (hence, the term kicking away the ladder).

Posted Friday, September 14, 2012 - 20:00

Good article well argued.

My problem with 3rd world patents is two fold. One that they're using them to slow down 1st world development by 'mass trolling.' Two that they ignore western patents that have themselves prevented 1st world development. So 1st world potential is wasted while 3rd world engages in mass copying. The better solution is to reduce patent terms so collaborations are formed directly between the 1st and 3rd world rather than indirectly through copying.

Ben Heslop