Patents – why and when?

Milind Sathe

A world famous speaker recently, said “An efficiently operating IP system is critical to our ability to spur innovation and bring new services and products to the marketplace faster”1. Patents benefit society from improved and better products.

Trade in knowledge economy is governed by intellectual property (IP). Patents provide assured means to earn the revenue from the sales of patented product and that is the best benefit of patents. Patents, a sophisticated entry barrier, are tools with known limitations, to protect the IP. It provides breathing space to develop a business based on an invention. Patents provide benefits in commercial, economic and societal terms. Commercial or economic benefits mean patentee may choose to make and sell the product, taking advantage of the monopoly rights afforded by the patent or licensing it out. The value of patents must be interpreted in relation with the economic structure of the society where patents are granted and practiced.

Patents are of specific importance in pharmaceuticals due to long development and approval periods for a new product, associated huge costs and increased need to prevent copying. Apart from commercial, economic and societal benefits, the reasons for use of patents in pharma products are i) to deter entry, ii) to enhance favourable conditions for commercial use, iii) out-licensing to secure royalty income, iv) to use in technology negotiations, v) to influence investors perception, vi) to signal to others, vii) for recognition to the inventors or to provide incentive to researchers, vii) to own versatile uses of the product, viii) to increase the returns from innovation, ix) to increase intangible property and internal wealth of the company which is useful during acquisitions and mergers, x) To use in cross licensing, xi) to block competitors’ attempts to patent a closely related invention, xii) to control a technology path, xiii) to eliminate the competition, xiii) to protect the investment, xiv) to raise finance, 2 xv) commercialisation of technology/product, xvi) to exponentially improve R&D productivity by avoiding ‘reinventing of the wheel,’ xvii) to sharpen the competitive edge at market place or to retain leadership, xviii) to invent around the patent.

Commercialisation potential of patents, commercialisation capabilities of patentee, and opportunities directly determine if the patent will be worked or not. Exposure of patentee and his readiness level determines if he would like to license out the patent or not; independent of his abilities or limitations to work it.

Basis of the patent system

It is believed that the patent system promotes innovation and economic competitiveness. Trade-related aspects of intellectual property rights (TRIPs) agreement aims to achieve four broad objectives by unified IP and patent frame: i) promotion of technological innovation; ii) the transfer and dissemination of technology; iii) the advantage consumers and inventors; and iv) in a manner conducive to social and economic welfare.

Grant of exclusive privilege to own, use or sell the method or the product patented for a limited period stimulates new inventions of commercial utility3. Patents promote the progress of science and the useful arts; reward of inventors is secondary and merely a means to that end4. Purpose of limitations on patentability was expressed as patents are issued not for private benefit but for public good5. Availability of patented products benefits to subject population6.

TRIPs Article 28 refers to rights conferred on patentee wrt product or process and empowers patentee with exclusive rights to make, use, offer for sale, sell, or import, to assign, or transfer by succession, the patent and to conclude licensing contracts. It prevents third parties not having the owner’s consent from doing the above acts.

Nowhere has it guided to interpret the text as an exclusive right to patentee ‘not to use, not sale, not import’. Quite clearly patents confer exclusive rights, in the interests of patentee and society.

The effectiveness of patents in protecting property rights is variable. It depends upon the extent to which the property rights can be protected by the local law frame and courts. Patents create more difficulty for competition but do not completely stop it. It is an effective entry barrier. Nations retain the power to regulate unfair practices without compromising national patent system.

Prime objective of the patent law is to encourage technological progress and ensure availability of patented product in the market7. The objective of patent rights is to foster innovation and economic growth. However, to date, there is little robust evidence that patents “work” as intended8. Richard D. Nelson and Roberto Mazzoleni, Columbia University state 4 broad theories of patents in “Economic Theories about the Costs and Benefits of Patents”. According to “Invention-inducement Theory” an anticipation of patent/exclusive rights provides motivation for useful invention and provides incentive effects. It believes that without patent protection there will be no invention; or incentives for invention will be too weak to reflect the public interest. It supports stronger patent protection. It presumes that holder wants to prevail in the market. This basic understanding contradicts expansive interpretation and negative version of patents that supports nonworking of patents. Disclosure Theory describes that by inducing inventors to disclose their inventions, patents facilitate wide knowledge about and use of inventions. However not all support this view. Supreme court in US is of the opinion that there is very little evidence in favor of the positive disclosure story. There is a feeling that learning from past patents is a highly overrated story, and facts indicate so. Prevailing disclosure style is inadequate and needs stringent disclosure norms9. Better ways of measuring the impact of disclosure are required. There is no evidence to support that disclosures avoid duplication or stop duplication of R&D or ensure cost reduction. Disclosures are in typical patent language and seldom deliver claimed advantages. Persons skilled in the art find it difficult to comprehend the technology. It is common experience that following the technology described in the patent leads to surprisingly different results. Therefore alleged advantages of disclosures are more of theoretical and philosophical in nature. According to ‘Development and Commercialisation Theory’, patents induce the investment needed to develop and commercialise inventions. According to ‘Prospect Development Theory’, patents enable the orderly exploration of broad prospects for derivative inventions.

In a competitive world, quality and quantity of returns are determined, not by who invents first but by who protects first. It increases the total inventive effort by faster or more deployment of 4Ms in inventive activity10. Direct entry by working or licensing enhances revenues and rents, supports R&D and encourages inventive efforts.

Innovation and economic growth

Mere grant is not enough. Being a patentee is not enough. It is of paramount importance that patent adds to revenue or protects current sources of revenue, else patenting is shear waste of resources. Understanding what patentee does with patent tells many other stories. Important economic strategic benefits sought by patents are (i) financial rewards/monetary benefits to cover R&D expenses and profit, (ii) creating reputation/recognition, (iii) securing market protection, iv) to build networks and corporate relationships such as JVs, alliances, co-marketing, tie ups v) practically creating a protective wall to ensure continuation of monopoly and vii) creating opportunities for product extensions. Generating economic value is the prime objective of patent. Economic value of IP is company, context, technology and manner of use specific. It is location and economy specific, determined by law of the land, despite TRIPs in existence. Patentee has to position himself perfectly to generate revenue12. Differences in motives of patenting and in effectiveness of patents across industries, differences in legal provisions, in economies and in level of earnings of subject populations determine revenue generation potential and in turn impact investments, expenditures, productivity and activity profile in R&D. Covering R&D expenditures is not the primary motivation for patents but is just one of many. Drive to license out the patent is of critical importance13.

Mazzoleni and Nelson (1998) propagated the theory of benefit and cost of patent which associate patents with a competitive weapon and as a source of unexpected revenues. In either case, patent leads to suppression of technology, product and or process if it is to be used as weapon to prevent competition.

Contradiction of treating markets as platforms for pure economic gains but advertising them as platforms of social relations marks Knowledge economy, in which markets in reality do not follow simple supply and demand curves, described in standard textbooks. Today, a market governed by law of the land is in reality a complex network of social, industrial, financial, political and institutional relationship prone for external influences. Apex institution and its wings are required to process enforcement of rights, for productive and effective exchange and to ensure balance of interests. Patentee must carry definite burden of performance. Patentee’s actions and interaction that disrespect / contradict the sovereign or law of the land, despite having information and knowledge, and his tendency to adopt double standards tell a different story about use, utility of patent and motives of patentee. Advertising market as a social platform is an attempt to gain reputation but patentee contradicts it by his behaviour in litigations against the State and against public interest. His behaviour against the nation creates hatred about patents, disgust about patentee. It defames the patent system. It exhibits the gap between what is preached and what is practised. There is no sound justification for not working the patent especially when law of the land prohibits it. A sincere desire to work the patent or license out, is a necessary precursor of patenting activity.

References:

1. http://www.commerce.gov/news/press-releases/2011/09/16/president-obama-signs-america-invents-act-and-announces-new-steps-hel, Last accessed on 23rd October 2012.
2. Understanding the Rationale to Patent in Pharmaceuticals – Henrique Machado Barros, Insper Working Paper, WPE: 084/2007 http://www.insper.edu.br/sites/default/files/2007_wpe084.pdf Last accessed on 19th October 2012. Ibmec São Paulo;- Rua Quatá, 300; Vila Olímpia; 04546-042; São Paulo-SP, Brazil. e-mail: [email protected]
3. Bishawanath Prasad Radhey Shyam v. Hindustan Metal Industries, ((1979) 2 SCC, 511)
4. U.S. v Masonite Corporation, N.Y.1942
5. Griffith Rubber Mills v. Hoffar, C.A.Or. 1963, 313 F. 2d 1, http://www.patents4technologies.com/PatentLaw.htm#1 Last accessed on 23rd October 2012.
6. http://www.du.edu/techtransfer/iptips.html University of Denver Office of technology transfer
7. Actions that do affect the marketing of patented invention do not affect the said exclusive right. Session III Introduction by Alberto BERKOVITZ (Chair) OCDE Madrid 18 May 2006. http://www.oepm.es/cs/OEPMSite/contenidos/ponen/conferenciantes/archivosPDF/36817271.pdf Last visited 18th October 2012
8. WIPO/IP/ECON/GE/5/10/INF.1, ORIGINAL: ENGLISH, DATE: SEPTEMBER 20, 2010. Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, (Professor Ivan P.L. Png) Geneva, November 30, 2010. Abstract: http://www.wipo.int/edocs/mdocs/mdocs/en/wipo_ip_econ_ge_5_10/wipo_ip_econ_ge_5_10_ref_huandpng.pdf
9.The Social Value of Patent DisclosurePatent Disclos Prof. Dietmar Harhoff, Ph.D., Institute for Innovation Research, Technology Management and Entrepreneurship, Ludwig Maximilians Universität München (LMU)Ludwig-Maximilians-Universität München (LMU), Munich School of Management, Kaulbachstr. 45, D-80539 München, Tel. +49 (0)89-2180-2239, Fax +49 (0)89-2180-6284, [email protected], http://www.inno-tec.de Last accessed on 26th October 2012.
10. overfishing models of Barzel (1968) and Dasgupta and Stiglitz (1980b) http://nicomedia.math.upatras.gr/Free- OpenSource/BiotechnologyRelated/IPRights&ResearchToolsInMolecularBiology/books/3.html Last accessed on 23rd October 2012.
11. Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, Albert G.Z. Hu* and I.P.L. Png, February 2009, This version: January 2010
12. best patent will not generate revenue if the firm is not correctly positioned to exploit it (Brooking, 1996)
13. 4th Annual Conference of the EPIP Association, Bologna, 24-25.09/2009, Economic Strategies and Patent Governance of UK Software Firms: A Study on Financial Benefits, Reputation and Positioning, Birgitte Andersen Professor of the Economics and Management of Innovation, University of London, Birkbeck College, UK, Email: [email protected]. Ainurul Afizah Rosli Research Fellow and Doctoral student, University of London, Birkbeck College, UK, Email: [email protected]