Blogs > Liberty and Power > Anti-Patents Op-Ed Published

Stephan Kinsella - 3/17/2006

Sheldon writes:

"I should put on the record that there are no heroes in this story. Research in Motion Ltd, the BlackBerry company, has "defended" its own patents in the past and says it will continue to do so."

This is akin to the problem that when there are so many laws, everyone is a lawbreaker. The enforcer of laws then gains. I am afraid that by similar logic, you could argue that libertarians should not fret about the income tax, antitrust laws, etc.--after all, most companies sued for antitrust (e.g., Microsoft) probably have sued others for that or at the least do not oppose such laws; and most people convicted of income tax evasion or draft dodging after all support the idea that the state has the right to tax or draft; etc. etc. There is something to this but it loses focus of the victims and the distinction between aggressor and victim, and those causally responsible for state-aggression. Can you really blame a company for navigating within the system it finds itself?

Another commentator wrote,

I have talked to high-tech execs who cannot speak publicly because they had to sign non-disclosure agreements with these "patent mills" after being shaken down.

Given the existing system, I see nothing whatsoever wrong with patent "mills" or "trolls". The complaint here is akin to the complaint against contingency fee arrangements where a lawyer in effect buys a part of someone's right to recover damages/sue. The efforts of tort-reformists to clamp down on contingency fees is an effort to address the symptom, not the cause--which is right to recover in ridiculous situations--if you have a right to get money from someone, however, what's wrong with selling a piece of it? Likewise, if the patent system grants a right to monopolize an idea, there is no objective way to single out "trolls". They are no worse than any other patentees.

"Even supporters of the patent system have to recognize that something is wrong here. For one thing, the patent examination process is woefully inadequate. To get a patent, you have to show that your invention is not obvious to someone skilled in the art; this one should never have been patented under current patent law in the first place. The result of inadequate patent examination is the issuing of patents that are now being used as innovation bottlenecks; they're bought up (or filed in the first place) by firms that specialize in patents, not in making anything, and that then go on to shake down companies that are actually innovating and producing useful products."

Well. This complaint is a bit like saying that the problem with the post office is it's too inefficient. I mean what do you expect, when you have government employees trying to carry out a non-objective job function? You have a double whammy. There is no way to have an "adequate" patent examination system, especially one run by the state; so I am not sure what it means to say they "should not" have allowed a given patent.

The implicit criticism of patentees that merely patent ideas, rather than those who "make things," is quaint, but utterly unrealistic.

William J. Stepp - 3/12/2006

I am not one to advocate subsidies (or monopolies), but David Levine points out that the patent system originated in an era during which governments raised much of their revenues by granting monopolies, as the income tax hadn't been invented.
The income tax originated with William Pitt the Younger, who served as Prime Minister from about 1783 to 1801, then resigned only to return three years later.

Economic growth has led to subsidizing of scientific R&D, which he holds is more efficient than creating IP monopolies, with their deadening affect on innovation.

There's a new book from the Heritage Foundation called _The Heritage Guide to the Constitution_ (Regnery), with more than 100 scholars offering the legal history of each article.
I wonder if they cover the "inducement to inventors' clause"?

William J. Stepp - 3/12/2006

But see Boldrin and Levine, "Growth and Intellectual Property," available at their homepages.
They cite the work of J.(ean) O.(lson) Lanjouw, including a 1999 paper, which doesn't seem to be at her webpage, but others on the pharma industry are there.

The drug industry is always the one that IP advocates cite as needing protection the most. But as Levine points out in an e-mail, "this is far from obvious."

The cost of a new drug, often cited at about $800 million (from a Tufts' report--see a recent post with some details at the biotchnology discussion board at www.fool.com), is inflated by regulatory costs, imposed primarily by the FDA, litigation, taxes (drug firms pay tons in taxes), and the cost of the patent system itself. The patent system that protects an invention prevents an inventor from exploiting someone else's invention.
(And as Microsoft is finding out now that its patent portfolio is growing like a weed, he who sues also gets sued.)
So what would the cost of drug innovation be in a free market--half the current cost?

Levine cites Lanjouw's 1999 work on the Indian pharma industry, which has been patent-free since 1972. It's generally assumed that generic drug firms would enter a market for a drug immediately, absent patent protection. But in India it takes five years on average for a generic competitor to drug X to appear.
First, generic firms wait about a year to see if a new drug will be successful--why invest in an imitator of a new drug that turns out to be a dud? Second, it occurs to me that generic firms might want to wait a while to see if there are any litigation risks that come to light quickly despite the regulators efforts to prevent this.

Levine says out that the first point above highlights a problem with the prevalent view that imitators have an automatic advantage. Innovators have a first mover advantage; contrary to the common view that generics automatically eat their lunch, they often (usually?) earn big profits before imitators erode their market share. Although generic competition is real and important, Levine claims proprietary firms retain on average about 50% of the market for their off patent drugs, and don't lower their prices to match those of generics. They also earn profits on off patent drugs. I assume at least some of the hand wringing in the financial press about drugs going off patent in X years is a self-serving ploy to shore up their rent-seeking position and to make sure the patent office stays bought and paid for.

Levine also says that the process of imitation and jumping over the regulatory barriers takes 3-4 years, and mentions Lanjouw's belief that the latter is much more significant, although there's not a lot of data on this.

Sans patent protection, innovators would have a five-year rather than a ten-year monopoly. (A patent must be filed well before a drug is on the market.) But even with a shorter period of having a monopoly, they can earn back their cost of capital.

Levine has a plausible model showing the loss of present value would be only 25% of their rents. Against this loss much be weighed the furute innovation discouragement factor caused by the patent system--a factor which is either ignored or underestimated.
Indeed, the patent system can have a detrimental effect on innovation and growth.

Tom G Palmer - 3/12/2006

Shel,

I'm referring to the issue of whether IP creates positive (or negative) incentives for useful innovation. I don't have my files before me (I'm away on business), but the literature and surveys that have been done tend to show that, due to the relative ease of reverse engineering in chemicals and pharmaceuticals, limited IP protection does seem to generate incentives for greater innovation. That may also be related to the issues of regulatory lag (FDA studies of efficacy, etc.), as firms come up with the drug and then only years later are able to introduce it, after the knowlege has become more widely spread.

In any case, whether the benefits of additional innovation merit such special and artificially created "scarcity" is a different matter from the matter of whether they are justified. I tend to think, however, that a broadly consequentialist/natural-rights approach could accommodate IP protection if the benefits are as overwhelming as drug innovation seems to be. (See some of the evidence in chapter 13 of Olaf Gersemann's "Cowboy Capitalism," which I do happen to have before me.) If the reason for rules is that they generate good consequences (i.e., the rules are the measure of action, but the justification for the rules is the consequences they generate), it would be hard to justify not adopting a rule that could be shown to generate enormously positive consequences, just because it was different from the other rules. The fact that an exception is an exception is a reason against adopting it, but it is, it seems to me, a rebuttable presumption, not an absolute ban. (Consider how we carve out exceptions for the treatment of the mentally handicapped, for example; the normal rule is that once you get to a certain age you can make all your own decisions, but all legal systems of which I am aware create exceptions for those who are incapable of making reasonable choices for themselves.) Similarly for other cases.

Again, merely invoking evidence that patent protection for pharmaceuticals creates incentives for additional innovation is not by itself a case for special treatment, but it would certainly be the main element of such a case.

Sheldon Richman - 3/12/2006

Thanks, Tom. Please say more about the pharmaceutical exception as you see it.

Tom G Palmer - 3/11/2006

Bravo, Sheldon. This is merely a public version of what is going on all over the country. I have talked to high-tech execs who cannot speak publicly because they had to sign non-disclosure agreements with these "patent mills" after being shaken down.

Even supporters of the patent system have to recognize that something is wrong here. For one thing, the patent examination process is woefully inadequate. To get a patent, you have to show that your invention is not obvious to someone skilled in the art; this one should never have been patented under current patent law in the first place. The result of inadequate patent examination is the issuing of patents that are now being used as innovation bottlenecks; they're bought up (or filed in the first place) by firms that specialize in patents, not in making anything, and that then go on to shake down companies that are actually innovating and producing useful products.

This is clear evidence that, at the least, the current system of patent protection in electronics (I'll set aside pharmaceuticals, which seems to be a different matter for a variety of reasons) is presenting disincentives, rather than incentives, for innovation.