Innovation

Time to fix patentsIdeas fuel the economy. Today’s patent systems are a rotten way of rewarding them

Aug 8th 2015 | From the print edition

IN 1970 the United States recognised the potentialof crop science by broadening the scope of patentsin agriculture. Patents are supposed to rewardinventiveness, so that should have galvanisedprogress. Yet, despite providing extra protection,that change and a further broadening of the regimein the 1980s led neither to more private researchinto wheat nor to an increase in yields. Overall, theproductivity of American agriculture continued its gentle upward climb, much as it had before.

In other industries, too, stronger patent systems seem not to lead to more innovation (see article(http://www.economist.com/node/21660559) ). That alone would be disappointing, but theevidence suggests something far worse.

Patents are supposed to spread knowledge, by obliging holders to lay out their innovation for allto see; they often fail, because patent-lawyers are masters of obfuscation. Instead, the system hascreated a parasitic ecology of trolls and defensive patent-holders, who aim to block innovation, orat least to stand in its way unless they can grab a share of the spoils. An early study found thatnewcomers to the semiconductor business had to buy licences from incumbents for as much as$200m. Patents should spur bursts of innovation; instead, they are used to lock in incumbents’advantages.

The patent system is expensive. A decade-old study reckons that in 2005, without the temporarymonopoly patents bestow, America might have saved three-quarters of its $210 billion bill forprescription drugs. The expense would be worth it if patents brought innovation and prosperity.They don’t.

Innovation fuels the abundance of modern life. From Google’s algorithms to a new treatment forcystic fibrosis, it underpins the knowledge in the “knowledge economy”. The cost of theinnovation that never takes place because of the flawed patent system is incalculable. Patentprotection is spreading, through deals such as the planned Trans-Pacific Partnership, which

promises to cover one-third of world trade. The aim should be to fix the system, not make it morepervasive.

The English patent

One radical answer would be to abolish patents altogether—indeed, in 19th-century Britain, thatwas this newspaper’s preference. But abolition flies in the face of the intuition that if you create adrug or invent a machine, you have a claim on your work just as you would if you had built ahouse. Should someone move into your living room uninvited, you would feel justifiablyaggrieved. So do those who have their ideas stolen.

Yet no property rights are absolute. When the benefits are large enough, governments routinelyoverride them—by seizing money through taxation, demolishing houses to make way for roadsand controlling what you can do with your land. Striking the balance between the claim of theindividual and the interests of society is hard. But with ideas, the argument that the governmentshould force the owners of intellectual property to share is especially strong.

One reason is that sharing ideas will not cause as much harm to the property owner as sharingphysical property does. Two farmers cannot harvest the same crops, but an imitator canreproduce an idea without depriving its owner of the original. The other reason is that sharingbrings huge benefits to society. These spring partly from the wider use of the idea itself. If only afew can afford a treatment, the diseased will suffer, despite the trivially small cost of actuallymanufacturing the pills to cure them. Sharing also leads to extra innovation. Ideas overlap.Inventions depend on earlier creative advances. There would be no jazz without blues; no iPhonewithout touchscreens. The signs are that innovation today is less about entirely novelbreakthroughs, and more about the clever combination and extension of existing ideas.

Governments have long recognised that these arguments justify limits on patents. Still, despiterepeated attempts to reform it, the system fails. Can it be made to work better?

Light-bulb moment

Reformers should be guided by an awareness of their own limitations. Because ideas areintangible and innovation is complex, Solomon himself would find it hard to adjudicate betweencompeting claims. Under-resourced patent-officers will always struggle against well-heeledpatent-lawyers. Over the years, the regime is likely to fall victim to lobbying and special pleading.Hence a clear, rough-and-ready patent system is better than an elegant but complex one. Ingovernment as in invention, simplicity is a strength.

One aim should be to rout the trolls and the blockers. Studies have found that 40-90% of patentsare never exploited or licensed out by their owners. Patents should come with a blunt “use it orlose it” rule, so that they expire if the invention is not brought to market. Patents should also beeasier to challenge without the expense of a full-blown court case. The burden of proof for

overturning a patent in court should be lowered.

Patents should reward those who work hard on big, fresh ideas, rather than those who file thepaperwork on a tiddler. The requirement for ideas to be “non-obvious” must be strengthened.Apple should not be granted patents on rectangular tablets with rounded corners; Twitter doesnot deserve a patent on its pull-to-refresh feed.

Patents also last too long. Protection for 20 years might make sense in the pharmaceuticalindustry, because to test a drug and bring it to market can take more than a decade. But inindustries like information technology, the time from brain wave to production line, or line ofcode, is much shorter. When patents lag behind the pace of innovation, firms end up withmonopolies on the building-blocks of an industry. Google, for instance, has a patent from 1998on ranking websites in search results by the number of other sites linking to them. Here someadditional complexity is inevitable: in fast-moving industries, governments should graduallyreduce the length of patents. Even pharmaceutical firms could live with shorter patents if theregulatory regime allowed them to bring treatments to market sooner and for less upfront cost.

Today’s patent regime operates in the name of progress. Instead, it sets innovation back. Time tofix it.

From the print edition: Leaders

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Innovation

Patents that killAug 8th 2014, 9:50 by A.T. | BOSTON

IN 1742 Benjamin Franklin invented a new type of stove, for which he was offered a patent.Franklin refused it, arguing in his autobiography that because “we enjoy[ed] great advantagesfrom the inventions of others, we should be glad of an opportunity to serve others by anyinvention of ours.”

Most inventors are not as generous as the “Newton of Electricity”: they want to turn theirinventions into a profit. The patent system, which was developed independently in 15th centuryVenice and then in 17th century England, gave entrepreneurs a monopoly to sell their inventionsfor a number of years. Yet by the 1860s the patent system came under attack, including from TheEconomist. Patents, critics argued, stifled future creativity by allowing inventors to rest on theirlaurels. Recent economic research (http://www.aeaweb.org/articles.php?doi=10.1257/jep.27.1.3)backs this up.

The pharmaceutical industry makes the best case for patents (and makes the most of patentswhen they are approved (http://www.economist.com/news/finance-and-economics/21604575-drug-companies-are-adept-extending-lifespan-patents-consumers) ). Medical research anddevelopment (R&D) is costly. Moreover, although a patent application must be filed straight aftera drug discovery, clinical trials necessary for drug approval may take several years. This shortensthe effective life of the patent. As three economists argue in a recent paper(http://faculty.chicagobooth.edu/eric.budish/research/BRW-Fixed-Patents-and-Cancer-R&D.pdf) this causes problems. In order to prove the efficacy of a drug, pharmaceuticals have tomatch the length of a clinical trial to the expected survival time of the patients. A clinical trial forpatients with metastatic prostate cancer lasts only three years compared to an 18-year-long trialfor those suffering from a milder, localised prostate cancer. Since a typical patent is in force for20 years, firms only have two years of effective patent length left to commercialise a new drugagainst localised prostate cancer.

The data paint a bleak picture. The economists find that pharmaceutical companies conduct 30

times more clinical trials for recurrent cancer drugs than for preventive drugs (the effect persistseven after adjusting for market size). The authors also show that firms divert their R&Dexpenditures away from more curable, localised cancers and focus on incurable metastatic andrecurrent cancers instead. The patent system encourages pharmaceuticals to pump out drugsaimed at those who have almost no chance of surviving the cancer anyway. This patent distortioncosts the U.S. economy around $89 billion a year in lost lives.

A one-size-fits-all patent system does not cater to the specifics of innovation in thepharmaceutical industry. But tailoring patent law may encourage lobbying and corruption. Acareful reform of the patent system is necessary(http://www.economist.com/news/business/21591206-congress-takes-aim-patent-abusers-trolls-hill) : outright abolition of patents will not be enough to save cancer patients’ lives.