Costs and Benefits of the Patent System
By Arnold Kling
An efficient property system notifies non-owners of property boundaries. For example, land rights have a well-developed and efficient system to notify third parties of boundaries. Because of this, only rarely does someone invest millions of dollars constructing a building that encroaches on someone else’s land without permission. Far more typically, would-be investors “clear” the necessary rights before investing. They locate markers, check land deeds, conduct surveys, and so forth, in order to determine the adjacent boundaries. They then either negotiate rights to the needed land or design the building to avoid encroachment.
While surveyors can plainly map the words in a deed to a physical boundary, it is much harder to map the words in a patent to technologies…Not only are the words that lawyers use sometimes vague, but the rules for interpreting the words are also sometimes unpredictable…There is thus no reliable way of determining patent boundaries short of litigation…
It is possible, however, for patent owners to hide the claim language
that defines patent boundaries from public view for many years, a practice that is becoming increasingly frequent…
…tangible property rights are linked closely to possession, hence the well-known expression, “possession is nine points of the law.” Patent law also requires possession of an invention, but often this requirement is not rigorously enforced. Courts sometimes grant patent owners rights to technology that is new, different, and distant from anything they actually made or possessed…
Investments in land or structures rarely involve many parcels of land, and property law discourages fragmentation of land rights. In contrast, investments in new technology often need to be checked against many patents— even thousands
I have only just started the book, and I may not be sufficiently invested in the topic to go through it entirely. But the main thesis seems sound.
My intuition is that drug patents are ok, but software patents are bad. The authors’ perspective supports this intuition. It is easier for drug patents to be based on clear boundaries and to satisfy the “notice function.”
I am trying to think about intellectual property in terms of the Coase theorem. Suppose I have come up with an invention, and I don’t want you to use it. Either you could pay me to use it, or I could pay you not to use it. Does it matter which? From a utilitarian perspective, do we care whether the law puts its thumb on the scale of the inventor or the infringer?
What happens when boundaries are unclear, so that the “notice function” operates poorly or not at all, is that the bargaining costs go way up. As the authors show, litigation costs are high relative to profits from innovation.
If there are reforms that could force innovators to give better “notice” with greater clarity on the boundaries of their patents, average welfare would improve. However, the welfare of patent attorneys would not improve, which leads me to suspect that patent reform will not happen. The term “rent-seeking” gets little usage in the book, but the concept comes up in their conclusion, on p. 257:
Clearer notice might undermine patent lawyers’ abilities to manipulate patents…the boom in litigation provides a boom in business for lawyers and the growth in the patent bar has outstripped the growth of R&D…the pharmaceutical industry already has clear notice, so they might be loath to introduce changes…in the near term these groups will most likely oppose improved notice.