Arnold Kling  

Intellectual Property

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Here are some interesting comments on intellectual property that have appeared recently.

Lawrence Lessig defends drug patents.


I don't know if the alternatives would be better - I don't believe patents are bad in every case. But I do know that if there is one place where the benefits from patents seem to outweigh the burdens, it is with drugs. At least, as long as politicians don't put grandstanding ahead of saving lives.

Alex Tabarrok says that patents should vary depending on the level of effort required to create the innovation.

Why not have patents of shorter length for those ideas that required little R&D? (Amazon's one-click shopping patent comes to mind). I think that such a system is possible...

To which drug company researcher Derek Lowe responds,

What I think this would do is create a powerful incentive to hocus one's R&D figures. In the drug industry, each extra year of patent protection can well be worth hundreds of millions of dollars in revenue, which is an incentive indeed (with hot fudge and extra sprinkles on it.) It's not like our drugs come cheaply to us now, but I can see that for an anticipated blockbuster, ways would be found to ensure that the patent racked up the longest possible life. You already see that happening at the back end of patent terms, as the constant battles with generic companies illustrate. Every possible reason is trotted out for why a given patent is invalid, and every possible means to preserve or extend the patent's term is invoked in response.

I am inclined to agree with Tabarrok that "one size fits all" is a poor approach to intellectual property. There is no clear-cut economic solution, because of the familiar problem that the activity that generates cost (research) differs from the activity from which one can extract revenue (sales of a product or service). My thoughts (which are not developed in any depth) are in this essay.

For Discussion. How could you design a system that varied the length of patent according to R&D input in a way that would be less likely to be gamed?


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COMMENTS (23 to date)
Brad Hutchings writes:

I wouldn't vary the length of patent protection. I would cap the liability for infringement based on dollars invested. With a patent application, an inventor would also list costs associated with creating the invention, subject to reasonable accounting guidlines, and with the expecation of some padding. I would use a factor from 10x to 100x for the infringment cap. I think this would encouarge patent monopolists to license instead of litigate. We wouldn't get the egregeous awards like Eolis.

-Brad

Boonton writes:

I wouldn't vary the length of the patent but I would create a market to set the value of the patent. Consider the following:

Upon applying for a patent, the company or individual would state a price that they would be willing to accept for the patent to be put into the public domain. They will pay a patent fee based on that price.

Should any individual, company or gov't pay the patent holder their stated price...the patent would revert to the public domain.

So if the patent was highly valuable, society would gain with a high patent fee while the inventor would benefit from patent protection or a high buyout. If a patent was less valuable, the inventor would be motivated to set a low price so it would be brought out and placed in the public domain for all to use freely.

Gov't could reinvest the patent fees into buying out patents that are deemed vital. So a 'vanity' drug like Viagra would generate ample fees for the gov't that could be used to buy out the patent for a new AIDS treatment...for example.

bill carone writes:

Trade secret law seems to be the best way to do this.

For example, if I invent a drug, then other people can continue to try to make it. If it takes them two years, I get two years of monopoly; if it takes them twenty years, I get twenty. So, my benefit equals exactly the benefit I have provided (since the drug existed twenty years before it would have).

The law would provide me protection from people who try to reverse-engineer my drug, or use industrial espionage.

I don't know how this deals with two issues:
- Often, knowing that something can be done makes it much easier to do it. I'm not sure if this is true, but I've heard it.
- This doesn't work with products whose workings are obvious when used (e.g. the wheel).

Any other problems I haven't heard about?

Lawrance George Lux writes:

The solution is not to set the length of the Patent time, but to set the largesse of the royalty. This combined with allowing any competition with simple payment of royalty solves the problem. The R&D is assured of funding, but monopoly concerns are eliminated. lgl

Boonton writes:

Bill,

I would object to your idea because it promotes inefficiency. Before a drug is part of the public domain it would have to be invented twice...in effect. Say it costs $5B to find a cure for cancer, another company would then have to spend $5B with your system (since they couldn't use reverse engineering or spying) to do it all over again.

Best case, society spent $10B to invent one new cure when it could have spent just $5B and used the other $5B to find something else. Worst case, no one wants to spend the $5B again so the original inventor gets a never ending monopoly.

Alan Erkkila writes:

I think we could gain major temporary benefits by granting reciprocity to drugs approved by EU countries. I say temporary because competition might encourage those countries to increase their requirements for approval to equal those of our FDA.

Alan Erkkila writes:

Boonton,

Your objection is ludicrous because it assumes that any individual's or corporation's actions equal the actions of "Society". Society is composed of many individuals, more of whom, once they are aware of the possibility of a solution to a problem, may begin to work on a problem. More than one of which may solve the problem just as well or better from an absolute - or even just an economic - perspective.

Zimran writes:

I agree both that 1) patents are neccessary and useful in some areas, and 2) it is ridiculous to grant 1-click the same duration as a new drug that cost $Bs to develop. I also acknowledge that tying patent length to $s invested creates very perverse incentives.

I would simply alter the length of patents depending on what type of thing was being patented. All drugs, regardless of how much money they cost to develop, would have the 18 years (or whatever) of patent protection they enjoy now. All software patents, regardless of how much money they cost to develop, would have 1 year of patent protection (or whatever). Etc.

While it is true that 18 years and 1 year might not be the perfect number, it is an improvement on what we have now. And while it is also true that you would have to come up with a specific duration for each class of patentable goods, I think it would also be OK to just pick the top few, give those a unique duration, and let all others remain at whatever they are.

Kludgey, I know, but still sensible.

Jim Glass writes:

"The Economist" argues in its current edition that Europe is paying a steep price for its intervention in the market to keep drug prices down. In money, high-paying jobs exported to America(!), and the health of its citizens.

Boonton writes:
Your objection is ludicrous because it assumes that any individual's or corporation's actions equal the actions of "Society". Society is composed of many individuals, more of whom, once they are aware of the possibility of a solution to a problem, may begin to work on a problem. More than one of which may solve the problem just as well or better from an absolute - or even just an economic - perspective.

That's nice, it still means that something will have to be invented twice which is still wasteful. It's wasteful even if it only takes half the effort to invent it the 2nd time.

Boonton writes:

Zimran,

There's no reason to assume, though, that 18 yrs (or whatever) is too much or too little to recover the cost of inventing a new drug. Likewise, its wrong to assume that all software inventions should be just 1 year. IMO, its better to have a system where the value of the patent is at least partially determined by a market mechanism.

Boonton

Bill Carone writes:

"It's wasteful even if it only takes half the effort to invent it the 2nd time."

I agree that there are efficiency costs to trade secrets. However, that doesn't lead to your conclusion, as there are efficiency costs to most alternatives, including patents, no?

Do you think that the costs involved in trade secrets are outweighed by other considerations? In other words, why are these costs bigger/smaller/about the same as the costs of other alternatives?

Victor writes:

I'd try this: limit or abolish the doctrine of equivalents. There are (sort of) two kinds of innovation you can patent: (1) a new way to do something, (2) a new thing to do. I think the second kind of innovation is more valuable to society in the long run (although it probably has less economic impact in the short run than innovation of the first type).

The doctrine of equivalents says that when someone gets a patent on a new way to do something, it will also cover other new ways to do that thing. If we abolished this, then the "effective" life of a patent would depend on how unique any patented solution really is. If there's only one good way to do something and someone patents it, they could enjoy the whole patent term. But if it turns out that there are other good ways to accomplish the goal, then the patent would effectively expire whenever one of those (other) ways was discovered.

So we would not have to look at "research inputs" which would be impossible to evaluate anyway (especially when you ask whether incredibly inefficient innovation really deserves more reward (of patent years) than a brilliant insight, just because the inefficent R&D cost more). Rather, we would reward solutions to "hard" problems (hard because they admit of few solutions) more than "easy" ones.

Boonton writes:
I agree that there are efficiency costs to trade secrets. However, that doesn't lead to your conclusion, as there are efficiency costs to most alternatives, including patents, no?

The patent that eventually expires does not require the wheel (or new drug) to be invented a 2nd time. In fact, it has one advantage because eventually the technology will make it into the public domain. Your method would require a second person to invent the technology of the patent holder. Even then the original patent holder could frustrate this by claiming in court that the 2nd person used 'reverse engineering'.

Unlike patents that expire this has the unpleasant possibility that some patent holders could have an eternal patent because no one else will want to take on the effort of duplicating their research (or because they know any attempt to do so will lead to an expensive court battle where the patent holders will claim that the 2nd inventors didn't really invent but violated trade secrets).

Bill Carone writes:

"some patent holders could have an eternal patent"

Watch out; an eternal patent on a buggy-whip isn't going to get you much :-)

"The patent that eventually expires does not require the wheel (or new drug) to be invented a 2nd time."

But it gives inappropriate incentives most of the time; it can make people spend too much to invent something too early, or make people spend too little to invent something too late, no? These efficiency costs could be huge (e.g. delaying the invention of a drug that could save lives. If we value a life at $10 million, it only takes a few hundred deaths to impose efficiency costs of billions for a single drug delayed a single year by bad incentives.).

Also, the time and effort it takes to "re-invent" something decreases with time, no? In other words, it will be easier to invent something ten years from now than it is to invent it today. Do you disagree?

"(or because they know any attempt to do so will lead to an expensive court battle where the patent holders will claim that the 2nd inventors didn't really invent but violated trade secrets)."

Yes, a legal system that handles these cases badly won't help at all, and might make the trade secrets system unworkable. Perhaps with a "loser pays" system, or a way to hold someone liable for fraudulent lawsuits would help?

Boonton writes:
Also, the time and effort it takes to "re-invent" something decreases with time, no? In other words, it will be easier to invent something ten years from now than it is to invent it today. Do you disagree?

Possibly, although I wonder how long it would take to 're-invent' the light bulb if you weren't allowed to reverse engineer existing light bulbs (or utilize what has been published about light bulbs since that's technically the same thing as reverse engineering them).

I suppose the bigger question is why. Why should something have to be invented two times before it goes to the public domain? Even if it is easier to invent something the second time around this imposes an unavoidable deadweight loss on society. In theory the current system may not impose such costs, if balanced correctly the benefits of encouraging innovation may offset the costs of having temporary monopolies.

I just don't see that possibility with an 'invent it again' system. Even worse, IMO, the more difficult the invention is the less chance it will ever get to the public domain. Like I said, how many companies will want to undertake a $500M project to reinvent a drug that already exists? Especially when the reward is that the drug becomes generic AND you will likely have to fight the original patent holder tooth and nail. Yes, we may create a legal system that can efficiently handle such complicated cases but there again...why do we want to put our energy into such a project?

bill carone writes:

"(or utilize what has been published about light bulbs since that's technically the same thing as reverse engineering them)."

That's actually another issue; researchers will still publish information. It isn't that the scientific community will shut down and never produce any information. Some information will be published and some hidden.

"I suppose the bigger question is why. Why should something have to be invented two times ... this imposes an unavoidable deadweight loss on society."

Again, I agree, it would impose deadweight costs on society. That fact is not enough to make your case.

You need to show that the other alternatives impose more costs. Trade secrets impose deadweight costs. Monopolies impose deadweight costs. Patents impose deadweight costs. Which is more?

For example. say we have a patent systems that gives seven years of monopoly.

Some inventions will produce little benefit for society; either they aren't that great, or they aren't that hard to invent (e.g. someone else would have invented it soon anyway). However, people will spend money just to "be first" and get the patent. They will also do this inefficiently soon, since if they wait, someone else will get the patent.

On the other end, there are inventions that produce great benefits and are the products of genius (e.g. no one else will invent them for twenty or thirty years). However, people will spend an inefficiently small amount of money to produce these, since all they get is seven years of monopoly.

These are deadweight costs as well, costs that the trade secret laws do not impose. Do these outweigh the other costs of trade secrets?

"Like I said, how many companies will want to undertake a $500M project to reinvent a drug that already exists?"

Because the benefits of being one of two companies who can produce the drug is worth the cost.

The drug wouldn't go into the public domain; it would be sold by two companies. The only things that would go into the public domain are things that people voluntarily put into the public domain.

And if it isn't worth the costs today, maybe it will next year, when more is known, and costs have decreased. Or perhaps a substitute will be invented.

"AND you will likely have to fight the original patent holder tooth and nail"

Again, fraudulent lawsuits should be punished more than they are today, either by loser pays or some other system. This is not just a trade secret issue. I brought it up to emphasize your point that a bad legal system might make patents more attractive.

Trade secret law isn't a tool that you can wield against anyone who independently invents your product; it usually just shores up some problems with typical contract law.

For example, I buy a drug, under contract not to reverse engineer it. I give it to Joe, and then disappear. Joe then reverse-engineers the drug and sells it.

Under contract law (IANAL), the drug company would have a case against me, but not Joe. Trade secret law gives the company the right to stop Joe, because of the way he got the drug.

The company could use many methods to prove that Joe copied the drug and didn't independently invent it. They could put inert material in the drug, or put some other invisible "signature" that would only in a copy, not the original.

Boonton writes:
Again, I agree, it would impose deadweight costs on society. That fact is not enough to make your case. You need to show that the other alternatives impose more costs. Trade secrets impose deadweight costs. Monopolies impose deadweight costs. Patents impose deadweight costs. Which is more? For example. say we have a patent systems that gives seven years of monopoly. Some inventions will produce little benefit for society; either they aren't that great, or they aren't that hard to invent (e.g. someone else would have invented it soon anyway). However, people will spend money just to "be first" and get the patent. They will also do this inefficiently soon, since if they wait, someone else will get the patent


The inefficiency caused by a low value patent is minor. The inefficiency can be estimated as the monopoly profits the patent holder earns. Clearly a product of low value will not earn much in the way of monopoly profits so patents for inferior inventions are not of much concern.

A high value invention, though, would be expected to have high monopoly profits....this would be valuable even if you could only hold the patent for a limited time. The chief danger, IMO, are patents being too long and not too short.

Nevertheless, the length of the patent can be tied to its value. There are several schemes out there that would use market mechanisms to determine the value of an invention. A high value invention then could be given a high value patent which resolves your issue of projects not being undertaken because of limited patent times.

Compare this to the unavoidable deadweight losses of a trade secret system. Without a public domain to pull from, everything will have to be worked out from scratch. The prohibition against 'reverse engineering' is both unworkable and wasteful in itself. Reverse engineering is a valid method to examine something from a different perspective. Not being allowed to do it will mean that some new things will not be invented (or only invented with more work than necessary).

It is also unworkable because the problem of defining it is huge. Take my example of asking you to invent a light bulb without reverse engineering. Could you really do it? Don't you think your knowledge of Edison's bulbs will have you at least doing a little reverse engineering in your head? It won't be a matter so much of spurious lawsuits, it will be a matter of lawsuits that will be difficult to judge fairly. That brings up a whole new level of waste since to do it right society will have to devote a significant portion of its best minds to judging such cases. Those who know a lot about engineering, software coding, applied sciences etc. would have to be enlisted to judge the merits of such disputes rather than applying their knowledge towards creating new innovations.

Bill Carone writes:

"Clearly a product of low value will not earn much in the way of monopoly profits so patents for inferior inventions are not of much concern."

There might be many more of these than the high-value kind, though. So the total deadweight costs of giving patents to low-value inventions might add up and outweigh the deadweight costs of high-value inventions.

"A high value invention, though, would be expected to have high monopoly profits....this would be valuable even if you could only hold the patent for a limited time."

It would be valuable, but not as valuable as it should be. People won't invest the efficient amount in the more valuable inventions (where valuable is a combination of benefit-giving and non-obviousness), so they will be underproduced. This is a deadweight cost.

Imagine I can choose one of two investments:

A. I produce something that gives a benefit of 1 trillion dollars to society, but it only gives me 1 million dollars of profit

B. I produce something that gives a benefit of 2 million dollars to society, and gives me $1.5 million dollars of profit.

Society would want me to do A, but I want to do B. A is valuable to me, but B is more valuable. This shows what can happen if you make the patents too short.

"The chief danger, IMO, are patents being too long and not too short."

How come? Deadweight costs happen for both, and you haven't shown that one is bigger than the other.

"There are several schemes out there that would use market mechanisms to determine the value of an invention."

For example?

One good thing about trade secrets is that it is the most "hands-off" of all the procedures; it requires the fewest regulations on innocent people. So, ethically, I find it the least objectionable.

"Without a public domain to pull from ..."

There would be a public domain. People would publish some things and not publish others. I see shows all the time where part of a manufacturing process is divulged, and part is kept secret. Researchers would want to publish in order to show how smart they are, to increase their future salaries.

"The prohibition against 'reverse engineering' is both unworkable and wasteful in itself."

Wasteful, meaning inefficient, perhaps, but these costs have to be weighed against the costs of patents, which might lead to even more waste.

"Take my example of asking you to invent a light bulb without reverse engineering. Could you really do it? Don't you think your knowledge of Edison's bulbs will have you at least doing a little reverse engineering in your head?"

By now, Edison's bulbs would be in the public domain (i.e. someone who had independently created it would have published it). So would many other inventions.

There is a difference between looking at a lightbulb and saying "Gee, I could make something that would let people to read at night" and taking the bulb apart to exactly copy the materials and technology used. Similarly for "curing cancer" or "manufacturing widgets." Is this too fine a line to draw? One problem with trade secrets is that it is difficult to use for, say, inventing spreadsheets, since once you see one in operation, you don't need to "reverse-engineer" it, you can just write one yourself.

"That brings up a whole new level of waste since to do it right society will have to devote a significant portion of its best minds to judging such cases"

Significant portion? What is your evidence for this?

Again, you can't just say there will be costs, you have to compare it with the costs of the other system. Too many seriously intelligent people I know are IP lawyers; this is the same kind of "waste" as you describe above, and I don't see why it is necessarily less than that of a trade secret system. In fact, trade secret law is fairly simple, compared with copyright and patent law, no?

And these cases won't be that complicated, surely; right now, for example, you can fairly easily figure out if code has been independently created or copied directly and fiddled with. I suspect similar things would happen in other realms, no? Trade secret law is more about protecting companies from espionage than suing everyone who invents a substitute.

Boonton writes:
"There are several schemes out there that would use market mechanisms to determine the value of an invention."

For example?

See the system I proposed above. The person applying for the patent will set a price that he will accept to let the patent revert to the public domain. The patent fee will be based on this price. If he prices his invention too steeply, he will overpay in patent fees. If he prices the patent too cheaply he will have it brought out from under him.

There are other systems out there that use auctions and other devices to determine the value of the innovation. This, IMO, is better than just declaring a drug is worth 10 years, a software program is worth a year and so on. Yes drugs may be expensive to produce but who is really to say there exists no possible 'killer ap' that may be worth as much as the any drug? On the flip side, are there no drugs that are near worthless as innovations?

Bill Carone writes:

"The person applying for the patent will set a price that he will accept to let the patent revert to the public domain. The patent fee will be based on this price. If he prices his invention too steeply, he will overpay in patent fees. If he prices the patent too cheaply he will have it brought out from under him."

Do you have a more involved explanation/example; I'd like to see the following:
- the terms of the patent given (particular number of years?)
- the fee as a function of price set (price/10?)

Is there any source you can cite with this kind of information?

Boonton writes:

Let's say the drug is viagra, Pfizer may declare their price to be $400M and maybe the patent fee is 20% of that or $80M. When I originally suggested this, I envisioned that the fee could go into a fund that would support basic research or buying out patents of drugs that the gov't deemed to be essential for saving lives....So Pfizer may see some of that $80M come back to it in the form of buying out lifesaving drugs or basic research that it could use to discover other drugs.

I would keep patent lifes as they currently are but I think you could build a system with multiple patent lives. Say we had a range of 1 to 15 years & we require the patent applicant to submit a price for each with the fee collected each year. Clearly Pfizer would have a high buyout price for year 1 because they haven't had a chance to reap any rewards for the drug yet. By year 14 they would probably have a very low price.

If you wanted to have indefinate patents you could even do that with this system. If Kodack wants to hold onto the patent for instant film for 100 years they could do so by always setting a sky high buyout price...but they would pay thru the nose for it.

Alex Tabarrok of the Marginal Revolution emailed me with an idea proposed by Michael Kremer. His idea would be to hold a auction for the patent but with a twist. The patent goes to the applicant and the gov't pays them the highest bid. To promote honest bidding, at random times the highest bidder will have to pay his bid and he will get the patent. If the gov't wanted to encourage more innovation it could even add a bonus to the highest bid as an extra reward for high value items.

Here's the source that Tabarrok gave me:

"Patent Buyouts: A Mechanism for Encouraging Innovation," Quarterly Journal of Economics, November 1998, pp.1137-1167. (NBER Working Paper 6304, 1997). Reprinted in Alexander Tabarrok (ed.), Entrepreneurial Economics: Bright Ideas from the Dismal Science, Oxford University Press, 2002.
Bill Carone writes:

Thanks!

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