ACCA - The global body for professional accountants

The development of intellectual property law in the mature economies is threatening to stifle innovation through patent inflation and the emergence of patent trolls

 

This article was first published in the February 2013 International edition of Accounting and Business magazine.

Apple is one of America’s most beloved companies. Its many fans therefore cheered when a jury awarded the company US$1bn in damages after Samsung replicated some of the ideas that went into Apple iPhone.

While it is true enough that some features of Samsung’s smartphones bear an uncanny resemblance to Apple’s trailblazing product, the judgment is seen by many experts as a sign that the patent system has got out of control.

Among the design features to which Apple laid claim in its lawsuit was that of a rectangular computer with rounded edges. Keith Maskus, professor of economics at the University of Colorado in Boulder and author of Private Rights and Public Problems, says: ‘Twenty years ago this would have been considered too vague an idea to be worthy of being awarded a patent. The patent system has now become so overprotective of inventions that it risks undermining competition and so hurting consumers.’

While the problem is most acute in the litigious US, Europe and Britain are also starting to succumb to the same disease.

There is, though, a funny side to patent inflation. A few years ago the US authorities awarded a patent for heart-shaped cheese slices. Another creative soul now has a 20-year monopoly on the idea of a lollipop that turns into a drinking straw.

But in the realm of technology and medicine, rampant patent inflation is less of a laughing matter. Michele Boldrin, a patent specialist at the University of Washington in St Louis, says: ‘Most modern hi-tech devices or new software make use of hundreds or even thousands of patents. As a result new products are almost inevitably going to tread on somebody else’s toes. This is a huge problem for innovative new companies and a bonanza for lawyers.’

The US patent office has been increasingly willing to grant monopolies for ever more vague and general ideas.

In 2010, the understaffed US Patent and Trademark Office granted 220,000 patents, a 31% increase on the previous year. It’s also a roughly four-fold increase on the early 1980s.

Boldrin says: ‘If this reflected an explosion of creativity, that would be a great sign. Sadly, if you look at productivity in the US economy it has actually slowed over the past decades from about 5% a year to an average of closer to 1% a year since the 1980s. If tighter intellectual property protection were a spur to innovation, then we might have expected to see exactly the reverse.’

Critics also say the system is no longer about protecting inventors. A new species of patent predator has emerged – the ‘patent troll’. Usually made up of lawyers and engineers, patent troll enterprises do not produce any goods but just collect patents by the hundreds and even thousands. They then prowl the marketplace in search of companies that have accidentally breached their patents.

Tim Lee, a scholar at the libertarian Cato Institute, says: ‘These trolls have become a huge public menace. It’s not just that they cost legitimate businesses a fortune in legal fees, they can also scare them away from producing certain goods altogether.’

The economic cost may have amounted to about US$500bn in the US since 1990, according to a study by Boston University academics. The problem is also getting more acute, totalling an average of US$83bn annually over the past four years. Even a slightly lower figure that measures pure legal costs of around US$29bn a year would amount to about 10% of the US$247bn spent every year on research and development.

‘The true damage may be even higher since it is impossible to measure the effect of lost innovation,’ says Steven Markovich, who is producing a study on patents for the Council on Foreign Relations. Giant companies like Google and Apple can usually protect themselves by buying up patents. When threatened with legal action they can often countersue, producing patents their rival is abusing. Markovich says: ‘For big companies there is often a kind of mutually assured destruction. But many smaller companies have simply been scared away from producing new products because there are too many legal trip wires.’

Software is a particular problem. Around 62% of US patent lawsuits involve software. A growing number of academics say software – already protected by copyright, which protects the literal text of a code – should not also be shielded by patent, which is intended to defend broad ideas.

Lee says: ‘You can make a case that pharmaceuticals should get patents, since they can cost billions of dollars to test and develop. Software, by contrast, can often be written very quickly and cheaply.’

So how did the patent system go awry? Boldrin believes that rich nations got carried away by the myth that patents always encourage innovation. He explains: ‘Patents are actually a form of monopoly that prevents other people from getting into a market.’

While this can be useful when an inventor has made a major leap forward, when the cost of development has been very high and when the invention is easy to copy, we have made a ideological leap, says Boldrin. ‘Instead of viewing patents as a monopoly, we have taken to viewing them as intellectual property and as a form of ownership.’

Even in areas like pharmaceuticals, where patent protection is often necessary to help companies recoup the huge cost of development, patents are being abused. Big drug companies have become remarkably successful at extending the life of patents on lucrative drugs beyond the standard 20 years, according to Marcia Angell, author of The Truth About Drug Companies and senior lecturer at Harvard Medical School. For a start she argues that many of the medicines developed were really the product of taxpayer-supported research. When patents come up for expiry, drug companies can often find a new use for their medicine and convince the authorities to extend their exclusive right.

So what can be done to fix the situation? Boldrin is worried that this problem has become ever more global. ‘Europe and Britain have been drifting in the US direction,’ he says. ‘They would be wise to avoid this course.’

Fixing it

On the bright side, the US has already started to fix some of the defects of its system, in part through the recent America Invents Act. The law allows rival companies to challenge trivial patents even after they have been officially granted. It will also boost the resources available to the patent office and so reduce the tendency of overworked officials to rubberstamp patents which have little real merit.

But experts believe far more needs to be done. For a start the standard 20-year life of a patent is too long for many industries, according to Maskus. He says: ‘In fast moving industries like software and micro-electronics, many technologies are superseded after just 18 months, so a 20-year monopoly is an absurd anachronism.’

The fact that nations like China, India and Brazil – the rising giants of the global economy – are so far less wedded to the idea of an ultra-strict patent system is encouraging. These countries may help push the world back towards a slightly better balance, some experts believe.

‘But the excesses of the patent system have developed over decades,’ says Boldrin. ‘The first step is to stop things getting any worse. Rolling the system back will be a difficult and arduous process.’

Christopher Alkan, journalist based in New York

Last updated: 19 Mar 2014