Faculteit Rechtsgeleerdheid Universiteit Gent

Academiejaar 2013-2014

THE FEASIBILITY OF PATENT LAW ABOLITION

Masterproef van de opleiding 'Master in de rechten'

Ingediend door

Thijs Herremans

(studentennr. 00905179)

Promotor: prof. dr. Hendrik Vanhees Commissaris: Diederik Bruloot

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Faculty of Law Ghent University

Academic Year 2013-2014

THE FEASIBILITY OF PATENT LAW ABOLITION

Master's thesis of the programme 'Master of Laws'

Submitted by

Thijs Herremans

(student no. 00905179)

Supervisor: prof. dr. Hendrik Vanhees Commissioner: Diederik Bruloot

ACKNOWLEDGEMENTS & PREFACE

First of all, I give my sincerest thanks to prof. dr. Hendrik Vanhees, for allowing me to research this most interesting topic, for giving me the freedom and independence one expects to receive when writing a master’s thesis, and to review the fruit of my labour. For the latter, I also thank Diederik Bruloot. A word of thanks to Bruno De Vuyst, for his insightful advice during our pleasant meeting. My eternal gratitude also goes to my parents, for giving me the opportunity to study and for their uncountable love and support. I also express gratitude to my friends, who found themselves in similar circumstances. Finally, I thank my girlfriend, Ieva, for lighting up the sometimes dark and difficult thesis times with her smile.

For the jewel in the crown of the five year study of law, I wanted to challenge myself by venturing into rather unexplored legal territory. I chose to investigate the topic of this thesis after reading an article in De Standaard of 5 October 2012, reporting on the paper of Boldrin and Levine, ‘The Case Against Patents’, calling into question the very system of patent protection. As it turns out, the patent system is not as evident as it seems. Besides, it is always wise to audit established institutions. In my research, I did not simply enhance my knowledge of the patent law rules. I have laid bare the system’s historical roots, shook its philosophical foundations and came to understand its economic functioning. And although the journey was filled with obstacles and the endpoint a mystery, I am glad to say I am a more well-rounded person for it. With this thesis, I have tried to scrutinise the patent system from as many useful angles as possible, so providing a solid foundation to rethink it, since it is clear the system is in desperate need for reform.

I would like to stress that this thesis is not a plea for the abolition of the patent system and that my choice to investigate did not stem from a conviction to eradicate, nor to glorify the patent system. I have approached the body of research objectively and unprejudiced.

Ressegem and Aarhus 11 May 2014 Thijs Herremans

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS & PREFACE ...... IV TABLE OF CONTENTS ...... V INTRODUCTION ...... 1 PART I. INTRODUCTION TO THE PATENT SYSTEM ...... 2 A. What Exactly is a Patent? ...... 2 1. Definition ...... 2 2. Purposes and Characteristics of Patent Law ...... 3 3. When to Patent - Alternatives: Other Ways to Protect an Invention - Strategy ...... 5 B. Obtaining a Patent ...... 9 1. What is Patentable? ...... 9 2. The Patent Application ...... 11 C. International and European Dimension ...... 12 1. International Dimension ...... 12 2. European Dimension ...... 13 D. Comparative Patent Law - Selected Topics ...... 14 PART II. HISTORY OF PATENT LAW ...... 16 A. Early Notions of Intellectual Property ...... 16 B. The History of Modern Patent Law ...... 17 1. The Birth of the Patent System ...... 17 2. The Diffusion of Patent Law...... 18 3. The Birth, Life and Death of the Patent Abolition Movement ...... 20 4. Explaining the Growth of the Patent System ...... 21 C. A History of Economic Views on Patent Law ...... 24 1. From a General Absence of Economic Opinions on Patent Law before 1850 ...... 24 2. To an Explosion of Discussion on the Patent System in the Second Half of the 19th Century ... 25 3. Absence of Economic Research on the Consequences of the Patent System ...... 26 D. Analysis of Historical Evidence of the Relationship Patent Law - Innovation ...... 27 1. Patents and the British Industrial Revolution ...... 27 2. Patent Pools and Innovation ...... 31 3. (Absent) Patent Laws, Alternative Mechanisms and Innovation ...... 34 PART III. PHILOSOPHICAL AND ETHICAL ANALYSIS OF PATENT LAW ...... 38

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A. Justifying Intellectual Property ...... 38 1. Labour Theory ...... 39 2. Personhood Theory ...... 40 3. Social Planning Theory ...... 41 B. Moral Justifications of the Patent System ...... 42 1. Natural Rights ...... 42 2. Distributive Justice ...... 45 PART IV. ECONOMIC ANALYSIS OF THE PATENT SYSTEM ...... 49 A. Economic Justifications of the Patent System ...... 49 1. Incentive to Invent and Innovate ...... 49 2. Disclosure of Inventions ...... 68 3. Commercialisation of Inventions ...... 74 4. Optimising Patterns of Production ...... 76 5. Rivalrous Competition ...... 76 6. The Overarching Theory ...... 77 B. Patents and Competition Law ...... 77 C. Costs of the Patent system ...... 79 D. Alternatives to the Patent System ...... 81 PART V. THE WORLD WITHOUT PATENTS ...... 83 A. Desirability of Abolition ...... 83 B. Feasibility of Abolition ...... 86 1. The Obstacles ...... 86 2. Route to a World Without Patents ...... 87 BIBLIOGRAPHY ...... 90 NEDERLANDSE SAMENVATTING ...... 99

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INTRODUCTION

In this thesis, I examine whether the (abolition of the) patent system is justified. I have collected both historical and recent theories and studies from diverse research areas. Many arguments and just as many counterarguments have been developed to justify respectively criticise the adopting or strengthening of patent protection. I have tried to touch upon as many arguments as possible, while still allowing a thorough examination. Frequently used arguments are discussed more extensively. Note that these discussions transcend the laws of any particular nation.

In the first part, I recall the patent law basics and the ideas behind the patent system. This is necessary to enable the reader to question the very principles on which the patent system was built. The topics discussed in this part must be read with the underlying questions of this thesis in mind, being: what is patent law; why do we have patent law; does patent law serve the purposes for which it has been established; do the benefits of a patent system outweigh its costs; is the patent system the best way to achieve its purposes, in other words: do we need patent law; if we do not need patent law, how do we ‘get rid of’ patent law, and what are possible alternatives.

Then, I investigate the origin of patent law. How and where did the patent system originate, and why. It will become clear the topic of this thesis has been subject to considerable debate throughout history. I also examine historical evidence on the relationship between patent law and innovation.

In the third part, I check the soundness of the philosophical arguments to justify the patent system. I also mention some ethical problems arising from patent protection.

In the fourth part, I subject the most commonly used arguments, sprouting from economic theory, in favour of the patent system to a serious examination. I identify potential benefits and costs of the patent system and briefly touch upon competition law and alternative systems to promote technological progress.

In the fifth and final part, I draw my conclusions from the available research, by answering the two main questions of this thesis: first, is abolition of patent law desirable, and second, is it feasible.

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PART I. INTRODUCTION TO THE PATENT SYSTEM

I will start by discussing ‘patent’ and ‘invention’, the idea behind patent law and the characteristics of a patent, and the main alternative to patent protection (section A). Then, I will discuss patentability and patenting procedure (section B). Since the patent system has macroeconomic impact, I will discuss the international and European dimension of the patent system (section C). Finally, I will highlight the most notable differences in patent law between jurisdictions (section D).

A. What Exactly is a Patent?

1. Definition

It is important to distinguish between the invention on the one hand, and the patent, which protects the invention, on the other.

a. Invention

Broadly speaking, an invention is the discovery or creation of any new thing. To invent is to discover or create the previously undiscovered respectively nonexistent. Not every invention, however, is patentable.

A patentable invention1 is the production or creation of a new and useful:

- material; - process; - use for an existing material; or - improvement of any of the above.

b. Patent

A patent is an official government document granting the right to exclude unauthorised others, during a fixed period, from making, using, importing or selling an invention (i.e. from exploiting or making commercial use of an invention) as claimed within the jurisdiction of the granting government. It is a legally recognised monopoly, limited in scope and time, in exchange for the disclosure of (the way to produce and use) an invention.

1 Note that there are differences between jurisdictions in defining ‘patentable invention’. De facto, the differences should not be exaggerated.

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Patents are commonly classified under the umbrella of laws and measures for the protection of intellectual property, sub-class industrial property.

2. Purposes and Characteristics of Patent Law

a. Patent Law Rationale

The patent system mainly serves two functions: first, to stimulate invention, i.e. the development of a new idea, and innovation, i.e. the implementation of the invention in practical form; second, to diffuse the knowledge that results from inventions. The patent system is meant to incentivise inventors to invent (or companies to allocate resources toward research and development) and to disclose their inventions to the public. This is done by giving the inventor an exclusive right to exploit his inventions during a limited period of time. In return for the exclusive protection, the inventor has to make his invention known to the public. The inventor is required to publicise the technical ideas in sufficient detail to allow a skilled person or group of persons to reproduce the invention. The patent system thus obliges inventors to disclose - “teach” - their inventions to the public, in order to get a limited term of exclusive exploitation rights of the invention.

A patent makes an invention known to the public, while protecting the invention at te same time. That way, the inventor has the opportunity to recover the time and money invested in the invention, while society benefits because it learns from the new invention and others can build freely - of course without being allowed to infringe the patent - upon the new knowledge. After the limited period of protection, the invention can be freely exploited by everyone. The patent system tries to balance the interests and investments of the inventor on the one hand and societal progress on the other. In other words, and simplistically put, patents pose a tradeoff between the social benefits from stronger incentives for invention and the monopoly pricing resulting in consumer welfare losses. The U.S. Constitution states in its article 1, section 8, that “The Congress shall have the power … to promote the progress of science … by securing for limited times to … inventors the exclusive right to their … discoveries.”

Patents are generally believed to reach this goal. Although the patent system is an exception to the principle of free trade, the functioning of the patent system does not seem to be questioned by the general public. In the Green Paper on the community patent, an easy patenting procedure, sufficient legal certainty and appropriate geographical covering are seen as essential requirements for an effective protection of innovation in the European Union. No justifications as to why this would be so are delivered. The Green Paper indicates that firms that market patented products or processes, are

3 economically speaking in a better position to maintain or enlarge their market share. Apparently, the authors regard this to be beneficial to innovation.2

The patent system is commonly regarded as evident, even natural. Advocates of the patent system say no person in his right mind would invest in research and development without being protected in form of a patent because competitors can simply copy the invention right after it is known. More and more economists however - and as shows from history, this questioning of the patent system is not at all a novelty - maintain that the patent system does not stimulate innovation, yet on the contrary slows it down and is detrimental to society. Since the recent software patent wars and abuses, even members of the general public have strong doubts about the proper functioning of the patent system. Indeed, the belief of the layman in the system seems to have suffered a quite fatal blow and skepticism grows. He answers the question whether the abuses and negative aspects of the patent system outweigh its advantages, thus whether the patent system should be abolished, more and more with ‘yes’.3

b. Monopoly - Scope of Protection

A patent confers an exclusive right to the patentee. Since the patent system is an exception to the general principle of free trade, patent protection is limited in several ways. The scope of the right is limited in its content by the patent claims: the patentee can exclude others from practising what is embodied in the patent’s claims, but only that. The right is also limited in time (generally 20 years from filing date due to TRIPS) and territory (principle of territoriality: only protection in the jurisdiction of the government granting the patent).

The patentee can only act against economic exploitation of the invention by unauthorised third parties. He cannot prohibit private use of the patented invention or use for scientific purposes. A third party who used the invention before the application for a patent, can - under certain circumstances and conditions - invoke the prior use exception in order not to be prevented from continuing that use.

2 Bevordering van innovatie door middel van octrooien, Groenboek over het Gemeenschapsoctrooi en het octrooistelsel in Europa, door de Commissie ingediend, http://europa.eu/documents/comm/green_papers/pdf/com97_314_nl.pdf, 4. 3 See e.g., although not a layman entirely: J. JAGERS, Interview with Kristof De Spiegeleer, “Patenten Afschaffen?”, Knack, 10 Oct 2012, 12.

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3. When to Patent - Alternatives: Other Ways to Protect an Invention - Strategy

a. The Pros and Cons of Patents

i. Advantages of Patenting

The main reason why an inventor files for a patent, is without a doubt the period of exclusive exploitation the patent confers upon him. The patent gives its holder (the “patentee”) a fixed period during which he can exclude others from exploiting the patented invention. This well-defined term and scope of protection provides the patentee with legal certainty.

Third parties who wish to practise the invention, can be authorised by the patentee to do so: the patentee can license others to exploit the patented invention in return for license fees or ‘royalties’.4

The grant of a patent for an invention can be used as an advertising tool. The average consumer doesn’t know that sometimes, inventions that do not meet the patentability requirements, obtain a patent.5

The holding of a patent, or a portfolio of patents, can be a signal to potential investors.

Owning a patent (portfolio) may enable the holder to cross-license its patented inventions with other inventors/companies6.

ii. Disadvantages of Patenting

In order to obtain a patent, the inventor must disclose information about the invention. In exchange for the exclusive right, the patentee must teach the invention to the public so that when the period of exclusivity comes to an end, anyone can exploit the invention. Then, the patentee loses his monopolistic position and competitors can freely use the invention to their benefit.

A patent doesn’t come free. The person who applies for a patent must pay an application fee. Also, when the patent has been granted, the patentee must pay an (annual) maintenance fee. When protection is sought in more than one country, this can be a very expensive venture. In today’s international trade setting, a company very often wants protection in multiple jurisdictions for its inventions.

4 In some years, Texas Instruments, after shifting to an aggressive licensing programme, even had more income from its licensing fees than from its business operations. 5 This is due to the fact that in many countries, the examination of a patent application is merely formal and no serious investigation of the patentability of the invention is done. This is also why it is difficult to argue that the number of patent applications correlates with the degree of innovation. The number of patent applications and issuances can at best be seen as one indicator of the degree of innovation, to be used with caution. 6 In 1999, Dell used its patent portfolio as collateral in a $16 bilion cross-licensing deal with IBM.

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b. The Pros and Cons of Trade Secrets

Trade secrets can be defined as any kind of business information that is actually or potentially valuable - provides a competitive edge - to its owner, is not generally known nor readily capable of being nosed out by the public, and for which the owner has made reasonable efforts to keep secret. No procedural formalities are required in order for them to be protected and there is no limit on the period of time they can be protected. The protection of trade secrets does not arise from an intellectual property right, rather it is the result of the secret nature of the information.

Though the conditions for information to be considered a trade secret vary between jurisdictions, art. 39 TRIPS brings to life some general standards: the information must be secret, it has commercial value because it is secret and the information must have been subject to reasonable measures by the rightful holder of the information for it to remain secret. In some legal systems, trade secret protection falls within the scope of unfair market practices or unfair competition. Other legal systems have provided specific trade secret provisions or developed trade secret protection through case law. Beside these rules, also general law provides protection for trade secrets. Trade secrets can be protected contractually, by non-disclosure agreements and wider the principle of good faith and fair dealing.7 In tort law, trade secrets are protected against third parties who apply illicit measures to discover the trade secrets. Yet, attempting to discover trade secrets is generally not an unlawful act, bearing in mind the principles of freedom of competition, freedom of information and freedom to imitate.

Seeing the broad scope of subject matter of trade secret protection, trade secrets can concern patentable inventions. Simplistically put, an inventor has to make a choice between applying for a patent and keeping his invention secret.

i. Advantages of Trade Secret Protection

First and foremost, trade secret protection is - unlike patent protection - not limited in time. As long as the information is not revealed to the public, the protection remains. Beside this main advantage, the trade secret offers other advantages: they have immediate effect (patent law: protection upon issuance of the patent, not the moment of inventing or filing the application for a patent); no formalities apply (no disclosure of the information to which the trade secret relates has to be disclosed to a government body), and thus no registration costs are incurred. However, one should always keep in mind the costs of keeping information confidential (e.g. fragmenting information, restricting access to information, costs of contractual arrangements, etc.).

7 Note that there are important differences between jurisdictions in accepting the application of a principle of good faith and fair dealing.

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ii. Disadvantages of Trade Secret Protection

Unlike patent law, trade secret protection does not provide the holder of an exclusive right to exclude others, who indepently came to the same invention, from exploiting the invention. On top of the lack of exclusive protection, trade secrets are more difficult to enforce than a patent. The danger in keeping an invention as a trade secret, is of course that when the secret is revealed, third parties have access to it and may use it at will. Knowledge can not be returned or ‘unknowledged’. When someone else develops the same invention by legitimate means, he may opt to patent it and then exclude parties who previously used the invention but kept it as a trade secret, from exploiting it. Most jurisdictions however have implemented a prior use exception which allows a third party - under certain circumstances and conditions - to continue the use of an invention when he used it before the filing of a patent application for the same invention.8 This is generally based on fairness. Prior use can be very hard to prove in court, a thorough keeping of records by an inventor is extremely important.

c. Strategy - Choosing the Correct Way to Protect an Invention

i. To Patent or not to Patent?

Patents are extremely important strategic tools for many companies. A patent can be used defensively, i.e. to protect the own investment, or offensively, i.e. to press competitors out of the market. Whether it is useful/desirable to patent an invention depends on a number of factors and is to be assessed on a case by case basis. Elements to keep in mind when deciding whether or not to patent are for example:

- Patenting involves - high - costs (application and maintenance fees).

- The subject matter of the patent has to be disclosed, there is no exclusive protection for secret information.

- When an invention is probably going to lead a very short life, it is probably not useful to file for a patent, keeping in mind the considerable time, during which no protection is enjoyed, between the filing and issuance of the patent.

- Will the inventor/company exploit the invention himself or does he want to obtain license fees through licensing the invention? When the latter is the case, patenting is favorable. A licensee will most likely want the (legal) certainty and monopoly position a patent offers.

- Is counterfeiting the product to which the patent relates easy and cheap or is expensive machinery required to uncover the invention or to copy the product? When competitors have

8 For an in-depth and comparative analysis, see http://www.uspto.gov/ip/global/prior_user_rights.pdf.

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to make huge investments to simply copy the patented product, it might be safe to assume they will not make those investments. Patenting is then superfluous.

- Is the invention interesting enough to apply for a patent? When it is not, making the invention public is a smart move: it takes away the novelty if another person/company who came up with the same invention would wish to patent it.

Not only the question whether to apply for a patent, but also the question where to apply for a patent is important in business strategy.

ii. Patent or Trade Secret?

The choice between patenting an invention or keeping it secret is often a difficult one that has to be made on a case by case analysis and involves an assessment of many factors. Both forms of protection have their positive and negative aspects.

When does the balance shift in favour of a patent and when in favour of secrecy?

Sometimes, the choice between patenting an invention or keeping it as a trade secret is easily made. Patents are clearly favoured over trade secret protection when the invention relates to a product that is self-revealing or that can be reverse engineered. Neither does a trade secret have much to offer when dealing with an invention that can be expected to be invented independently by a third party. Trade secret protection trumps seeking patent protection when the use of the invention will be of very short duration. The procedure to obtain a patent may take so long that the invention is no longer of any use upon the time of issuance. When it is likely that the invention will have a long life-span - longer than the “short” term of patent protection - in terms of usefulness, and it can be be maintained as a trade secret during that time, trade secret protection is favoured. Some say patent protection is only sought when the invention can not reasonably be kept secret, so inventors will not apply for a patent and thus have no obligation to disclose their invention. This way, the goal of patent law (progress of innovation and thus society by disclosure) is not reached.

Often, however, the choice between the two protective systems is not a clearcut one, and depends on many factors: not only the considerations discussed in the sections on the advantages and disadvantages of patenting and of trade secrets and the section on the question whether or not to patent, but also commercial and other legal elements may come into play. Surveys held toward the end of the previous century show that commercial research and development laboratories in most industries regard alternative mechanisms, such as secrecy and lead-time, to be more effective than patents.

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B. Obtaining a Patent

1. What is Patentable?

Patents protect inventions. A patent confers a temporary, exclusive right for any invention that has a technical character and that is new, non-obvious and susceptible of industrial application.

a. Invention

Although central in patent law, no univocal definition of ‘invention’ has ever appeared. Only the requirements which an invention must meet in order to be patentable have been defined. A patentable invention can be defined as a technical creation, i.e. a new product or a new process that contributes to the current level of science (i.e. the prior art). The invention offers a solution to a technical problem.

A discovery is not the same as an invention. To discover is to find a pre-existing - though previously unknown to man - principle or natural law. A discovery can not be patented. However, inventions are often, if not always, based on discoveries. Critics say it is unfair that inventors receive protection for their inventions under patent law, while the person responsible for the discovery of the underlying theory/principle/formula/…, which can be much more important and can have required much more skill/investment/…, is not protected at all. Others say that protecting discoveries is impractical and undesirable (because of the wide scope of applications a discovery can have). Also excluded from patentability, are e.g. theories, ideas and mathematical formulas, even though they might meet the material requirements of newness, usefulness and non-obviousness. They resemble discoveries and are not solutions to technical problems.

The absence of a fixed definition for ‘invention’ poses no real problems, since the constituting elements of any proposed definition cover the material requirements for the invention to be patentable. In litigational practice, nullity is never declared because of a lack of ‘invention’, but because of the non-fulfilling of the material requirements by the invention.9 Moreover, a fixed definition might preclude inventions in new areas from patentability.

9 S. MOMBAERTS, “Nietigheid van octrooien. Actuele oplossingen voor eeuwenoude problemen”, Jura Falconis Jg. 46, 2011-2012, nummer 4, 629.

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b. Material Requirements for Patentability of an Invention

i. Novelty Requirement

In order to be patentable, an invention has to be new. The novelty requirement requires the invention to be novel over the state of the art or “prior art.” The prior art comprises all information that has been made accessible to the public in any manner (i.e. information that has been publicly disclosed). Public disclosure means any communication to a person who is not obligated to keep the disclosed information confidential. A public disclosure renders an invention unpatentable if it enables the person with ordinary skill in the art to duplicate the invention. Prior art includes, but is not limited to, disclosures made in (scientific) literature, patent applications, broadcasts and on the internet. In certain cases and depending on the jurisdiction, disclosures do not affect the novelty requirement (e.g. manifest abuse). Note the existence of a grace period in the USA, which will be discussed in the section on Comparative Patent Law.

ii. Non-Obviousness Requirement

An invention fulfils the non-obviousness requirement when it does not obviously follow from the prior art, assessed from the viewpoint of a “person with ordinary skill in the art” (i.e. a theoretical standard generally referring to a person with a fair level of experience, but who is not recognised as a leader in the field). There has to be an “inventive step”, an invention is an unusual mental achievement. Judging whether or not an invention is obvious in light of the prior art (here disclosures in patent applications are excluded from the prior art since they are kept confidential and are thus not known by the person with ordinary skill in the art), is one of the most complex aspects in the patenting procedure. With the benefit of hindsight, an invention is quickly regarded as obvious. The assessment of the obviousness, however, has to be made according to foresight. The manner in which the invention was conceived is irrelevant: whether the invention is the product of intensive research or not or ‘accidental’, if the invention meets the patentability requirements, it is patentable.

iii. Utility Requirement

As soon as a product or process can be produced or applied industrially, it is deemed to be susceptible of industrial application and thus deemed to meet the utility requirement. Industrial production or application has a broad scope and means production or application anywhere in the economic trade. Note that this is not an exploitation requirement. One might ask himself why in the world anyone would want to patent a useless invention anyway. It is highly unlikely that the costs of obtaining a patent for a useless invention would ever be recovered.

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c. Exclusions

Some jurisdictions - e.g. Belgium, The Netherlands - exclude (among certain other types of inventions) medical procedures10 (this exception does not encompass pharmaceuticals) regarding the human body from ‘industrial application’. These inventions are thus not patentable. There are other types of inventions that are excluded from patentability because their commercial exploitation would go against public policy. However, it is usually fairly easy to come up with at least one appropriate use for any invention, which would make the invention eligible for a patent. Certain ‘things’ are brought outside the definition of ‘invention’, such as discoveries or mathematical formulas.

2. The Patent Application

Having regard to the fact that this thesis is not bound to a specific national law, to the many differences between jurisdictions in their respective procedures, and to the general irrelevance of procedural aspects toward the topic of the thesis, I will only discuss (universal) procedural elements pertaining to the subject of this dissertation.

a. Procedural requirements

i. Disclosure of the Invention

The application for a patent must be accompanied by a description of the invention. The description should enable the person with ordinary skill in the art to reproduce the invention without undue experimentation. The purpose of a patent is to encourage inventors to disclose their inventions - “teach” them - to the public, so society prospers. This goal can only be reached when the invention is explicitly, detailedly and fully described. Whether or not the disclosure actually serves that goal and thus justifies patent protection, will be discussed in the part Economic Analysis of the Patent System.

ii. Patent Claims

The content of the patent claims defines what is covered by the patent. They are the patent’s most crucial part: they are the enforceable part of the patent. They must be clear, concise and rooted in the description of the invention.

10 In the USA, medical procedures are patentable.

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b. Registration vs Examination

In a registration system, the patentability of an invention is not examined. Ultimately, the courts decide on the validity of a patent if and when an interested party asks for a patent to be declared null and void by the court.

In an examination system, the patentability of an invention is scrutinised, and a patent will only be issued when the invention meets all material requirements. The possibility of an opposition procedure may complement the system.

Obviously, a registration system is administratively cheaper than an examination system. However, the market may be burdened with the cost of monopolistic positions that should not have been granted.

An examination system is believed to avoid worthless, conflicting and invalid patents, which is beneficial to society and bona fide owners of valid patents. Provided that courts and patent administrations apply the same standards of patentability, an examination system reduces (the extent of) patent litigation. It also prevents the mala fide registering and selling of patents that are similar to already registered patents.

Today’s liberal approach to patent issuance11, and the presence of an abundance of patented inventions for which a patent should actually not have been granted, make it seem that ‘everything’ is patentable12.

C. International and European Dimension

1. International Dimension

There is no such thing as an international or world patent. There is no government body granting worldwide protection for inventions. Knowledge knows no boundaries, the patent system does. Though there are jurisdictional differences in patent laws, the basic rules and principles are roughly identical due to international agreements.

11 E.g. in The Netherlands, the examination has been completely abolished and a novelty research has become optional. 12 From patent statistics worldwide, it can be concluded that so many patents are filed that examination procedures have come under pressure. For more patent statistics, see e.g. http://www.epo.org/about-us/annual-reports-statistics/statistics.html or www.wipo.int/ipstats/en/wipi/. Patent applications and grants have proliferated (with a boom in 2012), with a strong growth in filings within the food chemistry and digital communication technology industries. The EPO records among top application fields: medical technology, electrical machinery, digital communication and computer technology. The businesses of the top applicants and patentees are accordingly situated in those fields. Methodological differences between EPO and USPTO statistics requires cautious data analysis. USA data indicates a very strong correlation between the number of granted patents and litigation. It is not clear, however, wether this correlation implies causation: do existing patents drive litigation, or does vice versa the desire to prosecute potential infringers drive the filing for a patent, or are there other elements of causation? See Darren Smyth’s post on IPKat: http://ipkitten.blogspot.be/2013/06/more-on-us-patent-litigation- statistics.html?m=1. Note the existence of and litigation by non-practicing entities (“patent trolls”) in the USA. The USPTO has a much higher rate of patent grantings to applications than the EPO or JPO.

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One could apply for a patent in every country he wants protection for his invention. This is an administrative hassle, not to mention very expensive. To meet the need for administrative streamlining, the Patent Cooperation Treaty (the Washington Treaty) was agreed upon. The PCT centralises the international application for a patent. The examination of the novelty is concentrated and the result is disclosed to the countries where the applicant seeks protection (i.e. the designated countries). After the international application, the different national procedures of patent granting are followed. The end result is a bundle of national patents, each providing protection in the jurisdiction of the granting government. The Union Treaty of Paris (1883) concerning industrial property, installed the in practice very important priority year. It also banned discrimination and put up a minimum level of protection.

Perhaps most importantly, the binding TRIPS-agreement imposes on the parties to the agreement minimum standards of patent protection to be implemented in their national patent laws.

2. European Dimension

a. European Patent Convention

As the Washington Treaty, the Munich Treaty (i.e. the European Patent Convention) does not install a ‘universal’ European patent. The end result here too is a bundle of national patents. The convention centralises both the application for as the granting of patents for its member countries. Once the patent has been granted for the chosen jurisdictions, the national rules of those countries apply. The EPC sets up a flexible, yet complex and costly system. The procedure to obtain a ‘European’ patent, follows the examination system. The inventions for which a patent is granted are scrutinised on their patentability. The delivered patents are thus considerably strong.

b. European Union

i. The European Patent with Unitary Effect

The first rules on a true European patent - as opposed to a bundle of national patents - were integrated in the Treaty of Luxemburg, also known as the Community Patent Convention. The CPC has never entered into force. In 2012, a “patent package” was agreed upon by 25 member states (Spain and Italy being the odd ones out) to install a “Unitary Patent” or “Community Patent”. The package consists of two regulations and an international agreement. The first regulation concerns the unitary patent protection, the second concerns the translation arrangements for said protection. The regulations entered into force on 20 January 2013. They shall only apply, however, from the entry into force of the

13 international agreement on a unified patent court, upon ratification of the agreement by at least 13 member states, including Germany, France and the United Kingdom. Once in place, inventors/companies will be able to obtain a patent providing EU (minus Italy and Spain) wide protection, governed by EU rules, with its own competent patent court. National law is lifted completely from the Community Patent system.

The mere setting up of this system, proves the absence of questioning the overall beneficial effect of a patent system by the EU policy makers.

ii. EU Rules on Patent Law

Other EU rules on patent law are restricted to specific topics: the supplementary protection certificate regulations and the biotechnology directives. Also the regulation concerning transfer of technology has its impact on patent law: it covers nearly all patent licensing contracts.

D. Comparative Patent Law - Selected Topics

As I mentioned before, patent law has greatly been harmonised by international agreements. There are, however, still differences between jurisdictions. This is mainly explained by the fact that the agreements provide only minimum harmonisation. Also, concepts used in the agreements are not universally interpreted in the same way. Comparative legal doctrine generally compares the patent systems of Europe (EPC), the USA and Japan.

The most notable difference lies in the different approach to the definition of ‘patentable invention’. In Europe, the invention is required to be of technical character. In the USA, it suffices that the invention is useful. A well-founded justification for the requirement of a technical character is absent, and even in the European practice, the requirement seems to be rather formal.

Another point of divergence between Europe and the USA and Japan is the long list of exceptions to what is a patentable invention in the EPC. However, the words ‘as such’ in the EPC - and national patent laws - restrict the scope of the stated exceptions. For example, software is excluded ‘as such’ from patentability. This does not mean that software can not be patented in Europe. Patent attorneys try to describe the software invention as technically as they can, and even the European Patent Office sometimes goes along with those descriptions13, resulting in a quite similar software patenting practice in Europe, the USA and Japan. A similar story can be told about the patenting of biotechnological inventions.

13 Reducing the technicality requirement of patentable inventions to a mere formal requirement.

14

There are of course procedural differences between jurisdictions:

- Until recently, patents in the USA were granted to the first-to-invent. In 2013, with the America Invents Act, the USA has adopted a first-to-file principle as in Europe and Japan. A first-to-invent principle does not encourage an inventor to patent his invention since he has the rights to the patent even though he is not the first to apply for one. Consequently, less inventions would be disclosed to the public through patenting. An objection to the first to file system is that it allows knowledgeable people to guess where technology is going and to file patents on inventions that cannot be exploited (yet).14

- Some countries (e.g. USA, Canada, Japan) have a so called ‘grace period’. A grace period allows an inventor to file for a patent during a certain time period after he made his invention known to the public. Grace periods are non-existent in Europe. They are not consistent with the patent law purpose: the invention is already disclosed to the public, ergo, the granting of a patent is no longer necessary to foster societal progress. They are however equitable toward the inventor.

- Patent applications are generally published 18 months after the filing date. In the USA, however, there are exceptions to the rule. Publishing of patent applications that did not result in the granting of a patent can have their use, despite the fact that there were probably good reasons for not granting the patent. Japan is most strict about disclosure.

- Europe and Japan have an opposition procedure, the USA has a re-examination procedure.

- Obtaining a European patent is much more expensive than obtaining an American or Japanese patent. This is - among other reasons - due to translation costs. The new unitary patent tries to reduce these high costs.

14 L. THUROW, “Needed: a new system of intellectual property rights”, Harvard Business Review, Sept - Oct 1997, 98.

15

PART II. HISTORY OF PATENT LAW

I will first mention the origins of intellectual property (section A), to move on to the origins and evolution of patent law (section B). Then I review the history of economic opinions on patent law (section C). Finally, I discuss the relationship between patent law and innovation, based on historical evidence (section D).

A. Early Notions of Intellectual Property

One of the earliest references to protection of intellectual creations that we know of are found in Deipnosophistae, written by the Greek Athenaeus in the 3rd century A.D. Athenaeus writes that from around 500 B.C, the winning cook - inventor of a new dish - at a culinary competition at Sybaris, was granted an exclusive right, limited to 1 year, to prepare his dish. There are some other works from Greek and Roman times that reveal some debate on intellectual property, e.g. ownership of a painting and ownership of the table on which the work was painted.15 These works mainly cover copyright topics and are generally believed to be atypical. To the extent of our knowledge, there were no intellectual property institutions or conventions in the ancient times. The ancient Greeks regarded the useful arts as inferior. Although inventions were made (e.g. Archimedes), they were seen as mere frivolities, not befitting a philosopher.16 The true origin of the patent system as we know it, will accordingly not be found in this period.

However, from these times until the flourishing of Florence (Italy), many privileges and royal favors were granted, some of which had connection to intellectual products.17 An interesting example is a ‘diploma’ granted in 1105 by Count William of Mortagne to a Norman abbot, who wished to set up windmills. Until we find an earlier mention of the windmill, we may believe that this grant was tied to the invention of the windmill.18

The prize of ‘first person recorded awarded with a real patent’ goes to the architect Filippo Brunelleschi. The State of Florence granted Brunelleschi with an exclusive right, limited to 3 years, to build and use his invention, on 19 June 1421.19 The statute granting this exclusive right recognised the

15 A. MOORE, “Intellectual Property”, Stanford Encyclopedia of Philosophy, 8 March 2011, http://plato.stanford.edu/entries/intellectual-property/. 16 M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 143. 17 A. MOORE, “Intellectual Property”, Stanford Encyclopedia of Philosophy, 8 March 2011, http://plato.stanford.edu/entries/intellectual-property/. 18 M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 144. 19 His invention being a barge-and-hoisting device for transporting heavy loads on rivers.

16 rights of inventors to the fruit of their intellectual efforts. Moreover, it included an incentive system that became an essential feature of the Anglo-American intellectual property protection. However, it appears the patent statute of Florence issued only the one patent to Brunelleschi.20

B. The History of Modern Patent Law

1. The Birth of the Patent System

The granting of real patents became quite systematic in Venice from 1450. The Venetian government had long before been interested in inventions. In 1474, Venice layed the foundation of the first lasting patent institution with a statute that set up a surprisingly sophisticated patent system.21 Venice’s main industry was glass-making, and secrecy was key. For Venetian glass-blowers, practising the art abroad was punishable by death. Yet, with glass being very desired, many Venetian glass-blowers emigrated with the prospect of profits. In doing so, they took their knowledge of the Venetian patent system with them, and convinced foreign governments to set up a similar system of protection in return for the introduction of their manufactures or techniques.22 Patents spread over various countries in the 16th century,23 many of them were granted for glass manufacture and the majority of the first patentees were Italian. Almost every European country granted privileges to inventors, or better, to innovating craftsmen and entrepreneurs, throughout the 16th and 17th century.24

20 Due to - among other reasons - guild influence. A. MOORE, “Intellectual Property”, Stanford Encyclopedia of Philosophy, 8 March 2011, http://plato.stanford.edu/entries/intellectual-property/. 21 The statute recognised inventors’ rights, implemented an incentive mechanism, a term limit of ten years and compensation for infringement. The state its right to free use. C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 5. The invention of printing led to a new kind of grant, that we now know as ‘registered design’. M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 145. The printing press itself however, invented by J. Gutenberg, was created before patents were available (1450), proving that world-altering inventions are possible without the promise of a patent. 22 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 5. One can already argue that in this way, the setting up of a patent system had nothing to do with stimulating innovation or incentivising inventors. Patent protection was sought by a settled industry to keep competitors off the market. More on this in the part on Economic Analysis. 23 Patent granting was widely done by German princes, some of whom applied a well-reasoned policy for granting priveleges: they considered utility and novelty and the burden that would be imposed on society by excluding others from using these inventions and by enabling patentees to charge higher prices. Some of the privileges were for new inventions, others for imported crafts, some for limited periods, others everlasting. F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 2. King Henry II of France introduced the principle that the patentee must fully disclose his invention, so that the public may benefit from the invention when the protection term expires. M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 145. 24 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 1. Note that privileges for invention/innovation were only one aspect in the wider field of privileges, licenses, charters, etc.

17

The type of protection offered by a patent or privilege in that time, can be divided in two categories. The first type of privilege granted protection against imitators/competitors, i.e. granted a monopoly position. The second type granted protection against guilds’ restrictive regulations, i.e. allowed doing what was prohibited under existing rules, thus reducing existing monopoly positions and increasing competition. This second type is sometimes credited with liberating industries from restrictive regulations by guilds and local authorities and with aiding England’s industrial revolution.25

Often, however, privileges were granted not as protection or reward for inventors or innovators, nor as exemption from restrictive regulations, nor to promote industrial development in general, but simply as profitable monopoly rights to favorites of the crown or benefactors of the treasury.26 In England, the malpractices were widespread and because of the harmful effects they inflicted on tradesmen and consumers, led to discontent among the people. To put an end to the abuse, the Statute of Monopolies, which is the basis of the modern (British) patent law, was enacted in 1624. The statute prohibited the granting of exclusive rights to trade by the Crown, except for patent monopolies to the “first and true inventor” of a new manufacture.27 This emphasis justifies calling the statute the “Magna Carta of inventors’ rights”.28

2. The Diffusion of Patent Law

Many foreign lawmakers drew inspiration from the English Statute of Monopolies. American states as Massachussets and South Carolina were the first to follow England in adopting patent law. In 1787, the US Constitution gave Congress the power to promote the progress of science and useful arts “by securing for limited times to […] inventors the exclusive right to their […] discoveries.” In 1790, Congress passed its first patent law. The continental European countries were slower to implement patent laws: the Constitutional Assembly of France passed a comprehensive patent law in 1791 and

25 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 2. In France for example, craftsmen’s guilds persecuted innovators far into the 18th century - sometimes with severe penalties, including death. 26 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 2. 27 The principle that monopolies should only be granted for new manufactures was laid down in 1602 by Francis Bacon in addressing the House of Commons. M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 145. 28 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 3.

18 between then and 1850, most other nations followed (e.g. Austria in 1810, Belgium and the Netherlands in 1817).29

The various patent laws showed four legal philosophies regarding the nature of the rights granted to an inventor30:

- The English recognised the monopolistic character of patents. In theory, the patent was considered a grant of royal favour. In practice, however, the inventor’s claim to receive a patent was regularly allowed.31

- The Americans stressed the inventor’s legal right to patent protection, leaving the property question blank.32

- The French declared an inventor’s right in his creation a natural property, from which they derived the inventor’s right to obtain a patent.33

- Ultimately, the Austrians, opposed to the French doctrine of the inventor’s natural property right, started from a “natural right to imitate” inventors’ ideas. Inventors did not have property rights in their inventions and had no legal right to a patent. When in the public interest, the government could grant privileges to restrict the freedom to imitate.34

29 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 3. 30 Inventors could obtain patent protection, in the sense of protection against competitors, as a matter of right F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the-Nineteenth- Century-1950-b.pdf, 3. 31 Thus the right of an inventor to obtain patent protection was de facto recognised. F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the-Nineteenth-Century-1950- b.pdf, 3.The English applied a registration procedure, the state was mainly interested in obtaining the (very high) price to be paid by the inventor in order to obtain a patent. C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 6. 32 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 3. 33 This ‘extreme’ standpoint is in line with the radical French Revolution. M. FRUMKIN, “The Origin of Patents”, Journal of the Patent Office Society, 27 (3), 1945 and www.compilerpress.ca/Library/Frumkin%20Origin%20of%20Patents%20JPOS%201945.htm, 148. 34 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 3.

19

3. The Birth, Life and Death of the Patent Abolition Movement

From the coming to be of patent law, various groups35 pressed for the strengthening of the protection patents confer (e.g. to lower costs to obtain a patent, include more patentable inventions, unify the patent system - for the different Länder in Germany). The 19th century was characterised by a notion of free trade and was inspired by economic liberalism36. Provoked by the lobbying for patent system strengthening, in most European countries, a patent abolition movement37 arose. Although ideologies permeated the patent debate, the main issues revolved around the workability of the patent laws and the difficulties of reforming them satisfactorily.38

The antipatent movement was strongest in The Netherlands, where the abolitionists convinced the Parliament that “a good law of patents is an impossibility” and caused the patent law to be repealed in 1869.39 The English patent system too was highly questioned and came close to being revoked. The Economist predicted in 1869 that Britain would follow the Dutch example and would abolish patent law.40 An equally strong or even stronger pack of patent opponents was present in Germany, various trade associations, chambers of commerce, the majority of economists - and chancellor Bismarck (1868) - recommended the patent law to be abolished.41 Also in France, the ‘patent controversy’ reached its height between 1850 and 1875.42

The antipatent movement died rather abruptly in 1873, after a fierce propaganda campaign by patent interest groups. Apart from pro-patent marketing, several reasons can be invoked to explain the collapse of patent abolitionism: the great depression, the rise of protectionism43 and nationalism, and

35 Those who saw profit in a patent system: e.g. engineers and (would-be-) inventors, industrialists with a vested interest in patents and patent lawyers. 36 The chief opponents of patents have been among the chief proponents of free enterprise. F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the-Nineteenth-Century-1950- b.pdf, 1. 37 E.g. industrialists and inventors whose innovative activities were restricted by existing patent positions and economists. 38 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 5. 39 Said by Godefroi, member of the liberal party, in the Dutch Parliament. F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent- System, 4. 40 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 21. 41 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 4. The Kongress deutscher Volkswirte declared “patents of invention as injurious to common welfare” in 1863. 42 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 1. 43 The great depression and pressure from cheap US agricultural imports made public opinion turn away from an absolute free trade and free competition idea. The protectionists defeated the free traders. This is probably the strongest explanation for the disappearance of the abolitionist movement. F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp- content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the-Nineteenth-Century-1950-b.pdf, 6.

20 the acceptance by patent proponents of a principle of compulsory licensing. It is said that this compromise saved the patent system by eliminating the objection that a patent conferred a monopoly.44 Britain, although at one point coming close to do so, did not abolish its patent law, proving the Economist’s prediction wrong.45 Instead, the fee to obtain a patent was substantially decreased. Germany adopted a uniform patent law for the entire Reich in 1877. The first international patent agreement, the 1883 Union Treaty of Paris, strengthened the patentee’s position by providing measures of cross-border co-operation.46 The Treaty helped putting pressure on the Swiss, who had long rejected proposals for patent legislation,47 to enable the lawmaker to establish a patent system in a referendum in 1887, and on the Dutch, who re-adopted patent law in 1910-12.48

Since the fall of the (widespread and quite powerful) antipatent movement, patent protection has generally49 been increased in both depth (e.g. longer term of protection and patentee-favourable interpretation of the law) and breadth (e.g. increase in patentable subject matter).

4. Explaining the Growth of the Patent System

The evolution of increasing patent protection can be explained by several factors. At least in the US, a first reason is the shift from an economy reliant on first agriculture, then industry, and during the 20th century, on information processing as the primary source of income, which increased the perceived need for intellectual property protection. Thus, the US transformed from a net consumer/importer of

44 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 5. Although the principle of compulsory licensing was implemented in the Vienna World Fair’s Patent Congress resolution of 1873, the actual setting up of such a licensing system was very slow in many countries, especially the US - seeing such a principle was already proposed in 1790 in the Senate. Until today, US patent law does not provide for compulsory licenses, but they are granted under special legislation and antitrust law. 45 Lord Granville stated that the whole patent system “was unadvisable, disadvantageous to inventors, and wrong in principle”. C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 21. 46 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 22. 47 A referendum in 1882 still opposed patent legislation. Authoritative economists found patent protection “pernicious and indefensible. F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 4-5. The lack of a patent system stigmatised the Swiss as pirates and other countries threatened to discriminate the Swiss in their commercial policies. F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the-Nineteenth-Century- 1950-b.pdf, 6. Sidenote: Japan first adopted patent law in 1872, abolished it the following year, to reintroduce it in 1885. 48 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 22. 49 Some exceptions. E.g. in the US, the interbellum was characterised by an unwillingness of the courts and Patent Office to uphold or grant patents, in a reaction to anticompetitive uses by large companies of their patents. From the 1950’s, this unwillingness faded and in 1982, a Court of Appeals for the Federal Circuit was established. This latter court has been much more favourable to patentees, having a very low standard of non-obviousness and allowing generous damages (this should not be a surprise, many of the judges are former patent attorneys). W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 7.

21 intellectual goods into a net producer/exporter. The interest shifted from pirating to protection against piracy.50

Beside that economic factor, cultural and ideological elements serve to explain the expansion. A first element is the durable and widespread commitment to the Lockean labour theory, stating that a person that has created something through productive labour deserves to own the resulting product of that labour. This theory might have been more important as patent law justification in the 19th century, but social psychologists say that even today, most Western Europeans and Americans relate to the closely connected theory of distributive justice according to which a person who contributes to a collective enterprise deserves a reward commensurate with the magnitude of his contribution.51

A second element is that with the growth of classical liberalism and its notion of separation of private and public spheres, and a general distrust toward governmental involvement in the market, a patent system conferring property rights - although also government intervention - was better defensible than a government that supported particular inventors with prizes and subsidies, which was also deemed too expensive.52

A third ideological element is the way the public perceives the ‘inventor’. The western people treat (great) inventors with considerable respect. In general, the inventor’s image has worked to support and expand the patent system.53 This despite the fact that most research and development is the work and result of collaborative efforts of whole groups or departments of inventors and despite the extent to which inventive activity depends upon and incorporates the creative work of predecessors.

Combine the economic and cultural-ideological factors with the following political dynamic, and the - quite aggressive - expansion of patent law and other forms of intellectual property should not surprise. The group of advocates for (stronger) patent protection, consists (and has always consisted) of established creators, businesses with patent portfolios, patent attorneys, and so on. Their interests are similar and concentrated. The interests of persons whose position would generally deteriorate from stronger patent protection - such as consumers and newcomers on established markets with patent

50 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 5. 51 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 13. A recent example of reference to the labour and distributive justice theories in respect of intellectual property is made by Justice O’Connor to justify a narrow interpretation of the fair use doctrine: “The rights conferred by copyright are designed to assure contributors to the store of knowledge a fair return for their labour”. 52 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 7. 53 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 8-9. Note that the way we regard inventors also led to the requirement of non-obviousness, which works restrictively. People wish to reward “flashes of genius”, not mere craftsmanship.

22 holding players - are far more diluted and less considerable than the possible gain of advocates of stronger patent protection. As a result, the lobbying efforts of proponents are more frequent, better organised, brought with more intense pleading and probably with certain compensations to people who can influence the decision on stronger patent laws in favour of the patent advocates.54 The strengthening of patent law then strengthens the pro-patent industry, which becomes then more authoritative for further strengthening of patent law. In becoming stronger, the patent lobby can ask more successfully for stronger protection, again resulting in a stronger lobby. This is a trend that is difficult to stop.55

A final factor that may have contributed to the patent law expansion is the change in legal terminology used to describe the rights involved. The term “monopoly”, with all its negative connotations, was gradually supplanted by the term “property”. Also the phrase “intellectual property” was used frequently only after World War II. Legal realists claim that the shift to using the term “property” resulted in the impression that interests in inventions are fundamentally similar to interests in tangible property and should thus be similarly protected.56

54 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 9-10. Note the early example of such pro patent efforts by John Fitch, who claimed to be the inventor of the steam boat, during the week of 20 August 1787. Fitch invited at least three members of the Constitutional Convention to a demonstration of his invention. 18 August, the first draft of the intellectual property clause for the US Constitution was presented and by 5 September, the definite version was agreed upon. Coincidence? Maybe. But this is not the only example of purported influence/pressure of interest groups in patent history. 55 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 11-12. Fisher states that patent opponents should not have any illusions: “a mutually reinforcing combination of economic, ideological, political and discursive conditions makes further expansion” of patent law likely. 56 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 10-11. Fisher remarks that “the “propertisation” of the field is now well-nigh complete”. COHEN notes in his research on trademark law an interesting reasoning which I will here try to translate in terms of patent law: who by the ingenuity of his invention has induced consumer responsiveness, has created a thing of value, a thing of value is property, the creator is entitled to protection against third parties who seek to deprive him of his property. This vicious circle purports that legal protection is based on the economic value of an invention, while as a matter of fact, the economic value of the invention depends upon the extent of legal protection it receives. F. COHEN, “Transcendental Nonsens and the Functional Approach”, 35 Columbia Law Review 809, Vol. XXXV, No. 6, 1935 and http://moglen.law.columbia.edu/LCS/cohen-transcendental.pdf, 815.

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C. A History of Economic Views on Patent Law

1. From a General Absence of Economic Opinions on Patent Law before 1850

Before the patent controversy started around 1850, the patent system was not yet given special attention as to the economic effects, but some economists gave their views on governmental policies, monopolies and competition in general. Economists were mainly approving of the patent system. 57

In Britain, Jeremy Bentham said patent protection “has nothing in common with monopolies which are so justly decried.” Adam Smith argued that the temporary monopoly granted to an inventor could be justified as a means of rewarding risk and expense, although monopolies in trade “deranged more or less the natural distribution of the stock of society”, which is “necessarily hurtful to the society in which it takes place.” John Stuart Mill opined that “the condemnation of monopolies ought not to extend to patents.”58

In France, the British classical economists were followed by Jean Baptiste Say, stating that patent protection “neither harms nor hinders any branch of industry that was previously known. The costs are paid only by those who do not mind paying them; their wants […] are not less fully satisfied than before.” Simonde de Sismondi, named “the dissenter”, had the extreme view that “the result of the privilege granted to an inventor is to give him a monopoly position in the market against the other producers in the country. As a consequence the consumers benefit very little from the invention, the inventor gains much, the other producers lose, and their workers fall into misery” and wanted “all inventions immediately made known and immediately subjected to imitation by all the competitors of the inventor.” On the other side of the spectrum, the majorats59 subscribed the view that rights in intellectual goods should be perpetual, assignable and indefinitely hereditary. Proudhon criticised this last doctrine, but regarded the granting of temporary industrial monopolies to inventors as a “necessity” for societal progress, finding a temporary monopoly the most effective stimulus to reach this goal.

In Germany, more reservations and even objections were made toward the patent system. Before Bentham and Smith stated their opinions, Johann Heinrich von Justi argued against patent protection on the grounds that the monopoly position it conferred could not be regarded as beneficial to the welfare of the country, although he was convinced that rewarding inventors - and thereby encouraging new ventures - was important. Ludwig Heinrich Jakob opined that patents should only be granted for

57 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 6-7. 58 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 7. 59 In Belgium, the most active proponent of perpetual patent protection was J.-B.-A.-M. Jobard, finding competition the cause of poverty and holding that tariffs and patents - both restrictions on competition - were most important in fostering progress.

24 inventions that had been expensive and “could not just as easily have been made by others.”60 Johann Friedrich Lotz, stating that it might be “fair and economically advantageous for a nation to compensate the inventor […] for the efforts and possibly considerable expenses”, thought that it was “very questionable whether monopolisation of his invention is the right kind of compensation”. More favourable to patent protection was Karl Heinrich Rau, finding that although “some important inventions are made by accident”, many inventions were the product of serious effort, and one “would not make such sacrifices if he could not hope for a period of protection from encroachment by competitors in the use of his invention.”61

2. To an Explosion of Discussion on the Patent System in the Second Half of the 19th Century

From the discussions between the patent system proponents and opponents (before but mainly) during the patent controversy (1850-1873), four main arguments - all criticised by the opponents - to justify the patent system can be derived.62 These arguments are used up to today. The first two arguments are rooted in ethical grounds. The third and fourth argument are rooted in economic grounds. They relate to the public interest and to offering incentives, respectively to invent and to disclose.

The first argument, based in “natural law”, is that an inventor has a natural property right in his ideas. The unauthorised use of those ideas by others is seen as theft. Society is morally obligated to recognise and protect property rights. Essentially, property rights are exclusive rights, thus exclusivity in the exploitation of a patented invention is the only appropriate way to protect the property rights of the inventor.63

The second argument, the “reward-by-monopoly” thesis, is that it is required by justice that society offers inventors a reward for their services, proportionate to their social usefulness. The most appropriate way to make sure that inventors receive a reward commensurate with their services to society, is by granting them exclusive rights for their inventions.64

60 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 7-8. 61 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 8. 62 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 21. 63 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 10. 64 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 10.

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The third argument, the “monopoly-profit-incentive” thesis, holds central that industrial65 progress benefits society. Inventions and their commercial application are necessary to secure industrial/technological/societal progress. However, in order to reach an adequate level of inventive and innovative activity, inventors and venture capitalists need a prospect of possible profit-yielding of their (investment in) inventions that makes their efforts and (financial) risk worth their while. The proponents of this argument state that the most effective and least costly way for society to incentivise inventors to innovate and capitalists to invest in that activity, is allowing them to have a monopoly position by patent rights.66

The final argument, called the “exchange-for-secrets” thesis, starts from the same central idea - industrial/technological progress benefits society. To secure an adequate level of progress, new inventions need to become public knowledge. When protection against immediate imitation of an innovation is absent, the inventor will keep his invention as a trade secret, which is detrimental to society. Society should thus incentivise inventors to disclose their inventions, so others can use it in the future and build upon the idea. The best way to ensure public disclosure of the invention by the inventor is by offering him exclusive patent protection, for a limited period of time.67

3. Absence of Economic Research on the Consequences of the Patent System

With the demise of the antipatent movement, economists no longer turned attention to the usefulness of the patent system. In 1958, Fritz Machlup concluded that on the basis of the knowledge at that time, no economist could possibly state with certainty that the patent system confers a net benefit or a net loss upon society. He held that “If one does not know whether a system “as a whole” (in contrast to certain features of it) is good or bad, the safest “policy conclusion” is to “muddle through” - either with it, if one has long lived with it, or without it, if one has lived without it. If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.”68 Still, patent protection - however not proven that the effects are overall beneficial to society - has been nothing but expanded. Until recently, (intensive) research into the consequences of patent laws has

65 Now, for the western civilisation, ‘industrial’ progress should be replaced by ‘technological’ progress. 66 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 10. 67 F. MACHLUP and E. PENROSE, “The Patent Controversy in the Nineteenth Century”, The Journal of Economic History, Vol. X, No. 1, May 1950 and http://c4sif.org/wp-content/uploads/2010/09/Machlup-Penrose-The-Patent-Controversy-in-the- Nineteenth-Century-1950-b.pdf, 10. 68 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 79-80.

26 been largely absent. However, probably sparked by increased patent litigation and the discovery of abuses of the system, along with the absence of evidence that patents are overall beneficial to society, more and more economists have started to question and investigate the purported beneficial effects of the patent system.

D. Analysis of Historical Evidence of the Relationship Patent Law - Innovation

Innovation fosters progress, and progress can be described as economic development. The role patents play in fostering economic development, is highly controversial and the relationship of patenting to technological progress is still obscure. In the absence of systematic economy-wide data, the rate of innovation is often measured by the number of patent grants. While this may give a first clue about the amount of innovative activity, it is flawed for several reasons. For example, measuring the rate of innovation by the number of granted patents does not take into account innovative activity that occurs outside the patent system.69 Another problem with this parameter is that patents are often granted for inventions that can hardly be considered innovative.

It is an extremely difficult exercise to determine the effect of adopting or strengthening patent laws. The impact has to be assessed on both a micro- and a macroeconomic level and many variables need to be taken into account. That is why few economists venture into such research and take peace with theoretical models. Historical data such as entries for world fairs, patent office documents and general economic factors (e.g. evolution of gross domestic product), however, can provide a basis to estimate innovative activity both inside and outside the patent system, thus revealing information on the effects of patents on innovation and thus of patents on economic development.

1. Patents and the British Industrial Revolution

The adoption of the Statute of Monopolies in Britain is sometimes seen as the main facilitator of the industrial revolution70 that led to Britain’s economic predominance in the world.71 Others are less

69 Survey data for the late twentieth century indicate that commercial R&D laboratories in most industries regard alternative mechanisms - e.g. secrecy or lead-time (i.e. being the first to offer a new product to the market) - to be more effective than patents. This indicates that patents may in fact play a relatively limited role in creating incentives to invent and innovate. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 9 with references there and P. MOSER, “Innovation Without Patents - Evidence from World Fairs”, 2011, http://ssrn.com/abstract=930241, 2. Another example of innovative activity outside the purview of the patent system is collective invention. 70 For an overview of recent literature on the industrial revolution, C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 1-2 and references there”. 71 See e.g. D. NORTH and R. THOMAS, The Rise of the Western World: A New Economic History, Cambridge, Cambridge University Press, 1973, 155-156, who develop a post hoc ergo propter hoc reasoning: the industrial revolution took place after the adoption of a patent system, so the industrial revolution took place because of the patent system: “by

27 convinced of a direct causal link between patents and the industrial revolution and opine that it is at least possible that even without the patent system, the British economy might have developed just as rapidly as it did.72 Recent research revealed a different than traditionally thought nature of the British industrial revolution and entailed a reassessment of the role the patent system played in the process of the industrial revolution. Technology exhibitions and fairs data during the industrial revolution period indicate that only a minority of innovations were patented, suggesting that the majority of innovations occurred outside the patent system.73 Also, elements of the patent system itself provide information about its role: obtaining a patent was (ridiculously) expensive;74 between 1750 and 1829, most judgements were disadvantageous to patentees, only from 1830, this rose to 76 % of judgements in favour of the patentee;75 there was enormous legal uncertainty about the validity of a patent.76

Of course the patent system had a strong relationship with industrialisation. However, the statement that patents caused the industrialisation, appears to be incorrect. The patent system was as much related to investment and capitalism as it was to inventivity and creativity.77 MacLeod and Nuvolari even go as far as to consider that it might have been industrialisation that promoted patents and that an oligarchic patent system was created by an oligarchic society.78 This is in line with Boldrin and Levine’s explanation of the industry lifecycle, and when patents become important (infra, IV.A.1.e). It is said that in the absence of a patent system, venture capital to develop and commercialise more capital-intensive inventions is harder to find. Investors perceived the patent system as an institution that permitted them to manage their investment and to exclude unauthorised users/competitors.79 However, opposite to the innovation incentives, it should be considered that patents may have discouraged follow-up inventions.

1700…England had begun to protect private property in knowledge with its patent law. The stage was now set for the industrial revolution.” 72 See e.g. D. GREASLY and L. OXLEY, Patenting, intellectual property rights and sectoral outputs in industrial revolution Britain, 1780-1851”, Journal of Econometrics, Vol. 139, issue 2, 2007, 340-354 and http://www.sciencedirect.com/science/article/pii/S0304407606002181. 73 P. MOSER, “Innovation Without Patents - Evidence from World Fairs”, 2011, http://ssrn.com/abstract=930241, 16. Moser notes that this is especially striking considering many unpatented innovations were probably not entered in the exhibitions out of fear of imitation. See also P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 18. 74 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 8. 75 H. DUTTON, The Patent System and Inventive Activity during the Industrial Revolution, Manchester, Manchester University Press, 1981, 79, available at google books (partly). 76 See M. BRUNEL’s statement in Select Committee on Patents, Report from the Select Committee Appointed to Inquire into the Present State of the Law and Practice Relative to the Granting of Patents for Inventions, British Parliamentary Papers, 1829, III, 454, 486: “I might as well toss for the fate of a patent”. 77 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 4. 78 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 28. Lord Chancellor Kenyon - although in favour of Boulton and Watt in 1799 - was struck by the fact that “there was a great deal of oppression of the lower orders of men from patents, by those who were more opulent.” 79 See H. DUTTON, The Patent System and Inventive Activity during the Industrial Revolution, Manchester, Manchester University Press, 1981, 151, available at google books (partly): “Few capitalists would invest in invention without the protection of a patent. Inventing was a risky activity and this kind of protection was the only realistic way of appropriating a return sufficient to cover the cost of producing and developing inventive output.” Consequently, the patent system was formed by and shaped according to their interests.

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MacLeod and Nuvolari contend, based on evidence of widespread inventive activity outside the purview of the patent system, that, notwithstanding the considerations mentioned in the previous alinea, British inventors would have continued to invent if patent protection had been absent. They maintain that, since most of the inventors ignored the patent system in the 18th century, it is doubtful that Britain would have seen less inventive activity in that period if there had not been a patent system.80

Inventive activity that takes place outside the patent system is however highly uncatalogued. Thus, detailed quantitative assessments of the amount of inventive activity undertaken outside the coverage of patent protection remain speculative.81

For example, many inventions of an incremental nature are not patented. Incremental improvements are however widely seen as of crucial importance in both histories of industrialisation and modern empirical studies on innovation. Various flows of incremental innovations were of high significance in the development of the high-pressure engine for western steamboats in the US during the early 19th century.82 The cumulative effect of the many minor advances resulted in a rate of productivity growth without parallel in the transport technology of the period.83

In the agricultural sector, technological advances, although largely absent in the patent records, led to increases in yields of wheats and other crops. The number of patents for improvements in e.g. drainage, manures and seeds, was not at all commensurate with the overall progress in this sector. A parallel absence of patents and increase in gains are reported from selective breeding of livestock. The technical advances in the farming sector were more often rewarded with prizes from agricultural societies or with copyright protection adopted in agrarian treatises than with patents. The progress in the agricultural sector made possible that more and more of the work force could migrate to the industrial and service sectors.84

80 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844,. They acknowledge that the industrial revolution might not have happened exactly as it did in the absence of a patent system, but the historical (and geographical) context implies that the industrial revolution would have occurred in some form more or less at the same time, most probably in Britain. See also R. ALLEN, The British Industrial Revolution in Global Perspective, Cambridge, Cambridge University Press, 2009. 81 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 14. 82 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 15 and references there, 17. E.g. the stream of innovations in machine tools - invented in workshops of highly skilled craftsmen, who remain anonymous and undervalued - that facilitated the cutting and shaping of metals and that opened the way for mass production. See also reference to L. HUNTER, Steamboats on the Western Rivers : An Economic and Technological History, Cambridge MA, Harvard University Press, 1949, 121-80. The innovations in the high-pressure engine too were a product of collective invention. 83 J. MAK and G. WALTON, “Steamboats and the great productivity surge in river transportation”, Journal of Economic History, 1972, 619-40, cited by C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844. 84 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 15, and references there.

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Even fewer patents are found in the mining industry, although growing in economic importance and its output rapidly increasing in both volume and value. The few patents that were applied for and obtained were for solutions to strictly mechanical problems that were visible on the surface, easily described and capital-intensive.85 But even inventions of this type often stayed outside the patent system: in response to the extended patent for the separate condenser of James Watt’s steam engine, mining engineers in Cornwall renounced the patent system. The share of Cornish steam-related patented inventions fell drastically in the first half of the 19th century. Curiously, this is the period in which Cornwall gained predominance in steam engineering, starting with Trevithick’s notable unpatented invention of the high pressure steam engine and continued through diffusion of best- practice techniques - e.g. publications in Lean’s Engine Reporter.86

The mining industry was not the only industry in which engineers tended to share their inventions. Innovations in communications and transport87, generally identified with the industrial revolution, are largely absent from the patent records. Other absentees in the patent records are for example the London clock and instrument makers. It should be noted that secrecy was probably as widely applied as or even more than collective invention.88 Other notable inventions outside the purview of the patent system are e.g. Crompton’s spinning mule, Jenner’s vaccination against smallpox and Harrison’s chronometer. Beside those, much inventive activity is found in institutional records that offered premiums or prizes for inventions.89,90

Recent studies suggest that patents did not play a major role in promoting technological progress and thus economic growth during the industrial revolution.91 MacLeod and Nuvolari conclude that the patent system seems to have had second order effects at best on industrial progress in Britain. They question the recent trends of extending and deepening patent protection, which seem to have highly

85 Conversely, improvements devised underground were rarely patented. 86 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 16. This phenomenon is called ‘collective invention’. Inventors share their findings to improve their technology; incremental inventions play a huge role here. By publishing their inventive capabilities, engineers enhanced their professional reputations and thereby their career prospects. It should be considered this was possible mainly because shareholders of one mining company often held shares in other mining companies. Other examples of collective invention can be found in US Berkshire paper-making industry, the French Lyon silk industry (crushing the London competition who relied on patents and secrecy), the Dutch Zaankstraat - the first place where wind power was used on a broad scale - millwrights and the Viennese bentwood furniture industry. C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 19 and references there. 87 E.g. tunnels and bridges. 88 C. MACLEOD, Inventing the Industrial Revolution: the English Patent System, 1660-1800, Cambridge, Cambridge University Press, 1988, 105-6 and 188, google books. 89 E.g. the Royal Society of London and the Society of Arts. Also, some respected inventors renounced patents, e.g. J. Wedgwood and J. Ramsden. 90 C. MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 14. 91 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 3 and references there.

30 ambiguous effect on both rates of innovation and social welfare.92 Consequently, they find an excessive emphasis has been put on the implementation of strong intellectual property rights regimes and that a more sober and pragmatic approach to patent reform is in order.93

It is clear and worth emphasising that essential technologies were at times developed through processes of collective invention, secrecy or prizes.94 History has proven that innovation often takes place through processes of knowledge-sharing or scientific experimentation or as a result of cultural attitudes that encourage risk-taking.95 This demonstrates that innovative activity can be effectively pursued without relying on patent protection. Nuvolari notes the historical parallels between collective invention and an innovation process based on knowledge sharing today, namely open source software.96 Shah, based on the positive impact on innovation rates of such processes, stresses the importance of contemplating possible policy measures that could incentivise the emergence and solidification of knowledge-sharing communities in new technological domains.97

2. Patent Pools and Innovation

Processes of collective invention as discussed above are also possible within the patent system. Innovative companies active in the same industry - competitors - may decide to cooperate through research associations. They can also modify the existing patent system by agreeing to set up a patent pool.98 The knowledge is then shared only within the patent pool group. In a patent pool, member companies use a set of patents as if they were jointly owned by all members of the pool and they can license the set of patents as a package to other (non-member) firms. In theory, patent pools encourage innovation. Patent pools are expected to reduce litigation risks for its members. Because members can attack infringers as a group, the expected costs of litigation go down. More means are thus available to

92 For which they refer to J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 331 p. and M. BOLDRIN and D. LEVINE, Against Intellectual Monopoly, Cambridge, Cambridge University Press, 2008, 323 p. and http://levine.sscnet.ucla.edu/papers/imbookfinalall.pdf. 93 MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 30. 94 Summarising the beforementioned technologies: high-pressure steam engines, iron production techniques, steamboats, automatic looms. 95 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 1-2 and references there. 96 A. NUVOLARI, Open source software development: some historical perspectives, First Monday, Vol 10 (10), http://www.firstmonday.org/issues/issue10_10/nuvolari/index.html. 97 MACLEOD and A. NUVOLARI“Patents and Industrialisation - An Historical Overview of the British Case, 1624-1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 20 with reference there to S. SHAH, “Open beyond software”, in C. Di Bona, D. Cooper and M. Stone (eds.), Open Sources 2, Sebastopol, O’Reilly, 2005. See also “Open Source. Beyond Capitalism?” The Economist, 10 June 2004, www.economist.com/node/2747734. 98 Examples of contemporary patent pools include the Radio Frequency Identification (RFID) pool, the proposals to develop diagnostic tests for breast cancer, improve treatments for HIV and AIDS, and develop cures for neglected diseases such as malaria or cholera, the MPEG-2 pool, the 3G-platform pool and DVD pools. R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 2. In forming patent pools today, special attention should be given to antitrust/competition law issues.

31 invest in innovative activity.99 Patent pools that group complementary patents are also expected to reduce licensing fees for non-member companies because “royalty stacking”, occurring when multiple patents cover the same product.100 They are seen as a remedy for patent blockage, i.e. resolve a deadlock when competing patents prevent the commercialisation of new technologies.101 In the 19th century, several pools were set up after a phase of low innovation due to a technological deadlock of blocking patents.102

Lampe and Moser tested the theoretical predictions by researching the 19th century sewing machine patent pool.103 Their findings challenge the theoretical predictions. In the period before the pool was formed, patenting rose enormously because of a patent race by prospective members in the prospect of a pool. The prospect of a pool thus stimulates patenting.104 This does not necessarily imply an increase in innovation. The data Lampe and Moser analysed, suggest that the sewing machine patent pool may have affected patenting strategy more than it affected innovation. The increase in patents might reflect a rise of the share of patents per innovation, rather than an actual increase in innovation. Prospective members might simply be more drawn to patent protection - and e.g. patent pre-existing secret innovations - to protect themselves against infringement suits or to improve their negotiating position

99 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 2. 100 However, pooling substitute patents is said to increase license fees for non-member companies. R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 3. This is in line with the theory that states that substitute technology pools can be more detrimental to social welfare than complementary technology pools. N. GALLINI, “The Economics of Patents: Lessons from Recent U.S. Patent Reform”, J. Econ. Persp., Winter 2002 and http://www.economics.ubc.ca/files/2013/06/pdf_paper_nancy-gallini-economics-patents-lessons-recent-US.pdf, 131. 101 A main problem of any patent system is the difficulty of defining boundaries of the ‘technology space’ covered by a patent. Patents may be issued that overlap the same technology, leading to several companies owning patents for basically the same invention, able to block one another to use the patented invention. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 12. 102 MACLEOD and A. NUVOLARI, “Patents and Industrialisation - An Historical Overview of the British Case, 1624- 1907”, UK Intellectual Property Office, 2010 and http://ssrn.com/abstract=2019844, 19, referring to the patent pool ‘Bessemer Association’ (production of Bessemer steel). Another example of a historic patent pool is the one of Wright and Curtiss in 1917, pressured by the US government - in great need of airplanes for WWI - to form a pool after the duo effectively blocked production of new airplanes (#planes produced in 1916: 83; #planes produced in 1918: 11.950). In 1975, the pool was dissolved by decision of the US Department of Justice because the pool “lessened competition in research and development” - showing the tense relationship between patent pool benefits and costs. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 12-13. During the blockage (through litigation) of the flying machine industry in the US by the Wrights , by contrast, Europe knew a faster advancement of flying machine development. T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 16. 103 Formed on 24 October 1856 by Singer, Wheeler & Wilson, Grover & Baker and Elias Howe (lock-stitch). Production had come to a near halt in the five years before the pool was formed. The way Howe used his patent, was very much like the modern day ‘patent troll’: he used his patent to threaten with litigation and collect licensing royalties and damages in court, rather than commercialising his invention himself. By 1867, Howe had received $2 million dollars in license fees. The pool was dissolved in 1877. R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 7 and P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 6. 104 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 16.

32 in setting up the pool.105 The race toward the pool may also be socially wasteful if it leads to duplicative research.106

Non-member patenting peaked just after the establishment of the pool. This might be because they participated in the patent race towards the pool, but were slower than the members. It might also be a strategic response to an increase in litigation risks for non-members. Indeed, where a patent pool reduces litigation risk for its members, it does not reduce that risk for non-member companies. Two years after the pool was set up, patenting by outside companies decreased and started to rise again only (three years) after the pool was dissolved. Pool members began to patent less once the pool had been set up and the decrease in patenting remained until the pool was dissolved. Then, former members briskly resumed patenting.107 A decline of the share of sewing machine patents relative to all US patents indicates that the pool discouraged patenting. A comparison of the US and the UK - where no patent pool was set up - sewing machine industries indicates the slowing down of innovation in the period of the pool’s existence was limited to the US.108

Lampe and MacLeod use sewing speed (stitches/minute) as objectively quantifiable measure of performance to assess whether the patent pool promoted innovation. In the 10 years before 1856, the performance of a sewing machine rose from 200 to 2000 stitches/minute. During the existence of the patent pool, sewing speed stayed more or less the same. Advances were only seen after 1877.109 This stagnation in sewing speed indicates a temporary halt on innovation during the existence of the pool. Non-members were discouraged from innovative activity in two ways. First, by the threat of litigation claims from the mighty patent pool.110 Second, non-members redirected their research and development away from the technologies that were covered by the pool’s patents and toward freely available substitutes - which were inferior.111 The weakened innovation and thus competition of non-

105 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 16-17, 22. 106 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 13. 107 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 17. 108 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 18. 109 In 1889 and 1900, non-member companies produced machines that reached respectively 2500 and 4000 stitches per minute. 110 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 5-6. Litigation data show that non-members incurred a greater litigation risk during the pool’s existence. 111 The research and development can also be redirected towards other, non-inferior domains. This is suggested by research by K. Vakili into the recent MPEG-2 patent pool, who suggests that the pool did not make innovation drop, but only changed its direction (for non-members of the pool). See www.forbes.com/sites/freekvermeulen/2013/01/22/patent-pools-do-they-kill- innovation/. However, this means the non-members are no longer competitors to the pool, which might affect the innovation incentives of the pool members.

33 member companies may in turn have resulted in less incentives to innovate for the patent pool members.112

The research of Lampe and Moser into the sewing machine patent pool suggests that the establishment of a pool leads to a decline of competion among pool members, who are generally larger and more established, at the expense of non-member companies, who are usually smaller and younger.113 Analysis of other historical patent pools by the same duo points in the same direction, namely that patent pools hinder innovation.114 However, each patent pool has its own specificities and the results are not necessarily transferable to other (modern) pools and industries.115

3. (Absent) Patent Laws, Alternative Mechanisms and Innovation

a. The Direction of Technological Change

The historical differences among national patent systems - strong, weak or absence of patent protection - provides us with opportunities to determine the relationship of patent law and innovation.116 Data from technology fairs and exhibitions in the second half of the 19th century show a remarkable amount of high-quality innovations from Switzerland, Denmark and The Netherlands - countries where no patent protection was offered. The innovations stemming from the named patentless countries were also more likely to win prizes for novelty and usefulness.117

Historical evidence indicates that in countries without patent laws, innovation mainly took place in industries where alternative mechanisms were effective to protect intellectual creations. Inventors in countries without patent laws depended on secrecy, lead time and other alternatives to secure appropriation. Consequently, inventive activity and investment therein were most attractive in industries where such alternatives were effective enough to allow for - at least - recuperating the investment made. Exhibition data show that in countries that had not adopted patent laws, innovative activity concentrated in industries where alternative mechanisms - mainly secrecy - were effective in

112 R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from the 19th Century Sewing Machine Industry”, NBER Working Paper No. 15061, 2009 and http://www.nber.org/papers/w15061, 6, 24. 113 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 15. 114 See R. LAMPE and P. MOSER, “Do Patent Pools Encourage Innovation? Evidence from 20 U.S. Industries under the New Deal”, 2012, www.nber.org/papers/w18316. 115 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 14. 116 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 3-4. 117 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 5. Absent patent laws, the Swiss and Dutch were master innovators in the food processing industry: e.g. milk chocolate, baby foods, ready-made soups. Side-note: high-quality innovations, were more likely to be patented, challenging the theoretical model that more important inventions would not be patented. P. MOSER, “Innovation Without Patents - Evidence from World Fairs”, 2011, http://ssrn.com/abstract=930241, 17.

34 protecting inventions.118 In countries that had adopted patent laws, innovative activity was less concentrated. This is explained by the fact that in a country with a patent system, inventors can obtain a position of exclusivity in any industry by taking out a patent for their innovations. The industry in which an inventor would like to be active is thus not only determined by the effectiveness of secrecy.119

Moser finds that the most significant variation in the share of innovations that are patented, occurs across industries - industries in which secrecy is effective, show low patenting rates and vice versa. This holds true for all countries with patent laws, even when the national patent laws show significant differences. For example, despite enormous differences in the national patent systems, the patenting decisions for the same industries were largely similar between Britain and the USA,120 showing that in general, only inventions that cannot be kept secret, will be patented. Moser gives a potential explanation for the patenting similarity. She states that the real costs of patenting, keeping in mind the expected costs of disclosure and litigation risks, may be substantially higher than suggested by the filing fees. She concludes that if a substantial share of innovations occurs outside the patent system - e.g. in secrecy -, legislation that implements even the most substantial strengthenings of patent protection may fail to affect the willingness to patent (and thus disclose the innovation).121

Survey data suggest that firms today deem the effectiveness of secrecy critical to answering the question “to patent or not to patent?” This was no different around the 1900s. The chemical industry provides a good insight in the patenting decision when secrecy becomes less effective. Until the 1850s, secrecy was very effective to protect chemical innovations, because they were (nearly) impossible to reverse engineer. A series of scientific breakthroughs - such as Mendeleev’s periodic table and Kekulé’s benzene ring - reduced the effectiveness of secrecy substantially. From then, a significant shift towards answering the above-mentioned question with “to patent” is noted in the chemical industry. At the same time, in the manufacturing machinery industry, where secrecy had always been rather ineffective, patenting propensity remained roughly the same.122 Thus, companies patent a relatively larger part of their innovations after secrecy effectiveness decreases. Today, patents are believed to be crucial in determining the success of a chemical/pharmaceutical company.

118 E.g. scientific instruments, dyes, textiles, chemical inventions and food processing. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 9. 119 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 9. 120 The British patent system was extremely expensive (excluding bribes: $37.000): the procedure was long and hard; British judges were less favourable to patentees. US procedure was easier, e.g. US applicants could mail in their applications; obtaining a US patent was cheap ($618), US judges were more favourable to patentees. Patents were thus more effective in the USA. The British and US patent protection both had a duration of 14 years. P. MOSER, “Innovation Without Patents - Evidence from World Fairs”, 2011, http://ssrn.com/abstract=930241, 3. 121 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 19. This seems true. Where secrecy is effective, a patent will most likely not be taken out even if the duration of protection is lengthened. 122 P. MOSER, “Innovation Without Patents - Evidence from World Fairs”, 2011, http://ssrn.com/abstract=930241, 1-6, 25.

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To investigate the link between patents and innovation in the pharmaceutical industry, the US rose breeding industry may provide a useful example. With the adoption of patent protection for plants in 1930, innovations in the rose breeding industry became patentable.123 Developing a new rose took around 12 years, was expensive, and fewer than 0.1 % of seedlings became commercially successful. However, data on registration of new roses between 1916 and 1970, suggest that the effect of the adoption of patent protection for plants was limited. Rose breeders created fewer new roses after 1931 and less than 20 % of registered new rose varieties after 1930 were patented. On top of that, biological lineage information shows that most commercially successful roses today descend from breeding efforts by scientists employed in the public-sector, before plant patents were offered.124 The rose breeding industry shows remarkable similarities with the pharmaceutical industry, i.e. high development costs, long development procedures, high uncertainty of success, and an easily reverse engineered or copied outcome. Although the findings may not automatically be transferred across industries, more research into the effect of patents on innovation in the pharmaceutical industry may be very well justified.

In conclusion, Moser finds that the historical data indicate that patent laws may influence the direction of technological change, even though patent laws do not appear to be a necessary or sufficient condition for increased innovation levels.125 As Nicholas explains it, “patent laws may exert more influence on the technical areas in which inventors choose to focus their efforts (i.e. the direction of technological change) as opposed to on the level of effort that they choose to invest in inventive activity.”126

If an invention can be kept secret, it will most likely not be patented, but the absence of patent protection might drive innovative activity away from innovation in products and processes that are readily copyable. Having a patent system in place may better allow for a shift of innovative activity towards new industries, even as it fails to raise the overall innovation level. However, it should be noted that during some time periods, countries without patent laws have produced as many

123 Note that the Plant Patent Act was actually adopted to foster domestic innovation and development of plant breeding to target food security by protecting breeders of food crops, who had argued that they were heavily dependent on patent protection to recover high development costs, and that alternative mechanisms were not effective. This aim was probably largely missed: nearly half of all plant patents between 1930 and 1970 were for roses. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 7. 124 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847,, 7. 125 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 10-11. 126 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 12.

36 innovations as countries that did have patent laws in effect, and that the quality of the innovations among the two types of countries has been largely comparable.127

b. The Diffusion of Knowledge

Historical analysis of the chemistry sector suggests that a shift towards patenting leads to a greater diffusion of innovation. Patents seem to be an effective way to spread (changes in) technological knowledge. This supports the hypothesis that the patent system provides an incentive to disclose and “teach” the invention to the public.128 A patentee who feels protected by a patent would be less reluctant to publicise or share his ideas.129 A famous example is that of the French chemist Mège Mourès who, feeling protected by his patent, shared his margarine production process with two Dutch entrepreneurs who then started producing margarine themselves once the Netherlands had abolished their patent law.130

127 P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 18-19. 128 Infra IV.A.2. 129 P. MOSER, “Do Patents Weaken the Localization of Innovations? Evidence from World’s Fairs”, 2010, http://ssrn.com/abstract=941571, 3. 130 The fight between the two Dutch entrepreneurs, where one kept his improvements toward superior taste secret and the other was not able to reverse engineer them, is also illustrative for the effectiveness of secrecy relative to patents. P. MOSER, “Patents and Innovation: Evidence from Economic History”, Stanford Law and Economics Olin Working Paper No. 437, 2012 and http://ssrn.com/abstract=2180847, 9.

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PART III. PHILOSOPHICAL AND ETHICAL ANALYSIS OF PATENT LAW

In this part, I will look into the moral rationales behind intellectual property rights. Why do we have such rights and in what way are they justified? I will briefly discuss this in a general manner for all types of intellectual property (section A), before narrowing the arguments down to the patent system (section B).

A. Justifying Intellectual Property

Several (legal) theories have seen the light in more recent decades. Theorists have tried to discover and explain the (moral) rationales behind a patent system, more broadly behind the whole intellectual property system. The theories behind intellectual property can mainly be situated in one of four following categories131:

- Utilitarian theory

- Natural Rights - Labour theory

- Natural Rights - Personhood theory

- Social Planning theory

The utilitarian theory is located in the field of economic analysis of law. The other theories are rooted in well defined traditions of political and moral philosophy, these will form the core topic of analysis in this part. Although the justification of patent law is generally based on utilitarian, economic arguments, the questioning of the morality of the patent system is ethically justified, because every society should aspire to fulfil deeper ethical goals of prosperity, justice and rights, beyond mere economic development.132

131 Menell lists five other non-utilitarian theories on intellectual property: unjust enrichment, libertarian theories, democratic theories, radical/socialist theories and ecological theories. P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 156-163. These theories, and the social planning theory, are said to be derivatives of the four main theories. 132 D. MACER, “Inventions, Patents and Morality”, in Encyclopedia of Life Support Systems (EOLSS) and www.eolss.net/sample-chapters/c17/E6-58-12-03.pdf, 1.

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1. Labour Theory

a. Description

The labour theory springs from the Lockean idea that a person who mixes his labour with resources, that are not owned by anyone or that are held in common, has a natural property right to the product of his labour. In other words, the theory is based on the notion that a person deserves to own what he has created by productive labour.133 By means of his labour, a person adds something to another thing, this way he excludes others from having rights on the resultant. The state must respect and enforce the natural property right. Locke sets forth two conditions which must be met. The first condition, the “enough and as good proviso”, states that a person may only acquire property rights if after the appropriation, “there is enough and as good left in common for others” (i.e. a sufficient number of the same thing of the same quality remains). The second requirement, the “non-waste proviso”, forbids a person to appropriate more than he can use.

This theory seems to be particularly applicable to intellectual property, where the resources (ideas, concepts, facts, etc.) can indeed be seen as held in common, and where labour contributes so notably to the value of the ultimate product. References in case law and legal doctrine to the importance and morality of rewarding (authors and) inventors for their labour are almost as common as references to the importance of providing incentives for inventive activity or intellectual labour, i.e. to the economic utilitarian approach.

b. Criticism

Why exactly should labour upon an unowned or commonly held object entitle the labourer to a property right in the resource itself? Why is mixing what a person owns with something he doesn’t own a way of acquiring what he doesn’t own, rather than a way of losing what he owns?134 Fisher brings forth several arguments from Locke, noting that applying those arguments to intellectual property is not without problems. He also remarks that it is not clear what Locke saw as the scope of his theory and whether he (would have) included intellectual property.135

How is to be decided what it is exactly that has become the property of the person applying labour to an object? This question could be answered according to the value of the resultant of the labour- application to the object. In this approach, a distinction needs to be made between the value of the

133 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 2-3. 134 R. NOZICK, Anarchy, State, and Utopia, Oxford, Basil Blackwell, 1974 and www.colorado.edu/philosophy/provisionalia/nozick.pdf, 174-175. 135 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 10-14.

39 object to which labour is applied, and the value of the labour itself (i.e. the added value). It is crucial to ascertain the proportionality of those distinct values in relation to the total value of the resultant product. However, the determination of the values is often challenging.

It is also difficult to define “intellectual labour” and “unowned or commonly held resources” in the area of intellectual property rights.

Another problem with the Lockean approach is that some intellectual products do not have social value or do not require labour to be produced.

Then there are problems relating to proportionality136 and to the sufficiency proviso (infra).

Finally, Locke suggested that the property rights acquired through the application of labour to the resource are universal and last forever. Intellectual property rights, however, are generally limited in both time and space.

2. Personhood Theory

a. Description

The personhood or personality theory, historically more relied upon in continental Europe, is inspired by Kant and Hegel and sets forth the following two propositions:

- private property rights are crucial to the satisfaction of some fundamental human needs or interests; and

- policymakers should accordingly create and allocate entitlements to resources in a way that best induces people to serve those needs.137

From these propositions, intellectual property rights may be justified on the ground that they protect from appropration or modification of artifacts through which the creator has expressed his or her “will” - an activity central to “personhood” - or on the ground that they create socioeconomic conditions that foster creative intellectual activity that in turn fosters human flourishing. In this theory, support for moral rights, such as the right to be mentioned as inventor (i.e. paternity right), can easily be found.

136 The famous question NOZICK poses: “If I own a can of tomato juice and spill it in the sea so that its molecules (made radioactive, so I can check this) mingle evenly throughout the sea, do I thereby come to own the sea, or have I foolishly dissipated my tomato juice?” R. NOZICK, Anarchy, State, and Utopia, Oxford, Basil Blackwell, 1974 and www.colorado.edu/philosophy/provisionalia/nozick.pdf, 175. 137 In other words: to achieve proper development as a person, one needs some control over resources in the external environment in the form of property rights. M. RADIN, “Property and Personhood”, 34 Stanford Law Review 957, 1982 and http://cyber.law.harvard.edu/IPCoop/82radi.html, 957-1015.

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b. Criticism138

How should we determine the specific needs and interests that we wish to promote? How and to what extent do intellectual property rights promote the human needs and interests?

Not all intellectual products appear to reflect (some of) the personality of their creator(s).139 Some categories of intellectual property seem not to manifest any personality of their creators. Patentable inventions usually embody solutions to very specific technological problems. People do not think of them as expressing the creator’s personality.140 The personality theory is thus not a strong justification for the patent system. The theory neglects products that do not express the creator’s personality and does not provide them a basis for legal protection. Accordingly, this theory will not be further discussed in the more specific section on Moral Justifications of the Patent System.141

3. Social Planning Theory

a. Description

The social planning or equity theory suggests that intellectual property rights should be construed in the way they most contribute to the achievement of a just and attractive culture. This theory is inspired by various political and legal theorists such as Jefferson, Marx, legal realists and classical republicanists. Social planning arguments play a prominent role in discussions concerning the appropriate scope of intellectual property rights on the internet.

138 A. MOORE, “Intellectual Property”, Stanford Encyclopedia of Philosophy, 8 March 2011, http://plato.stanford.edu/entries/intellectual-property/, and references there. The natural property right in ideas has several more weaknesses (both in the Lockean and the personhood theories). For example, it is contradictorial to say an inventor has a natural property right in his inventions, while at the same time that right is limited in time and maintenance fees have to be paid; an idea can not be ‘possessed’ or ‘controlled’ or ‘uninvented’ once thought of; a person who independently comes to the same idea, even though he did not free ride on the efforts of the first inventor, is not allowed to exploit the idea for the sole reason that he thought of it later in time. M. JANIS, “Patent Abolitionism”, Berkeley Technology Law Journal, http://www.dklevine.com/archive/janis.pdf, 66, cites Macfie’s argument: “Those things that belong to the province of patent right are in their nature capable of being independently discovered or originated, in the same identical form, by a plurality of persons.” and that “It is otherwise with things that belong to the province of copyright.” In R. MACFIE, “The Patent Question”, Transactions of the National Association for the Promotion of Social Sciences, 1864, 818,821. 139 J. HUGHES, The Philosophy of Intellectual Property, 77 Georgetown Law Journal 287, 1988 and http://www.justinhughes.net/docs/a-ip01.pdf, 34-36. 140 State of the art is not art. However, in some cases one might find personality of the creator in an invention. 141 For a discussion on personhood theory in relation to patent law, see J. HUGHES, “The Personality Interest of Artists and Inventors in Intellectual Poperty”, 16 Cardoza Arts & Entertainment Law Journal 81, 1998 and http://cyber.law.harvard.edu/property/respect/personality.html.

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b. Criticism

The debate on what a “just and attractive culture” 142 means or should mean, can go on in eternity. What sort of society should we try to promote through (adjustments of) the various intellectual property rights? The possibilities are endless.143

B. Moral Justifications of the Patent System

Economic arguments dominate the debate on justifying the patent system. However, there are other, non-utilitarian arguments that can be invoked to justify patent protection. These could help in shaping an optimal patent system that not only incentivises inventive activity, but also fosters other goals, such as reward for labour and personal development of individuals.144 However, these arguments are not free of criticism. I will now present and examine the main philosophical justification theories for patent law.

1. Natural Rights

Can the Lockean theory of a natural property right be applied (usefully) to the patent system?145

It is not clear what the “unowned or commonly held resources” are in patent law146. In addition to that fundamental issue, there is the fact that intellectual resources are usually products of previous thinkers. Their labour is also an element in the value of the resulting product as explained above. Who then should be entitled to the value of the resultant? 147 Knowledge is built up by the efforts of billions of people. Hettinger says that a person, who relies on human intellectual history (i.e. public knowledge) and makes a small modification to produce something of great value, should no more receive what the market will bear than should the last person needed to lift a car receive full credit for lifting it. He maintains that if labouring gives the labourer the right to receive the market value of the resulting product, the market value should be shared by all those whose ideas contributed to the origin of the product and. The fact that most of the contributors are no longer present should not be regarded a valid

142 A. MOORE, “Intellectual Property”, Stanford Encyclopedia of Philosophy, 8 March 2011, http://plato.stanford.edu/entries/intellectual-property/. 143 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 18-20. 144 O. TUR-SINAI, “Beyond Incentives: Expanding the Theoretical Framework for Patent Law Analysis”, Akron Law Review, 2012, http://ssrn.com/abstract=1697254, 242-287. It should also be noted that not all inventors are driven by economic motives. Some simply take pleasure from inventing, others strive to acquire fame and reputation, and so on. 145 A. ODDI, “Un-unified Economic Theories of Patents - the Not-Quite-Holy Grail”, 71 Notre Dame Law Review 267, 1996, 267-327. 146 They could be e.g. the universe of facts or the set of all possible ideas. 147 J. HUGHES, The Philosophy of Intellectual Property, 77 Georgetown Law Journal 287, 1988 and http://www.justinhughes.net/docs/a-ip01.pdf, 6-28.

42 reason to give the entire market value to the last contributor. Creators’ property interest should be limited to the value they add by their labour, as opposed to the total value of the resultant.148 Based on this reasoning, one can easily question current patent law rules and practice. For example:

- Law: the person discovering a principle on which many inventions are based is left unprotected by patent protection;

- (Law and) Practice: many patents are granted to inventions that modify a pre-existing invention only slightly.

If the labour theory applies to patent law, what can be said about Locke’s provisos?149

The “enough and as good proviso”

It is clear that the monopolistic position a patent offers, might easily violate the requirement that there should be enough and of the same quality left of the resource following the appropriation. Nozick argues that this is not a problem because the invention would not have existed at all without the efforts of the inventor.150 He states that if an object becomes somebody’s property, everyone else’s situation changes because that object can only be used with the owner’s permission. According to Nozick, however, the central issue is whether the appropriation of the previously unowned object worsens the situation of others. Nozick believes this is not necessarily the case in patent law. Nozick sets forth an example in which one appropriates a grain of sand. After the appropriation, no one else may do as they will with that particular grain of sand. But plenty other grains of sand remain, and if not grains of sand, then other things. The things the owner does with the grain of sand might improve the position of others, counter-balancing their loss of the liberty to use that grain.151 In terms of patent law, one could analogously read: plenty of other inventions remain exploitable, not the same, but maybe comparable ones. By exploiting the patent, the inventor might improve the situation of others, thus counter- balancing the loss of their liberty to use the invention.

There are several difficulties with Nozick’s entitlement theory, making it unconvincing regarding patent law:

- The proposition that sufficient objects will remain for others is not valid for anything covered by a patent. A patent contains one or more claims describing the invention. Any other invention that fits the description infringes the patent. And not only the exploitation of

148 E. HETTINGER, “Justifying Intellectual Property”, Philosophy & Public Affairs Vol. 18 No. 1, 1989 and http://www3.nccu.edu.tw/~adali/hettinger.pdf, 38. 149 S. STERCKX, “The Moral Justifiability of Patents”, Ethical Perspectives : Journal of the European Ethics Network 13, no. 2, 2006 and http://www.ethical-perspectives.be/page.php?LAN=E&FILE=ep_detail&ID=109&TID=973, 250-255. 150 At some point in time, however, it is likely/probable that another person would come up with the same invention. 151 R. NOZICK, Anarchy, State, and Utopia, Oxford, Basil Blackwell, 1974 and www.colorado.edu/philosophy/provisionalia/nozick.pdf, 175.

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identical inventions can be prohibited. Similar or equivalent inventions are also captured by the patent (many patent offices apply the doctrine of equivalents152).

- The proposition that sufficient samples of other objects remain, can be said to be irrelevant if the specific object is precisely what others need or has no equivalent substitutes. They are then automatically worse off. Furthermore, here too the danger of infringing similar or equivalent inventions plays. Theoretically, the novelty requirement allows no patent for inventions already in public use at the time of the application. In reality, the novelty requirement is often not applied as it should be.

- While it is plausible that the exploitation of the invention by the patentee might improve the position of others, thus compensating them for the loss of their freedom to use the invention, it can be remarked that the patentee is not obliged to exploit his invention. Even if he does, others are still prohibited to use the invention. Moreover, the use of similar inventions might also be restricted.153

For the proviso not to be violated, Nozick does state that the exclusive right should be limited in two ways. First, an inventor who comes to the same invention independently, should not be excluded from exploiting his invention. Second, the term of protection should not be longer than the time it would have taken another person to invent the same invention.154 However, these two limitations are not implemented in current patent laws.

The “non-waste proviso”

This requirement can be very significant in connection with intellectual property rights, in light of the non-rival nature of intangible goods. An invention can serve as the basis for numerous tangible copies embodying it, so that many individuals can use it simultaneously. Accordingly, waste occurs whenever a certain potential use of an invention that could have brought benefit to the user does not take place, so that the social value of the invention is not fully realised.155

(Most) patent laws do not oblige the patent holder to exploit the patented invention. If a patentee does not exploit his invention, waste occurs and the proviso is violated. If other people are in need of the unexploited patented invention, the waste is all the more severe.

152 For example, International Nickel had a patent that covered a cast ferrous alloy, in which was described that the addition of magnesium was of quantity 0.04%. Ford Motor Company’s iron contained 0.02% magnesium, yet was still found to be infringing. 153 S. STERCKX, “The Moral Justifiability of Patents”, Ethical Perspectives : Journal of the European Ethics Network 13, no. 2, 2006 and http://www.ethical-perspectives.be/page.php?LAN=E&FILE=ep_detail&ID=109&TID=973, 254-255. 154 With this limitation, Nozick seems to implicitly admit that his statement that patent law does not worsen the situation of others because the object of the patent would not have existed without the efforts of the inventor, is not entirely absolute. 155 O. TUR-SINAI, “Beyond Incentives: Expanding the Theoretical Framework for Patent Law Analysis”, Akron Law Review, 2012, http://ssrn.com/abstract=1697254, 22.

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Waste can take place even if the patentee exploits the patented invention. The patentee can restrict the use(s) of his invention. The artificial limitation of the use of intellectual resources - that are typically non-exclusive in nature, i.e. they can be used by several (if not all) people simultaneously - can surely generate waste.

It is clear that there are several problems in applying Locke’s labour theory and Nozick’s entitlement theory to the patent system. In addition, the patent laws are in many aspects inconsistent with said theories.156 Accordingly, the natural rights theories do not seem to provide a very strong justification for the patent system.

2. Distributive Justice

The distributive justice argument is based on the idea that a person who contributes to a collective enterprise, deserves a reward commensurate with the magnitude of his or her contribution to the enterprise.157 This theory seeks to (re)distribute society’s resources on the basis of just principles.158 The determining of such principles is strongly debated among political philosophers.159 The argument states that a patent system is justified because absence of a patent system would allow for unfair ‘free riding’ behaviour. Free riders are people who did not invest time or money in the development of an invention, yet simply copy an existing invention. In the absence of a patent system, they can compete, at the expense of the inventor, under normal market conditions.160 To reward people who apply themselves to the act of inventing, and to protect them against free riders, they should be granted an exclusive right to the exploitation of their inventions. This based on the idea that the inventor fosters

156 E.g. the Nozick requirements mentioned supra are not implemented, systems of compulsory licensing, the validity of a patent is limited in time and space, patents can be declared void, certain categories are excluded from patentability, etc. 157 W. FISHER, “The Growth of Intellectual Property: A History of the Ownership of Ideas in the United States” in Eigentumskulturen im Vergleich, Göttingen, Vandenhoeck & Ruprecht, 1999 and http://cyber.law.harvard.edu/property00/history.html, 4. 158 P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 160-161. 159 See e.g. J. RAWLS, A Theory of Justice, Cambridge MA, Harvard University Press, 1971, 607 p. and E. RAKOWSKI, Equal Justice, New York, NY, Oxford University Press, 1991, 385 p. 160 A concrete manifestation of the distributive justice approach can be found in the International Undertaking on Plant Genetic Resources of the UN Food and Agriculture Organisation. This accord recognises farmers as innovators entitled to intellectual integrity and access to the germplasm and technologies they have developed collectively over generations. This protects the interests of those lacking the knowledge or resources to perfect their intellectual property rights against the exercise of formal rights by better organised parties that develop patent portfolios. Distributive justice arguments have also been used in assessing the morality of claims to cell lines and other products of the human body (see e.g. J. HARRIS, Wonderwoman and Superman: The Ethics of Human Biotechnology, New York, NY, Oxford University Press).

45 societal welfare.161 Offering a reward for inventions means that at least some members of society can devote their time and energy to creativity.162

Although intuitively appealing, the distributive justice argument bears several weaknesses and not one reasonable interpretation of the argument would produce a patent system as we know it.

The first question that arises is what the ground for reward is. There seem to be two possible bases: (1) the value of the result and (2) the amount of effort.

The value of the result is often determined by factors outside the inventor’s control. The invention’s value/success can greatly depend on luck or marketing/advertising. Besides, what kind of value should be taken into account? Assuming that it is societal value, granting greater reward to the inventor of a socially more valuable invention is not related to giving the inventor what he deserves. It relates to the question whether the reward is needed as an incentive to invent and disclose socially valuable products and processes.163

The other ground for the reward is the extent to which the inventor has made an effort, has tried, to come to an invention. From that perspective, also the inventors who try and fail should be rewarded for their efforts. They to have invested time, labour and money. It can be said that this statement is untrue because they have not produced anything that benefits society. However, is the knowledge that what they have attempted is not beneficial, in itself not beneficial to society? Future inventors need not go down the same road their predecessing failed colleague has followed and hence do not lose time or money. It is of course likely that a failed inventor will not disclose his unsuccessful attempts. A system of rewards for unsuccessful inventors - in which they disclose their trials and errors - might provide a solution.

Another question about the very fundamentals of this argument is whether it is just and equitable to grant exclusive ownership rights on information. Which of the two is the just thing to do: is it allowing the inventor, the creator of the information to decide who may use his invention and protecting him against ‘free riders’ by reward of a patent or is it allowing equal access to information by all (possibly at the expense of the inventor)?

161 Yet when the patented invention is of extraordinary benefit to the public, it is sometimes suggested that antitrust laws or general public interest reasons should be used to exempt the invention from property ownership to stimulate the faster distribution and wider use of the invention so that societal benefit is maximised. The uncertainty this would create would be detrimental to innovation incentives. 162 D. MACER, “Inventions, Patents and Morality”, in Encyclopedia of Life Support Systems (EOLSS) and www.eolss.net/sample-chapters/c17/E6-58-12-03.pdf. 163 The function of the patent system is claimed to be the regulation of inventive activity, not the regulation of the commercial uses of inventions. E.g. consider the amount of money people spend on patented cosmetical products. When (the investment in) those products are compared to severe diseases, that may be considered a waste of research investment in terms of distributive justice. See D. MACER, “Inventions, Patents and Morality”, in Encyclopedia of Life Support Systems (EOLSS) and www.eolss.net/sample-chapters/c17/E6-58-12-03.pdf.

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If we accept that the inventor deserves a reward for his inventive activity, why should this reward come in the form of patent protection? Exclusive ownership of the invention is not the only possible reward. Many other forms of reward can be thought of, e.g. financial bonuses, prizes, status, public financial support,etc. Hettinger maintains it is a mistake to interweave the created object - i.e. the invention - which makes a person deserving of a reward, with what that reward should be. Rewarding property rights is not the only option.164 The question that arises is whether a reward in the form of a patent system meets the proportionality requirement.

Distributive justice wishes to reward the inventor according to his specific contribution and merit. However, no link between the (social) value of an invention and the strength of the protection - e.g. in terms of period or scope of protection - is implemented in the current patent systems. A patent is granted irrespective of the effort of the inventor. Admittedly, in practice it would be very hard to determine and distinguish the just level of patent protection for every specific invention. Another problem in proportionality between social value and the size of the reward is the frequent issuing of patents with overly broad claims that are disproportionate to the actual contribution made by the inventor.

Furthermore, inventions do not emerge from a knowledge vacuum. Inventors absorb ideas and inspiration from other inventors, even from inventors that have long been buried. And here lies a strong criticism of the patent system: it rewards only those who apply the ‘finishing touch’ to work carried out by predecessors, those who take the final step to practical applicability. It is said this is unfair.165

Finally, there should be mentioned that certain inventions and discoveries are excluded as patentable subject matter.166 These too can have great societal value and require a serious amount of effort. Is it fair that a person who is responsible for such an invention or discovery is not rewarded under the patent system?

The absence of a reward in case of discoveries can be argued on the basis of the different ethical intuitions a discovery invokes. If a person merely discovers something, one does not feel as though that person has an equally strong claim to the discovered thing, as a person creating/inventing something. These intuitions can however be altered when the discovery required a great deal of skill and effort or investment or vice versa when the invention did not require a great deal of investment, skill or effort. Yet generally, a discovery does not seem to generate the belief that a strong right like a

164 E. HETTINGER, “Justifying Intellectual Property”, Philosophy & Public Affairs Vol. 18 No. 1, 1989 and http://www3.nccu.edu.tw/~adali/hettinger.pdf, 41. 165 S. STERCKX, “The Moral Justifiability of Patents”, Ethical Perspectives : Journal of the European Ethics Network 13, no. 2, 2006 and http://www.ethical-perspectives.be/page.php?LAN=E&FILE=ep_detail&ID=109&TID=973, 258. See also supra (Section Natural Rights), the example of lifting a car given by Hettinger. 166 The first statutory (im)morality clause is considered to be implemented in the 1623 UK Statute of Monopolies.

47 patent confers is justified.167 Note that an exclusive right on the discovery of a principle might have a too detrimental effect on innovation (by deterring follow-up inventions excessively).

To address the fact that certain inventions are excluded from patentability, I refer to the fact that some jurisdictions have excluded medical treatments - not medicicines - of the human body from the patent system based on moral grounds. Without deeper thought, one would immediately agree with the moral unacceptability168 of patents on medical procedures seeing that they relate to the human body. But the patent system is said to aim to promote innovation and reward the inventor. Is innovation in this particular field of inventive activity not extremely desirable? And is it not fair to reward inventors who apply themselves to promoting medical progress? It would then seem that to exclude medical treatments from patentability, is the immoral route to follow. Do exemptions of certain types of inventions from patentability not reflect a distrust in the functioning of the patent system?169 It certainly seems inconsistent with the distributive justice and the natural rights arguments. A deeper analysis of ethical issues in patenting certain subject matter, is beyond the subject of this thesis.

167 P. CROSKERY, “The Intellectual Property Literature : A Structured Approach”, in Owning Scientific and Technical Information - Value and Ethical Issues, V. WEIL and J. SNAPPER (eds.), New Brunswick, Rutgers University Press, 1989, 270. 168 Public opinion is often quite opposed patents on medical procedures, biotechnological findings or agricultural applications: monopolised cures for terminal diseases, monopolies on seeds, etc. seem unjustifiable. Think of all the protest against the patenting practice of Monsanto or medical patient Viktor. 169 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 9.

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PART IV. ECONOMIC ANALYSIS OF THE PATENT SYSTEM

In this part, I will examine the most important economic justifications of the patent system (section A). I will give most weight to the most frequently used arguments. I move on to discuss briefly the effects of the patent system on competition law and policy (section B), provide an overview of the potential costs of the patent system (section C), to end by discussing the main alternatives to the patent system (section D).

A. Economic Justifications of the Patent System

The utilitarian approach to patent rights is based on the premise that the patent system should serve the greatest good for the greatest number. This means that patents should maximise net social welfare. The legislator should induce people to behave in a way that advances socially beneficial goods and services and see to it that those goods and services are distributed in a way that maximises the net welfare for people. It is generally believed that to reach this goal, it is necessary to balance on the one hand the power of an exclusive right to stimulate innovative activity, and on the other the tendency of such a right to reduce widespread public enjoyment.170 According to United States courts the primary objective of intellectual property rights is the production and dissemination of works of the intellect. The central question is whether the utilitarian theory justifies the patent system, or, whether allowing a patent system improves social welfare, and if it does, if it improves social welfare more than would the absence of a patent system. The question is open to considerable debate since empirical findings on the effects of the patent system as a whole are scarce and often conflict. Hereunder, I review several economic arguments that (try to) justify the patent system.171

1. Incentive to Invent and Innovate

a. The Theory

This approach to justify the patent system is the most used and widespread. Lawmakers reforming patent laws and court decisions in patent cases often refer to this theory.172 As previously mentioned,

170 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 2. 171 See also R. MAZZOLENI and R. NELSON, “Economic Theories About the Benefits and Costs of Patents”, 32 J. Econ. Issues 1031, 1998 and https://www2.bc.edu/~zlate/biotech/mazzolininelson1998.pdf, constructing a framework for organising patent system theories and discussing several major theories. 172 The US Supreme Court stated that Congress’s authority to provide patent protection “is exercised in the hope that the productive effort thereby fostered will have a positive effect on society through the introduction of new products and

49 the theory is even incorporated in the US Constititution. Patent systems in most countries are often justified by the assumption that the prospect of patent protection will encourage innovation, leading to the accrual of greater societal benefits than without a patent system.173 However, “the question that must always be asked of any patent regime is whether we have good reason to believe that patents have that effect.”174 There appears to be little empirical evidence to provide a conclusive answer to this question. Boldrin and Levine find that existing studies find weak or no evidence that strengthening patent regimes increases innovation.175

The basic purpose behind patent law, as it is widely acknowledged, is that it seeks to promote innovation, while enabling public availability. The patent system seeks to provide incentives to conceive a new technology (invention), develop it into a commercial product or process (commercialisation), and to put it to use (innovation).176 The patent system wants to provide an answer to the difficulties that an innovator may encounter in trying to recover his costs of research and development when the innovation is readily copyable.177 Legal protection for inventions is meant to lift this problem, so encouraging investment.178

The appropriability of economic returns on investment is considered the driving force behind technological innovation.179 The argument to defend a patent system is that no one would engage in inventing, or investing in inventing, something valuable, if, from the moment the innovation has been released to the public, anyone can make a copy and compete with the original inventor without having delivered any input or experienced costs themselves and are thus able to offer a lower price to their

processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens.” The intended beneficiaries of the patent system is thus the general public, not the patentee. See e.g. Kewanee Oil Co. v. Bicron Corp., 1974, 416 U.S. 470, 480. 173 A. TORRANCE and B. TOMLINSON, “Patents and the Regress of Useful Arts”, The Columbia Science And Tech. L. Rev., Vol. X, 2009 and http://www.stlr.org/cite.cgi?volume=10&article=3, 166. 174 L. LESSIG, The Future of Ideas, New York, Random House, 2001 and http://www.the-future-of-ideas.com/download/, 205. 175 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 15. 176 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 6. Machlup notes that these are different activities - although sometimes interrelated -, usually not properly separated in analysis. He maintains that the justification of the patent system as an incentive for innovating enterprise and entrepreneurial investment would call for different supporting arguments than the justification as an incentive for inventions, such as that innovations based on patentable inventions are socially more desirable. F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An- Economic-Review-of-the-Patent-System, 56. 177 W. LANDES and R. POSNER, The Economic Structure of Intellectual Property Law, Cambridge MA, Harvard University Press, 2003, 294. 178 P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 146. 179 A. ODDI, “Un-unified Economic Theories of Patents - the Not-Quite-Holy Grail”, 71 Notre Dame Law Review 267, 1996, 275-277.

50 customers. Basically, the argument says that in order to encourage people to apply themselves to innovative activity, they need strong external incentives - such as patent protection.180

The fundamental problem with intellectual goods is the ability to copy them. Regular goods, as in tangible goods such as cars or chairs, are not susceptible to copying. In economic terms, they are called “rivalrous” - i.e. the enjoyment of the good by one person defeats another person’s ability to enjoy that good - and “excludable” - i.e. a person can prevent other persons from enjoying the good. Conversely, intangible goods such as technological innovations (or simply, information), are “non- rivalrous” and “non-excludable”.181

The use of a piece of information by one person does not reduce the quantity available to other persons and there is nothing you can do to stop other persons to use it. Information can be used by more than one person at the same time, i.e. it is non-rivalrous, and one person can’t stop others from using it, i.e. it is non-excludable. These non-excludable, non-rivalrous goods are called public goods, in the sense that, from the moment they are created, they are instantly at the disposal of the public at large. This leads to an adverse effect of potential free riding by third parties on the incentives to engage in innovative activity, i.e. the free-rider problem.182 The copyability problem is also recognised by Machlup, yet he minimises the extent of the problem and emphasises the importance of lead time advantages. He states that, for product innovations, always a minimum amount of time will pass before the invention has been detected, copied and marketed by competitors. In the case of process innovations, he asks whether the invention can ever be copied, since the underlying process often remains invisible. Only when the inventor is unable to assume a dominant market position, the investments are too high or competition is quick to react, the investment can not be recovered.183 Taylor and Silberston agree that lead time can indeed be sufficient to recover the investment, but only in the case that the product life-cycle is short and technological development moves fast.184

Yet the classical starting point is that the production of public goods cannot be left to the free market and that state intervention is necessary. However, the fact that certain public goods, such as scientific principles or mathematical formulas, non-patentable inventions, discoveries or market strategies, are

180 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 630. 181 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 4-5. The authors refer to the famous quote by Thomas Jefferson indicating the non-rivalrous character of intellectual goods: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” In economic analysis, innovation is assimilated to the production of information. 182 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 628-629. Stating that “If no one pays for the ride, the bus isn’t going anywhere.” 183 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 60. 184 C. TAYLOR and A. SILBERSTON, The Economic Impact of the Patent System. A Study of the British Experience, Cambridge, Cambridge University Press, 1973, 27.

51 indeed developed without state interference, suggest that it is untrue that a market for public goods, such as the one of knowledge or ideas, cannot function without state intervention. The market can function through for example technological barriers, complementary goods, grouping of goods, contractual mechanisms or market strategies.185

In some fields, intervention will be necessary, in others, not. Just because knowledge is a public good, does not automatically imply that there will be market failure. If, in the absence of patent protection, market failure would arise, market players might automatically develop mechanisms that lead to a functioning market.186

The patent system seems unjustifiable from a free market perspective. However, most free market supporters accept that patent protection is a necessary exception because of the assumption stated above. According to traditional economic rationale, intellectual goods such as innovations will not be produced in a free market.187 If it is impossible for the person undertaking the expense to appropriate sufficient returns, this will lead to under-investment in technological development.188 The patent system tries to overcome this problem by securing appropriability via an exclusive right, in return for disclosure.

The mechanism is necessarily imperfect because the reward-incentive is given at the cost to society of excludability. However, society benefits because, in the absence of the patent protection, the innovation would not have occurred. The reasoning is that by temporarily blocking third parties from using the innovation, the patent system makes innovation possible.

The fact that ideas are non-rivalrous and non-excludable, allows a person who comes to an idea to both keep and sell the idea and also allows the person who receives or buys an idea to both keep and re-sell it. From the moment a freely and at cheaply copyable good as an invention enters the market, the price will drop tremendously.189 Inventors realise they will experience difficulties covering their costs, let alone make a profit, and will decide not to produce such a good. This constitutes a loss in welfare from the perspective of the public at large, because goods for which a market exists, are not created.190 Accordingly, to make sure people will still be willing to venture into innovative activity and

185 T. PALMER, “Intellectual Property: A Non-Posnerian Law and Economics Approach”, Hamline Law Review, Vol. 12, No. 2, 1989, and http://tomgpalmer.com/wp-content/uploads/papers/palmer-non-posnerian-hamline-v12n2.pdf, 276-297. 186 O. LAMME, Octrooirecht: Vloek of Zegen, Universiteit Groningen, Masterthesis, 2006 and www.iusmentis.com/octrooien/lamme-vloekofzegen/scriptielamme2006.pdf, 34. 187 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 630. 188 R. NELSON, “The Simple Economics of Basic Scientific Research”, 67 J. Pol. Econ., 1959 and http://cstpr.colorado.edu/students/envs_5100/nelson_1959.pdf, 298-302. 189 Johnson gives the example of a cave dweller who was the first to make fire. He can sell a flame (or the knowledge on how to start a fire) for a lot of money, but only once. After that, the acquirer of the knowledge or the flame can start re-selling his flame or knowledge and undercut the price of the original inventor. E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 632. 190 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 5.

52 intellectual goods will be produced, there is a need for a incentivising reward, commensurate with the value of the innovative activity.

However, by allowing the patentee to exclude people from the use of a non-excludable good, and by making it possible for the patentee to charge money for the use of the good, the use of the innovation is rationed. This because the non-rivalrous nature of a good has as consequence that the marginal cost of serving an additional consumer is zero. What would otherwise be a freely accessible good, now has to be paid for because of the patent protection. As a result, less people will be willing/able to use the innovation, resulting in a deadweight loss.191

Classical economic theory not only states that in a free market, intellectual goods will not be produced, moreover, it states that they will not be produced at optimum levels.192 To have intellectual goods created at optimum levels, what is needed is equality between the innovator’s aggregate receipts and the cumulative amount users are willing to pay. In other words, to allow optimal production of intellectual goods, the creator of those goods has to be able to collect their full value. To obtain the optimal level of innovation possible, some market intervention is necessary.193 Allowing the inventor to temporarily exclude others from using his invention, is thought to assure the inventor that his efforts will be compensated commensurate with their value.

b. The Impact of Patents on Innovation

For the incentive theory to justify the patent system, the following has to be true: the patents system promotes innovation, it is the best way to do so, and, the benefits of the system outweigh the costs.

Does providing a temporary exclusive right actually and efficiently stimulate innovation? This is one of the most persistent empirical questions in the economics of technological change. However, robust conclusions regarding the empirical consequences of patents on technological innovation are few.194 Cohen and Merrill give two causes for the lack of empirical analysis: (1) insufficient data, and (2) the

191 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 5,7. 192 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 630. 193 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 632-633. E.g. if an invention is worth € 1000 to a thousand people, then the invention has a value of € 1 million. The optimal economic outcome is for someone to create the invention for € 1 million. 194 A. JAFFE, “The US Patent System in Transition: Policy Innovation and the Innovation process”, Research Policy 29, 2000, https://www2.bc.edu/~zlate/biotech/Jaffe2000.pdf, 531. Jaffe also noted that there is “widespread unease that the costs of stronger patent protection may exceed the benefits” and that this is suggested by both theoretical and, to a lesser extent, empirical research (p. 555).

53 fact that “the effect of patent policy has many dimensions,” making it hard to determine how any particular aspect of patent policy affects innovation.195

While it is true that patent protection encourages inventions, this does not automatically imply technological progress. Patents may even halt progress by restricting use of previous knowledge. Empirical research on the economic effects of the patent system as a whole on technological progress is difficult, scarce and inconclusive. It has not yet been able to provide a response to the question of whether the incentive to innovation - if indeed effective -, is worth its costs.196 At the moment, due to a lack of information, we simply cannot say with certainty whether the patent system as a whole stimulates innovation.197 Even if we were able to say that the patent system does stimulate innovation, the question remains if the absence of the system or alternatives would do so even more. Keeping in mind the crucial importance of innovation for technological progress and thus economic growth and the world economy,198 it is of the utmost importance to know the impact of patent law on innovation so we can get innovation incentives right.

A growing body of empirical research appears to question that patent laws promote innovation. Von Hippel stated, already in 1988, that empirical data indicates that patent protection has little value to innovators in most industries, and that innovators do not regard patents as very useful to exclude imitators or collect royalties in most industries.199 Cohen and Merrill conclude that there are reasons to doubt whether the patent system advances innovation “in a substantial way in most industries” both theoretically and empirically.200 One of the causes they suggest is that of broad patent protection on upstream inventions, impeding follow-up innovations - relating to cumulative innovation. Boldrin and Levine argue that without patents, we would have more innovation, and call for the abolition of patent law.201 Bessen and Meurer conclude in the same way that their evidence implies that patents “place a

195 National Research Council, Patents in the Knowlegde-Based Economy, S. MERRILL and W. COHEN (eds.), Washington DC, The National Academies Press, 2003, 3-4. 196 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 8-9. 197 It seems curious that patent protection has often been strengthened with reference to the incentive theory, not knowing if the patent system is an efficient way of providing a stimulus to innovate. Moreover, economic experiments that extended or strenghtened patent rights do not seem to show clear evidence of increased innovation, except, perhaps, to a limited degree among the wealthiest nations. J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 13. 198 F. SCHERER and D. ROSS, Industrial Market Structure and Economic Performance (3rd ed.), Boston, Houghton Mifflin, 1990, 660. This duo opines that rapid technological progress requires a subtle mix of competition and monopoly, with more emphasis on competition and with the role of monopolistic elements diminishing when rich technological opportunities exist. 199 E. von HIPPEL, Sources of Innovation, Oxford, Oxford University Press, 1988, http://web.mit.edu/evhippel/www/sources.htm, 48-51. 200 National Research Council, Patents in the Knowlegde-Based Economy, S. MERRILL and W. COHEN (eds.), Washington DC, The National Academies Press, 2003, 2. 201 M. BOLDRIN and D. LEVINE, Against Intellectual Monopoly, Cambridge, Cambridge University Press, 2008 and http://levine.sscnet.ucla.edu/papers/imbookfinalall.pdf, Chapter 4, 1.

54 drag on innovation” and that “without this drag, the rate of innovation and technological progress might have been even greater, perhaps much greater”.202

Lerner finds that, subject to several caveats about research design such as the fact that patents are an imperfect measure of innovation, that the effect of patents on the promotion of innovation may be negative. Studying patent reforms in 60 countries over 150 years, he finds that although stronger patents tend to have a positive effect on foreign direct investment - since the expropriation risk is mitigated - strengthening patents beyond a certain treshold may be detrimental to domestic innovation.203

Boldrin and Levine maintain that patents have negative consequences because they negate competition and are generally unnecessary. On top of that, they find empirical pro patent arguments in the doctrine weak, stating there is no evidence that patents promote innovation and productivity, unless those are identified with the number of patents awarded. They find that the number of patents has no correlation with measured productivity.204 Other studies suggest that patents do correlate with productivity.205 The duo states that the Cohen et al. survey indicates that the majority of patents is part of an arms race (constructing a patent portfolio as weapons and defenses against other companies). They conclude that, “if all firms [in the arms race] get counterbalancing patent portfolios and all innovate, then they would have innovated in the absence of patents - hence patents do not serve to encourage innovation.” But, if certain companies in the race only have patents, while not infringing others - because they do not produce a marketeable product - they cannot be countersued, so they can share in the profits of others without doing the work. It then follows that patents discourage innnovation and “are a pure waste from a social standpoint.”206

Empirical evidence makes Bessen and Hunt suggest that on average, at least in the software sector, R&D expenditure goes down, as investment in patent protection is increased. This result occurs primarily in industries where strategic patenting is widespread and conflicts with the assumption that granting more patents will increase R&D. If strategic patenting increases, the result might well be less

202 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 146. 203 J. LERNER, “The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues”, 99 Am. Econ. Rev., 2011, and http://www.idei.fr/tnit/papers/lerner3.pdf, 10, finding the lack of a positive impact of strengthening of patent protection a “puzzling result” and J. LERNER, “150 Years of Patent Protection”, NBER Working Paper No. 7478, 2000, http://www.nber.org/papers/w7478, 26-28. 204 E.g. the software industry has developed largely without relying on intellectual monopoly. M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013 and http://research.stlouisfed.org/wp/2012/2012- 035.pdf, 3. 205 See e.g. S. LACH, “Patents and Productivity Growth at the Industry Level: A First Look”, 40 Econ. Lett., 1995 and Z. GRILICHES, “Patent Statistics as Economic Indicators: A Survey”, 28 J. Econ. Lit., 1990. 206 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 7-8. They refer to the recent patent war between Apple, Samsung, Microsoft and Google, noting that Microsoft acts as a patent troll, not being able to bring to market a competitive smartphone or tablet, and tries to share in the profits of its competitors through patent royalties.

55 innovation.207 Bessen and Meurer find that their empirical research suggests that the patent system provides little incentive to innovate to most public firms, which are responsible for the majority of R&D. Consequently, it “seems unlikely that patents today are an effective policy instrument to encourage innovation overall.”208 They also claim that empirical evidence suggests that much innovation is not dependent on patenting and that patents are not the only, and not even the most important means of incentivising innovation. On average, patents appear to deliver only a small contribution thereto.209 Based on their empirical evidence, Bessen and Meurer maintain that during the late 1990s, patents provided a net disincentive to innovation outside the chemical and pharmaceutical industries.210

Pollock concludes from his research that in the absence of intellectual property rights, a significant amount of innovation still occurs and welfare may actually be higher than with intellectual property rights. He explains this is not simply because - conditional upon the innovation being made - greater competition without patents leads to in increased output and lower deadweight losses, but rather, because the set of innovations occurring under a patent system are, “on average, less socially valuable because they have have higher fixed costs of creation.”211

A study conducted by Torrance and Tomlinson, in which they apply a simulation game approach (“The Patent Game”), suggests that a system that combines patent and non-patent protection (which is similar to modern patent systems) “generates significantly lower rates of innovation, productivity and social utility than does a commons system [i.e. a system in which no patent protection exists].”212

A reason why this might be so is offered by Benkler. Refering to the “standing on the shoulders of giants” concept, he explains that increasing patent protection increases the costs that potential innovators have to pay for existing knowledge more than it increases their ability to appropriate the value of their own contributions.213 Phrased differently, innovators who incorporate previous patented inventions in their own inventions, have to pay more - e.g. in time, effort and legal fees for negotiating licenses or litigating - for the use of the patented invention than they can appropriate by exploiting their own follow-up invention.

207 J. BESSEN and R. HUNT, “An Empirical Look at Software Patents”, Research On Innovation Working Paper no. 03- 17/R, 2004, http://www.researchoninnovation.org/swpat.pdf, 41. 208 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 216. 209 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 118. 210 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 142. 211 R. POLLOCK, “Innovation and Imitation with and without Intellectual Property Rights”, MPRA paper no. 5025, 2007 and http://mpra.ub.uni-muenchen.de/5025/1/MPRA_paper_5025.pdf, 20-22. 212 A. TORRANCE and B. TOMLINSON, “Patents and the Regress of Useful Arts”, The Columbia Science And Tech. L. Rev., Vol. X, 2009 and http://www.stlr.org/cite.cgi?volume=10&article=3, 162. 213 Y. BENKLER, Wealth of Networks, New Haven/London, Yale University Press, 2006 and http://www.benkler.org/Benkler_Wealth_Of_Networks.pdf, 39.

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Exclusive rights on one innovation are often fragmented in patents on the different components of the innovation. Since several parties each own a patent on a component of an innovation, they are likely to fix a high price for the use of their particular component. Add to that the transaction costs e.g. negotiating licenses, and situations are created where potential innovators are deterred. This is called the “tragedy of the anticommons.”214

These findings are in line with studies of historical evidence, discussed in part II, that suggest that the level of innovation was not higher in countries with a patent system, compared to countries that did not offer patent protection. Moser concludes that the patent system might have a greater impact on the direction of innovative activity, rather than on the level of innovative activity.215

In a more recent experiment, Torrance and Tomlinson find that treating patent protection as a system of liability - only allowing the patent holder to claim damages for unauthorised use - rather than as a system of property - damages and prohibiting further exploitation by the infringer - has positive effects on innovation, production and social utility.216 This is inconsistent with the belief that private property is good for economic development.

Olson claims patent protection should not cover subject matter in fields where innovation is already high due to low R&D costs, lead time, secrecy, etc. Allowing patents in areas where innovation does not suffer market failure, results in inefficiency and cannot be justified from a utilitarian standpoint.217

Jaffe and Lerner state that the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are increasingly found to entail major costs of bringing new products and processes to market. The patent system then misses its goal of fostering innovation and generates waste and uncertainty.218 Indeed, the existence of many patents reduces the incentives to innovate as current innovators are subject to constant legal action and licensing demands from patent holders.219 Still, as most economic literature, they maintain that economic analysis does not support abolishing patents.

Bessen and Meurer note that it makes sense for firms to patent, since they do seem to provide profits for the patent holder. However, when they take into account the effect of other owners’ patents,

214 M. HELLER and R. EISENBERG, “Can Patents Deter Innovation? The Anticommons in Biomedical Research”, Science, 280, 698-701 and https://www.sciencemag.org/content/280/5364/698.full, who are responsible for the term ‘tragedy of the anticommons’, a drawback to the ‘tragedy of the commons’ in which scarce resources in free access are overused and depleted. 215 P. MOSER, “How Do Patent Laws Influence Innovation? Evidence from 19th Century World Fairs”, NBER Working Paper No. 9909, 2003 and http://www.nber.org/papers/w9909, 39. 216 A. TORRANCE and B. TOMLINSON, “Property Rules, Liability Rules, and Patents: One Experimental View of the Cathedral”, 14 Yale J. of L.&Tech. 138, 2011 and http://ssrn.com/abstract=1991453, 159. An interesting result to argue for patent reform in a way that use is allowed, as long as it is paid for, e.g. extensively granting compulsory licenses. 217 D. OLSON, “Taking the Utilitarian Basis for Patent Law Seriously: The Case for Restricting Patentable Subject Matter”, Boston College Law School Research Paper 172, 2010, http://ssrn.com/abstract=933167, 181. 218 A. JAFFE and J. LERNER, Inovation and its Discontents, http://www.nber.org/chapters/c0204, 4. 219 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013 and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 2.

57 including litigation risk, they maintain that “the average public firm outside the chemical and pharmaceutical industries would be better off if patents did not exist.”220 Lessig maintains that “the strongest conclusion one can draw is that whatever benefit patents provide (except in industries such as pharmaceutics), it is small.”221

Despite all theoretical contemplations and empirical studies producing evidence both in favor and against patent law, the effects of patents on innovation remain ambiguous at best.

Since strengthening of patent laws around 1980, there has been a boom in the number of patents, especially in the US. One possible cause is the positive effect of the stronger patent law: additional protection encouraged more investment, leading to more inventions.222 Investment in R&D did indeed increase at the same time as the patent boom, but does not alone account for the entire increase.223 The number of patents has especially increased in new technologies such as information technology and biotechnology. Another reason for the increase in patents might thus be technological progress. However, according to Lévêque and Ménière, technological progress is not a sufficient explanation. Another reason why the patent volume increased could be that in the high tech sectors, inventors often make simultaneous independent inventions. Patenting an invention is then a way of mitigating the (high) risk that another company will develop and patent the invention, then able to block inventors who developed the same invention but chose to keep it secret, from exploiting the invention.224 Basic patent statistics suggest that innovation is flourishing: each year, approximately one million patents are granted worldwide.225 However, as studies show, an increase in patents does not necessarily correlate with an increase in innovation.226 Nicholas found that after the 1883 Patents Act in Britain, the propensity to patent increased significantly, but that there was no increase in the quality of inventive activity. He concluded from the evidence that lower patenting fees made inventors patent more, but not innovate more.

220 J. BESSEN and M. MEURER, Patent Failure - How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton, Princeton University Press, 2008, 16. 221 L. LESSIG, The Future of Ideas, New York, Random House, 2001 and http://www.the-future-of-ideas.com/download/, 205. 222 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 49. It should be noted that the existence of a patent system also prevents certain inventions from being made, because of the litigation risk from infringing other companies’ patents. 223 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 51-52. Yet it is unknown whether the increased innovation is a consequence of the patent system. The number of patents is an imperfect measure of innovation, because not all patents cover technologies of equal importance. Reference to A. JAFFE and M. TRAJTENBERG, Patents, Citations and Innovation. A Window on the Knowledge Economy, Cambridge MA, MIT Press, 2002. 224 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 10, reference to K. KULTTI, T. TAKALO and J. TOIKKA, “Secrecy versus Patenting”, 38 Rand J. Econ., 2007. 225 WIPO statistics database November 2012, http://ipstatsdb.wipo.org.ipstatv2/ipstats/patentSearch. 226 T. NICHOLAS, “Cheaper Patents”, 40 Res. Policy, 2011 and http://www.people.hbs.edu/tnicholas/Cheaper%20Patents.pdf, 325.

58

In conclusion, Lemley, though not going so far as to say that the whole patent system should be eliminated, concludes that “if we are to justify the patent system, we need an alternative theory.”227

c. Patents and Innovation Across Industries

“There is not a universal effect of patents.”228 Studies show significant between-industry differences in the propensity to patent. Lévêque and Ménière conclude that empirical economic studies suggest that patents have “a small but significant” positive impact on R&D, but that this impact varies strongly across industries.229

Moreover, as a general rule, patents tend to be least emphasised by companies in the majority of manufacturing industries, while lead time and secrecy tend to be emphasised most heavily.230 Actually, it seems that only in the pharmaceutical, chemical and biotechnology sectors the additional profits generated by a patent have a positive effect on R&D expenditure.231 Innovations in these industries are characterised by extremely high development costs, uncertain results, and relatively easy and cheap copyability. A one billion dollar investment in the pharmaceutical industry is needed to develop around a thousand drugs, of which only one will be marketable. Given the huge investment and the cheap and easy copyability, patent protection seems vital to ensure return on investment. However, as Boldrin and Levine note, there are other sectors that are characterised by very high fixed costs, such as the automobile industry, where patents are not deemed effective. This makes them believe that the emphasis on patents does not stem from the high development costs, but because disclosure is more meaningful in the pharma sector.232

However, these industries stand rather alone and surveys of R&D managers indicate a lack of faith in patent protection for innovations. The surveys show that lead time and secrecy are deemed more

227 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 59, 106. 228 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 10. 229 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 11, 24. Based on A. ARORA and R. MERGES, Specialized Supply Firms, Property Rights and Firms’ Boundaries, Industrial and Corporate Change, 13, 2003, 451-475. 230 As indicated by the 1983 “Yale” and 1994 “Carnegie Mellon” surveys. See W. COHEN, R. NELSON, J. WALSH, “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)”, National Bureau of Econ. Res. Working Paper No. 7552, Feb. 2000, http://www.nber.org/papers/w7552. Note that these findings are in line with the findings of Moser, she found that the vast majority of inventions at the international exhibitions she examined, were not patented (see Part 2). Boldrin and Levine point out that, since most inventive activity takes place outside the patent system, it is difficult to make the case for patents as a necessary prerequisite to innovation. T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 15. 231 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 51-53, reference to A. ARORA, A. GAMBARDELLA and A. FOSTURI, Markets for Technology: Economics of Innovation and Corporate Strategy, MIT Press, Cambridge MA, 2001. 232 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 4. Remember the rose breeding industry (supra II.D.3.a.)

59 effective than patent protection. Being first to market is in 53 % of product innovations and 38 % of process innovations considered sufficient innovation protection. The survey also indicated that trade secrecy is considered effective in 51 % of both product and process innovations. Studies in Europe come to comparable results. The value of patent protection is estimated at between 15 % and 25 % of total R&D expenditure.233

Moreover, the fact that patents are considered effective in the chemicals, pharma and bio-tech industries, does not necessarily imply that patents lead to more innovation in those industries. The fact that they are considered largely ineffective in most other industries, does imply that patents do not result in more innovation in those industries.234 This, however, does not necessarily follow. There is still a number of innovations in those industries that are patented, so the additional protection the patent system offers, might incentivise innovation to a certain extent. In other words, in these industries, the patent system might be a complement - and in some cases a substitute - to lead time, secrecy and other means such as contractual mechanisms or tying the innovation to complementary sales, services or manufacturing.235 The question is thus what the decrease (in investments) in innovation, if any, would be in the absence of patent law.236

Another problem with the pharmaceutical industry specifically, seems to be that few new treatments constitute real progress. A study of 2257 new medicines in France between 1981 and 2000 revealed that only 11.8 % constituted a real progress (and only 3.3 % were important, and a very small minority very important). The remaining 88.2 %, although not constituting progress compared to existing medication, were nevertheless developed and marketed.237 It is harder to find cures for diseases that not yet have an existing cure. Developing variations on existing medication is easier. However, selling patented medicines that are not proven to produce better results, is hard. The biggest pharmaceutical companies invest an enormous amount in marketing, sometimes even more than in the actual development of the medicine.238 The consumer pays the bill, since the company tries to recover not

233 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 53, references to the following surveys/studies: J. LANJOUW, “Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value”, Review of Economic Studies 65, 1998, 671-710; W. COHEN, R. NELSON and R. WALSH, “Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)”, NBER Working Paper 7552, 2000; E. COMBE and E. PFISTER, The Effectiveness of Intellectual Property Rights: an Exploration of French Survey Data in Multinational Firms and Impacts on Employment, Trade and Technology, eds. R. LIPSEY and J.-L. Mucchielli, London, Routledge, 2002 234 O. LAMME, Octrooirecht: Vloek of Zegen, Universiteit Groningen, Masterthesis, 2006 and www.iusmentis.com/octrooien/lamme-vloekofzegen/scriptielamme2006.pdf, 43. 235 W. COHEN, R. NELSON, J. WALSH, Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not), National Bureau of Econ. Res. Working Paper No. 7552, Feb. 2000, http://www.nber.org/papers/w7552. 236 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 9. 237 O. LAMME, Octrooirecht: Vloek of Zegen, Universiteit Groningen, Masterthesis, 2006 and www.iusmentis.com/octrooien/lamme-vloekofzegen/scriptielamme2006.pdf, 44. 238 See P. BÜGEL, De markt van ziekte en geluk. Farmaceutische industrie ziet vooral profijt in het helpen van gezonde mensen, De Academische Boekengids, 2006, 57, 13.

60 only the costs of development, but also the costs of marketing. A minority of new medicines does indeed have value, the question is, at what cost.239

Also, the contribution of the private sector to research in new medicines seems to be rather small when one considers the percentage of references in scientific literature. One study shows that only 6.2 % of references in literature refers to research done by the private sector. The other part are references to findings in academic, government or non-profit research, who are responsible for most breakthroughs.240 The high costs of monopoly pricing of pharmaceutics - especially for life-saving drugs - makes various economists believe that in the pharmaceutical sector, a system of prizes or subsidies would be superior to the patent system.241

From these studies, one can only conclude that in most fields of innovation, apart from pharmaceuticals, chemicals and biotechnology, patent protection is only secondary or complementary to alternative ways of protection, such as secrecy and first mover advantage. Somaya finds that a patent (portfolio) can provide security, by protecting the coded elements of a new technology that is of crucial importance to a firm’s competitive advantage, while know-how related to the invention is protected by trade secrecy.242 Lévêque and Ménière give Philips as example: the world leadership of Philips in optical technologies, is mainly brought about by its laboratory engineers, while patents only represent the visible tip of its technological capital, offering a way to organise its relations with its competitors and license partners. Thus, at least in this case, the main function of patents is trade facilitation, rather than incentivising innovative activity.243 Studies indicate that license agreements are indeed more common in industries where patent protection is considered effective, such as biotechnology and chemicals.244

Patents, by making return on investment easier in certain industries, have encouraged private agents - both venture capitalists and investors at large - to invest in biotech companies.245 However, potential innovators and start-ups are forced to acquire - under high transaction costs - a large number of licenses in order to work. Similarly, research often requires access to protected databases, for which fees are often charged. So, contrary to its intended purpose, patent protection is becoming an obstacle

239 O. LAMME, Octrooirecht: Vloek of Zegen, Universiteit Groningen, Masterthesis, 2006 and www.iusmentis.com/octrooien/lamme-vloekofzegen/scriptielamme2006.pdf, 45-46. 240 See D. ZINNER, Medical R&D at the Turn of the Millenium, Health Affairs, Sep-Oct 2001, 204 and Public Citizen, Rx R&D Myths: The Case Against the Drug Industry’s R&D “Scare Card”, http://www.citizen.org/documents/ACFDC.pdf, 2001, 8-10. 241 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 5. 242 See D. SOMAYA, “My Strategy Says: ‘See You in Court!’ Determinants of Decisions not to Settle Patent Litigation” in Computers and Research Medicines, Mimeo, Robert Smith School of Business, University of Maryland, 2001. 243 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 53-54. 244 See A. ARORA, A. GAMBARDELLA and A. FOSTURI, Markets for Technology: Economics of Innovation and Corporate Strategy, Cambridge MA, MIT Press 2001, 331 p. 245 See C. HENRY, M. TROMMETTER and L. TUBIANA, « Innovations et droits de propriété intellectuelle: quels enjeux pour les biotechnologies? », Propriété Intellectuelle, La Documentation Française, CAE Report 41, 2003, 263-291.

61 to innovation.246 As evidenced by historic examples (Howe’s lock-stitch; Wright Bros.; etc.), patents can be effectively used to block technological progress. Patent portfolios can be designed to exclude competitors from certain fields of research or even from the market altogether.247 From the early 1980s, in response to the risk of such blocking strategies from other companies, and to have better negotiation positions, large companies started patenting their inventions systematically (‘arms race’).248 Patent portfolio strategies risk stifling innovation: they create stable industries, dominated by a few major players, that are closed to newcomers other than R&D specialised firms.249

Surveys of R&D directors demonstrate the importance of non-IP factors in appropriating returns on investment. Boldrin and Levine report that “it turns out that businesses do not regard patents as a significant factor in their decisions to innovate.”250 As mentioned before, first to market and trade secrecy were considered the most effective ways to appropriating gains from a product and a process innovation respectively. Moreover, patents were largely considered ineffective to obtain that goal. Only a third of respondents said patents were even minimally effective in achieving return on R&D investment. Even in the pharmaceutical sector, the effectiveness of patents is not absolute. A survey by Mansfield indicated that 65 % of pharmaceutical innovations would not have been introduced to the market if it weren’t for patent incentive. That means that over a third of pharmaceutical inventions had not needed the patent incentive to be produced.251 In many other industries, Mansfield reported no evidence to assume that patent protection was necessary for the development of any invention, nor for their introduction to the market.252 In some sectors, such as the software sector, patents have turned out to be, not only to be largely worthless in terms of disclosure, but also costly to defend against.253

246 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 56. 247 See J. BARTON, “Patents and Antitrust: A Rethinking in Light of Patent Breadth and Sequential Innovations”, Antitrust Law Journal 65.2, 1997, 449-466. These strategies are especially common in electronics and IT. A firm’s negotiation power to obtain and give out licenses (cross-licensing) depends on its patent portfolio. Patent porfolios also play a major role in mitigating, organising, or protection from litigation risk. Google bought a Motorala patent portfolio for this reason. 248 E.g. many in the software sector fear the holdup problem. Innovators that do not have patent portfolios and risk patent infringement litigation are dissuaded from innovative activity. F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 59. 249 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 60. 250 M. BOLDRIN and D. LEVINE, Against Intellectual Monopoly, Cambridge, Cambridge University Press, 2008 and http://levine.sscnet.ucla.edu/papers/imbookfinalall.pdf, 62. 251 E. MANSFIELD, “Patents and Innovation: an Empirical Study”, 32 Mgmt. Sci. 173, 1986, 175. 252 E. MANSFIELD, “Patents and Innovation: an Empirical Study”, 32 Mgmt. Sci. 173, 1986, 174-175. 253 Software patents seem a notorious example of not being incentivised by patent law, yet produce a vast mess of entitlements that frustrate the industry. The sector is characterised by its cumulative and complementary (i.e. one innovation is protected by more than one patent. While this is the case for most innovations, this is particularly true for software (and semiconductor) inventions. “… for many commercial sectors, patents are just bringing everyone down.” E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 663, reference to R. THOMAS, “Debugging Software Patents: Increasing Innovation and Reducing Uncertainty in the Judicial Reform of Software Patent Law”, 25 Santa Clara Computer & High Tech. L.J. 191, 2008. Moreover, many software patents are described in a way that software programmers cannot work the patented invention, because it makes little sense to translate programming language to regular language. In an interview, a programmer labeled all the patent descriptions of inventions he had worked on “nothing but crap”, “mungojumbo” and “do

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Finally, the availability of patent protection incentivises bonus-taking behaviour or “rent-seeking”, i.e. to use your resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.254 Johnson concludes that while there is evidence that in certain situations, external incentives are required, this is quite clearly the exception. Innovation has the general propensity to prosper in the absence of external rewards. He denies that a “problem of public goods” exists. The patent system, according to him, is a cure for a disease - lack of innovation - that does not exist.255 Nevertheless, even where patents are generally considered ineffective in appropriating returns, they are often filed. Mansfield found that 50 % of patented inventions were patented because it offered a way to delay potential competitors or could be used as bargaining chips in negotiations.256 Specifically for computers and electronics firms, evidence suggests that patents are taken out to block other firms, prevent law suits and negotiate licences, rather than to prevent imitation.257

In conclusion, the whole body of theories and research has led to a growing consensus among economists that (a) patents offer a real, but limited incentive to innovate in some industrial sectors, (b) that the importance of patents varies substantially across industries, and (c) that the connection between patents and social welfare improvements is extraordinarily complex.258

d. Incentives and Psychology

i. The Individual

Findings in psychology, behavioural economics and business management studies make social scientists argue that the assumption that innovators need external incentives to be motivated to innovate, is a mistake and that natural and intrinsic motivations will cause technology to prosper even in the absence of external rewards or incentives. More and more literature from a primarily social sciences source finds that, for creative, inventive or challenging intellectual labour, intrinsic motivation is the most important driver to take action.259 The idea of intrinsic motivation goes against the homo economicus concept and might seem counter-intuitive, yet the evidence is compelling. not make sense to engineers.” Minute 8-9. http://www.npr.org/blogs/money/2011/07/26/138576167/when-patents-attack, talking about abuses such as non-practising entities and the ‘broken’ patent system. 254 http://www.investopedia.com/terms/r/rentseeking.asp. 255 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 665, 671. 256 E. MANSFIELD, “Patents and Innovation: an Empirical Study”, 32 Mgmt. Sci. 173, 1986, 176. 257 W. COHEN, R. NELSON, J. WALSH, “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)”, National Bureau of Econ. Res. Working Paper No. 7552, Feb. 2000, http://www.nber.org/papers/w7552. 258 P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 136 and references to studies there. 259 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 641.

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People are inherently driven to create. Johnson argues that in general, socially beneficial innovation does not require external incentives.260 He maintains that it’s clear that the “confidence in the classical economic view, with its understandings of incentives and public goods, has been seriously misplaced.”261 He accepts, however, that in some cases, external reward is indeed necessary to spur progress.

Individuals generally do not need patent incentives because they have “the drive to engage in activity because it is interesting and involving.”262 They “derive utility not only from income (as is implied in much of received theory) but also from highly valued social relations and from a sense of self- determination, as well as from capitalising upon their own competence. Moreover, individuals derive utility from processes, not just from outcomes.”263 Tushnet writes on copyright law that approaching creativity as “a product of economic incentives can miss the mark and harm what it aims to promote” because “the desire to create can be excessive, beyond rationality, and free from the need for economic incentive.”264

What is more, studies suggest that extrinsic rewards can work opposite to the intended purpose and can undermine people’s inherent motivation, thus discouraging inventive activity.265 Amabile found that intrinsic motivation is conducive to creativity, but that exctrinsic motivation is detrimental.266 Pink explains that external rewards can transform an interesting task into a drudge, turning play into work.267 These statements are backed by results from experiments in which subjects performed creative problem-solving exercises worse when a cash incentive was offered.268 Deci, Koestner and Ryan conclude, based on findings in 128 experiments, “that tangible rewards tend to have a

260 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 624-625. Johnson also reminds the reader of the birth of the patent system. Although it is widely thought that patents were cleverly created to solve market failure, the patent system was given life before the incentive to innovate theory. So rather than the incentive theory being the raison d’être of the patent system, the ‘être’ preceded the ‘raison’ (p. 635). What is more, modern economics was only developed after the development of modern patent law (p. 637). Although not responsible for the coming to be of the patent system, the incentive theory is responsible to justify its retention, expansion and strengthening (p. 640). 261 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 647. Reference to the works refered to in footnotes 93-102. 262 T. AMABILE, Creativity in Context, Boulder, Westview Press, 1996, 17. 263 B. FREY, Happiness : a Revolution in Economics, Cambridge MA, The MIT Press, 2008, at ix. 264 R. TUSHNET, “Economies of Desire : Fair Use and Marketplace Assumptions”, 51 Wm. & Mary L. Rev. 513, 2009 and http://ssrn.com/abstract=1498542, 528-532. 265 For a more extensive frame of reference to studies on the subject, see E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 643-647. 266 T. AMABILE, Creativity in Context, Boulder, Westview Press, 1996, 15. 267 D. PINK, Drive: The Surprising Truth about what Motivates Us, Riverhead Books, 2009, 37. He calls this the Sawyer Effect, named for the cunning way in which Tom Sawyer tricked his friends into doing his chore - whitewashing a fence - and even making them pay him money for it, in Mark Twain’s The Adventures of Tom Sawyer. Similarly, services for friends can give one a certain social esteem, while doing the service in exchange for money, might make it into unrespected work, not worth doing. 268 E. DECI, “Effects of Externally Mediated Rewards on Intrinsic Motivation”, 18 J. Personality & Soc. Psychol. 105, 1971 and http://selfdeterminationtheory.org/SDT/documents/1971_Deci.pdf, 114. Subjects were asked to solve puzzles.

64 substantially negative effect on intrinsic motivation.”269 Conform Pink’s reasoning, Deci opines that the reason for this is that people lose their natural excitement and vitality for the activities, and start seeing them as mere instruments for getting the cash reward.270 A survey of 684 programmers who participate in open-source software projects indicates that enjoyment-based intrinsic motivation is at the basis of their programming activity.271

ii. The Corporation

The destructive effect of extrinsic incentives on the will of individuals to engage in innovative activity is quite well established. However, the patent system is mainly used by companies, although the argument of the ‘heroic inventor’ is frequently used to justify the patent system.272 Besides, many inventions require tremendous investment and cannot be done by a sole inventor. The findings in social sciences on individual behaviour do not automatically apply to company behaviour. Companies are legally bound to be oriented toward profit. As such, companies are not intrinsically motivated. The homo economicus concept applies in a - much - stronger degree to companies than it does to individuals. However, company behaviour is expressed through employees and managers who are intrinsically motivated, and persons can be inherently motivated to be employed by companies active in public goods projects that are too capital-intensive for the sole inventor. Thus, despite being artificial creations of law, companies are made up of individuals and only capable of acting through those individuals. At least to some extent, company behaviour will be affected by intrinsic motivation.273 The assumption that all company behaviour is rationally calculated to benefit the shareholders is a theoretical ideal and does not fully reflect the complex reality.

However, these effects will only distort corporate action to a limited extent. Having intrinsically motivated managers and employees does not imply that companies would pursue capital-intensive

269 See E. DECI, R. KOESTNER and R. RYAN, “A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation”, 125 Psychol. Bull. 627, 1999, 658-659. 270 See E. DECI, R. FLASTE, Why We Do What We Do: The Dynamics of Personal Autonomy, Putnam’s Sons, 1995, 25. They have called the non-monetary rewards that foster intrinsic motivation the “self-determination theory”. 271 See K. LAKHANI and R. WOLF, “Why Hackers Do What They Do : Understanding Motivation and Effort in Free/Open Source Software Projects”, in J. FELLER et al. (eds.), Perspectives on Free and Open Software, 2005. 272 Already in 1958, Machlup said “the role of the “evening-and-Sunday inventors” has become quite insignificant in our age of organized research and development.” F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 45. 273 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 666.

65 innovation in the absence of external incentives, such as patents.274 The economically rational tendency of companies will often overshadow its employees’ or managers’ intrinsic motivation.275

Johnson then poses the question whether the external incentive theory holds true for corporations and answers it negatively, at least in general.276 He bases his answer on empirical research. As previously mentioned, surveys show that in most industries, patents are considered to have only minor or secondary importance in order to appropriate returns on investment. Further, surveys of business managers show a surprising ignorance of what must be done to claim patent protection, suggesting that patent protection is not vital to business decisions to innovate and that patents are not driving innovation.277 Returns on R&D expenditures often stem from marketing strategies and particular ways of business conducting, including lead time/first-mover-advantage, sales-and-service/post-sale- services expertise, superior manufacturing capacity, scale, and rapid progress down the learning/cost curve (i.e. experience demonstrates ways of cutting costs and improving the product).278

e. The Industry Lifecycle

To fully understand patents in practice, Boldrin and Levine argue that it is necessary to examine the lifecycle of industries. Typically, a new industry begins with a competitive burst of entries through which very many innovators try hard to get their products to market. In this stage, many firms bring different versions of the new product to market, demand rapidly grows and the product is rapidly improved, resulting in high price elasticity. For the innovator, it is crucial to get the product to market as fast as possible and reduce costs, rather than to dominate the market.

274 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 668. 275 The gap could be filled by intrinsically motivated philantropy, such as crowd-sourced funding see e.g. the Kickstarter project. E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 666-669. 276 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 661. 277 See R. PITKETHLY, “UK Intellectual Property Awareness Survey 2006”, UK Intellectual Property Office 11, 2006, http://www.ipo.gov.uk/ipsurvey.pdf. According to E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 661-662, 664-665, this backs the statement that the need for external incentives - since many business managers seem largely unaware of them - is the exception rather than the rule. The survey indicated that 98.4 % of companies reported not offering any specific incentives to staff to obtain IP rights, such as patents. Of the companies that reported having patents, 87.7 % said not to search infringers actively. The surveyers concluded that IP awareness should be promoted. Johnson wonders why: since firms are innovating without being aware about patents, then patents are not what’s driving innovation. 278 E. JOHNSON, “Calibrating Patent Lifetimes”, 22 Santa Clara Computer & High Tech. L.J. 269, 2006, 278. E.g. Fear of being caught up by competitors can keep companies on their toes and incentivise them to constantly innovate. As Zuckerberg said: “One of the core values of Facebook is to move fast.”278 If a company moves fast enough, they keep copying competitors behind, since copying always takes at least a minimum amount of time. As two of Schumpeter’s generally agreed upon principles go: (1) innovations continually upset testablished relationships in markets and organisational structures through a process of ‘creative destruction’; (2) technological innovation provides the opportunity for temporary monopoly profit (by being first to market). R. MERGES, “Commercial Success and Patent Standards: Economic Perspectives on Inovation”, 76 California Law Review, 1988, 843 and F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 59.

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As the industry matures, demand stabilises, cost-reducing innovations become harder, and elasticity drops. The potential for additional product innovation shrinks and the benefits of monopoly power grow. Typically, a shake-out takes place: many companies are bought out of the industry or simply disappear (the duo mentions the automobile industry and the recent dotcom bubble to give an example). At this point, market dominance prevails over bringing products to market quickly. Rent- seeking becomes attractive and patents are taken out to prevent entry to the market. Patent litigation takes place - “the dead hand of dying institutions [e.g. Texas Instruments, Microsoft] gets hold of the industry as they attempt to tax consumers, new entrants and any potential competitor” - and innovation is at a low rate.279

The political demand for stronger patent protection does not come from new and innovative companies or industries, but from old and stagnant ones.280 The political economy of the patent system is the reason why Boldrin and Levine recommend abolition rather than reform. They argue that the patent system is how it is, because it cannot be otherwise. The ‘optimal’ patent system - whatever that may be - a benevolent dictator would adopt, is pointless to advocate, since not of this world. They accept that the recommendation of reform rather than abolition is “fine”, but if the political economy makes it impossible to accomplish reform, abolition is the proper solution.281 They criticise Landes and Posner, and actually most other industrial organisation researchers, for not attempting to explain why the patent system is highly used in mature industries, and scarcely used in new ones, or why it seems to be capable of only becoming larger - expanding patentable subject matter - and stronger - increasing scope, duration, etc. of protection -, making the system ever costlier.282 They name the rent- seeking efforts of large, cash-rich companies unable to keep up with new and creative competitors as the driving force of each strengthening.283

Scherer asks why political forces increase patent protection so much in light of the fact “[…] that the record of debates on the enabling bill contains no solid evidence that the change would in fact stimulate R&D, and that there is no evidence of an acceleration in company-financed R&D between the 27 years before the bill was enacted and the 18 years thereafter.”284 Boldrin and Levine extend the

279 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 5. The evolution from 1991, when Bill Gates said “If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today…A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose”, to Microsoft’s licensing and litigating behaviour today, and its lobbying in Europe and Asia to adopt software patents, is remarkable to say the least. 280 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 1. 281 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 10. 282 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 11-12. 283 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 14. 284 F. SCHERER, “The Political Economy of Patent Policy Reform”, 7 J. on Telecomm. and High Tech. L. 167, 2009 and http://ssrn.com/abstract=963136, 30.

67 question to: why did a theoretically sound institution, such as the patent system was supposed to be, “degenerate into something so socially damaging exactly during the three decades in which academic research was realising the limitations and potential dangerousness.”285 They provide the following reasoning to answer the question.

There are many players in the patent game but consumers are not among them. The lobbying incentive and power of proponents of the patent system is greater than that of opposers. This results from the fact that interested parties, such as monopolists and patent attorneys, have more to gain from the introduction and strengthening of patent protection than the individual consumer suffers from the costs that come with it.286 To understand why the patent system is the way it is, the duo holds that it is necessary to understand the motivations and incentives of the relevant players. However, an empirical, quantitative analysis of the stakes involved and of the gains and losses to both the active players and to the rest of society, from the general public to the innovators-that-never-were because of patent protection, is yet to be conducted.287

2. Disclosure of Inventions

The whole invention is disclosed in the patent. Consequently, at least four types of information become public knowledge: information about (1) the existence of the invention and the patent, (2) the identity of the developer and/or patentee, (3) the technology itself and (4) the scope of protection.288

a. The Grand Bargain

The patent system, by offering an exclusive right for a limited period, tries to obtain a balance between on the one hand the incentive to innovate, and the diffusion of the resulting innovation on the other. The incentive to innovate is provided by making the innovation excludable (allows cost covering and profit making), for a certain period, during which consumption is rationed and society suffers a deadweight loss. Patents thus create artificial scarcity and restrict competition - solving the non- excludability problem. When the term of the exclusive right expires, the innovation enters the public domain and is accessible free of charge to all, which makes the deadweight loss disappear, but also

285 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 11-12, reference to F. SCHERER, “The Political Economy of Patent Policy Reform”, J. Telecomm. & High Tech. L., Vol 7, 167-216. 286 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 11. 287 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 14-15. 288 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 35.

68 makes the patentee lose his income, which might lead to socially useful innovations not being produced.289 Seeing that the patent needs to disclose the invention, the invention is known by the public. Once the patent expires, the invention becomes a rivalrous good.290

By providing an exclusive right in return for dissemination of innovations, more innovations are made that can be divulged. Robinson describes the justification of the patent system as the ‘paradox of patents’: “[…] by slowing down the diffusion of technical progress it ensures that there will be more progress to diffuse. […] Since it is rooted in a contradiction, there can be no such thing as an ideally beneficial patent system.”

The economic justification for patents stems from a belief in the idea that dynamic positive effects - stimulating innovation - associated with patents outweigh the static costs.291 Patent law tries to balance these two types of economic efficiency objectives.

In return for allowing patentees to exclude others from the use of their patented invention, they are obliged to disclose their invention. Otherwise, society would not become ‘smarter’. This kind of ‘social contract’ between society and inventor is in economic jargon called the trade-off between static efficiency, to promote access and use by the greatest number, and dynamic efficiency, which refers to the improvement and renewal of production techniques and goods over time.292 The trade, however, is only fair if at the time the patent expires, the invention still contains useful information to society.

The mandatory disclosure benefits society because knowledge is diffused.293 According to Machlup, the benefits of disclosure should not be overestimated, since inventions will only be patented if they cannot be kept secret.294 This opinion is in line with surveys of companies indicating that patent

289 A balance has to be found between the following two extremes: 1: infinite legal protection (to do away with the problem posed by non-excludability), and 2: no legal protection (to do away with the deadweight losses incurred by society as a result from charging money for otherwise freely available public goods). F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM- eBookIP.pdf, 7. In the absence of patent protection, there would be less innovation. J. ROBINSON, “The Accumulation of Capital, Homewood”, I11., Richard D. Irwin, 1958, 87. 290 Disclosure requirements are said to improve technological knowledge and spur further research. P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 146. 291 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 6. 292 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 5-7. It should be noted, however, that (most) knowledge is hard to keep secret, that the disclosure requirement is often not taken very seriously by patent offices, and that patentees’ interest is too disclose as few as possible, so they might hold off competition even after the protection period expires. E.g. know-how related to the invention is often withheld and protected by trade secrecy. Now, with software patents, this problem has become of considerable importance. 293 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 6, 10. 294 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 24.

69 databases are one of the least important sources for information to learn from inventions. 295 It should be mentioned however, that some innovations that can be kept secret, will be patented, e.g. when the inventor is in doubt whether secrecy will be effective, when the inventor wants to license the invention, or when it is likely that others will come to the same invention (and patent it).

Because patentees are obliged to disclose their invention, often is talked about the ‘incentive to innovate’ and the ‘incentive to disclose’.296 In my view, since many innovations go unpatented, and innovations that can be kept secret will mainly not be patented, the incentive is not directly aimed at the disclosure part. The incentive is to innovate.

The protection-in-exchange-for-disclosure is not always desirable for the inventor - otherwise secrecy would not be so widespread. The justified fear exists that by disclosing the invention, others can imitate, and the patentee will have to - first, sometimes actively look for, and then - defend the validity of his patent in expensive litigation.297 Another danger is that by disclosing the invention, others can circumvent or ‘invent around’ the patent.

The fact that disclosure allows for copying and inventing around might in fact result in a loss for the patentee. Patentees are thus incentivised to limit the disclosure as much as possible.298 The opinion expressed by Denicolò and Franzoni that the more protection a patent confers, the more information innovators will accept to disclose,299 while logical, probably only holds true up to some point. Seeing that most innovations do not have a lifespan of 20 years, that point has probably long been surpassed for most industries. Also, stronger patent protection might not affect the willingness to disclose enough to reduce the will to maximise profits (and thus patentees disclose as little information as possible).

Surveys indicate that mandatory disclosure is one of the main reasons why inventors are unwilling to take out a patent.300 Indeed, patent disclosure hightens the imitation and circumventing risk by allowing competitors to access and use the information. This is backed by surveys indicating that

295 It is possible that, in the future, due to online availability, patent databases become a more important source. Yet, note that many (US) companies prohibit their employees-inventors to research patent databases out of fear for higher damages in case of (‘wilful’) infringement. 296 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 22. 297 W. LANDES and R. POSNER, The Economic Structure of Intellectual Property Law, Cambridge MA, Harvard University Press, 2003, 295. 298 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 36. 299 V. DENICOLO and L. FRANZONI, “The Contract Theory of Patents”, International Review of Law and Economics 23, 365-380. 300 W. COHEN, R. NELSON, J. WALSH, “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)”, National Bureau of Econ. Res. Working Paper No. 7552, 2000, http://www.nber.org/papers/w7552 and Ministerie van Economische Zaken, “Intellectueel Eigendom en Innovatie. Over de rol van intellectueel eigendom in de Nederlandse kenniseconomie”, Den Haag, 2001, 36.

70 competitors’ patents - although varying across jurisdictions301 - are a much used source of information on competitors’ R&D and for designing and implementing one’s own R&D strategy (note this is not the same as using others’ patents to learn from them to invent something yourself). Sometimes, even ‘fake’ patents are taken out, to confuse or misdirect competitors.

Thus, if a patent is indeed taken out, it is in the interest of the patentee to disclose as little information as possible. If a patent is taken out, the patentee will try to disclose only the information that can not be kept secret. The value of such a disclosure is obviously very limited, since the total innovation can not be imitated.302

b. Benefits of Disclosure

Once the innovation has been divulged, others can build on these disclosed innovations and can identify unsolved problems more easily. The publication allows for research that is directly linked to an initial innovation and that, in the absence of disclosure, would not have been undertaken.303 This way, the initial innovation might set a wave of innovations in motion that are based on the initial innovation. These innovations are called “cumulative innovations”.304 Cumulativeness is another characteristic of ‘knowledge’.305 It means knowledge can not only be consumed, but also function as primary production factor for the creation of new knowledge.

Another benefit of disclosure, mainly for competitors, is that it can reduce costs and makes better organisation of R&D possible by saving on useless R&D duplication, thereby also allowing them to allocate their resources to other research areas.

301 J. ORDOVER, “A Patent System for Both Diffusion and Exclusion”, Journal of Economic Perspective, 1991, 45. Japan: geared towards diffusion (quick patent filing and disclosure), US: strong protection, yet low disclosure requirements, EU: intermediate position. 302 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 24. 303 As Isaac Newton said: “If I have seen furter it is by standing on the shoulders of giants.” As historical and industry studies indicate, most inventions indeed build upon existing work. P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 137, 140. 304 Cumulative innovations can be: improvements (of the quality) of an existing product, cost-reduction of a production process, a new application for an existing invention, or research tools (i.e. tools used to produce other innovations). F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 61-62; F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 37-38. Who should receive protection for a cumulative innovation? If the initial patentee is not offered strong enough protection, he might not invest to come to the initial invention, thereby also eliminating the possibility of cumulative innovations. If the owner of the initial patent receives protection for all cumulative innovations, this will create a problem of holdup, in which no one or too few will seek to come to a cumulative innovation. Thereby, also the initial innovator will be less motivated to invest in inventing an initial innovator. Empirical work conflicts. See T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14- 036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 7 and references there. See also Hettinger’s opinion on the matter in Part II. 305 It is the “standing on the shoulders of giants.”

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Although at first sight, disclosure does not appear to confer any benefit to the patentee, the disclosure can indeed have a positive effect for the patentee. Namely, patents may provide a useful indicator of innovators’ performance and emit credible information towards other actors in the market.306 Companies use patents to attract venture capital or investors at large. Indeed, it appears that start-ups have a higher propensity to patent and that the grant of a patent or the expiration of one can have a severe impact on a company’s value.307

c. Evaluation of the Disclosure Theory

Do the benefits of the disclosure outweigh the costs of the patent system? In other words, to what extent does the disclosure requirement in itself justify the existence of the patent system? Since one of the two fundamental functions of the patent system is that inventions are disclosed and knowledge is diffused, thereby allowing further innovations, one should expect that disclosure provides a strong justification for the patent system. The answer seems to be inconclusive due to a lack of empirical data that show whether the benefits of disclosure outweigh the costs of the patent system.

However, some find the information-revealing function of the patent system to be largely illusory.308 Devlin finds the disclosure to play merely an ancillary role in the larger purpose of the patent system and maintains that expanding patentable subject matter beyond the required level to spur the creation and commercialisation of innovations cannot be defended by the disclosure theory because the patent regime requires disclosure at the expense of ex ante incentives.309 Lemley states that the disclosure theory, in its present form, cannot support the patent system since inventors don’t learn their science from patents. If they read patents at all, it is to know what is owned, not what is known - researching patents to develop a strategy, rather than become more capable in the art.310 He examines two indirect theories of disclosure on their justifying power.

The first theory is that patents encourage public disclosure of inventions that would otherwise be kept secret. However, Lemley argues that companies primarily rely on patent protection to protect

306 C. LONG, “Patent Signals”, University of Chicago Law Review Vol. 69, No. 2, 2002 and http://ssrn.com/abstract=320941, 679. 307 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 40-41 and references there. 308 A. DEVLIN, “The Misunderstood Function of Disclosure in Patent Law”, Harvard Journal of Law & Technology, Vol. 23, No. 2, 2010, http://www.inventions.org/wp- content/uploads/2012/10/MisunderstoondFunctionOfDisclosureInInPatentLaw.pdf, 410, reference to D. BURK, “The Role of Patent Law in Knowledge Codification”, 23 Berkeley Tech. L.J. 1009, 2008, 1010. 309 A. DEVLIN, “The Misunderstood Function of Disclosure in Patent Law”, Harvard Journal of Law & Technology, Vol. 23, No. 2, 2010, http://www.inventions.org/wp- content/uploads/2012/10/MisunderstoondFunctionOfDisclosureInInPatentLaw.pdf, 444. 310 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 74-78. He refers to the incentive patentees and patent lawyers have to disclose vaguely, the delay in publication of the disclosure the disclosure confers the state of the art of a moment pretty far in the past, the huge mass of patents and the fact that lawyers often advise engineers not to read patents (wilful infringement damages are higher).

72 inventions that are self-disclosing or can be reverse engineered and that they will only take out a patent if an invention cannot be kept secret at reasonable cost.311 More empirical research is necessary to back this argument, and as I mentioned higher, some innovations that can be kept secret, will be patented, but the argument does sound logical.

The second theory relies not on public disclosure of the invention, but on the private communication thereof. In this theory, patents are justified on the basis that they encourage the transfer of technologies by creating rights that can actually be transferred (sold/licensed). Patent law has created a system of temporary, exclusive rights that are transferable. The first two characteristics relate to specific properties of information, i.e. non-rivalrousness and non-excludability. They reflect the trade-off between static efficiency, to promote access and use by the greatest number, and dynamic efficiency, to foster innovation. The question is whether the compromise between incentive and disclosure is beneficial or detrimental in terms of social welfare.

Facilitating the transfer of technological innovation, an intellectual property asset, is a major economic function of the patent system.312 From an economic perspective, the ability to transfer rights is as important as exclusivity. This because, by permitting trade and reducing transaction costs, it facilitates the invention to end up in the hands of the party who values it most, by selling or licensing the patented invention. What is more, by licensing, additional revenues are generated, increasing the value of patents and thus the incentives to innovate.313

Exclusivity and temporality on the one hand, and transferability on the other are complementary: when transferability becomes less costly, by clearly defined property rights, the inventor can hope to obtain a higher profit in selling or licensing his invention, thus strengthening the incentives to innovate.314 Technology transfers should also improve the diffusion of innovations, e.g. by licensing the invention to companies operating in a region where the patentee does not operate, the invention is exploited on a larger geographical scale.315

Studies show that patent protection is an important condition for allowing technology transfers - disclosing information to potential buyers/licensees allows them to assess what they are buying, while the seller/licensor is protected by his patent. Disclosure of the innovation is at the same time the

311 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 79. Also in that way: A. DEVLIN, “The Misunderstood Function of Disclosure in Patent Law, Harvard Journal of Law & Technology”, Vol. 23, No. 2, Spring 2010, available at http://www.inventions.org/wp- content/uploads/2012/10/MisunderstoondFunctionOfDisclosureInInPatentLaw.pdf, 427-432. 312 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 49. 313 For an overview of ways in which static efficiency is maximised, see F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 50-51. 314 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 19. 315 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 50.

73 condition and the obstacle to its trade.316 In the absence of patent protection, this could in practice for example be solved by non-disclosure agreements (nda). The questions are whether an nda would be effective and whether an nda can be obtained by a party with a weak bargaining position. A government organised system to encourage the transferability of innovations could be that the innovator can register his innovation, paying a fee, in return not receiving an exclusive right, but a way to prove the innovation was his, allowing him to invoke an nda more effectively.

There is no direct evidence on the relationship of technology transfers and the level of innovation. What is known, however, is that the market for trade in innovations is growing, thereby diffusing innovations and increasing innovators’ profits, which would incentivise innovation.317 Important to note is that licensing practices differ across industries. Particularly the chemicals, pharmaceuticals and the information communication technologies industries have a higher propensity to license.318 Lemley admits that, as a theory, the transferability rationale for patent law makes “considerable sense”.319 However, empirical research does not allow us to answer the question whether the theory actually justifies the patent system.

3. Commercialisation of Inventions

In this theory, the emphasis is put on the development and commercialisation of inventions once they are made, i.e. what people do with existing inventions, rather than on incentivising the coming to the invention itself.320 Two different approaches have arisen in economic literature.

a. Prospect Theory

According to the prospect theory, broad patents should be granted in order to give the owner of that patent the incentive to further develop the field.321 The assumption is that, to efficiently incentivise a

316 K. ARROW, “Economic Welfare and the Allocation of Resources for Inventions” in R. NELSON (ed.), The Rate and Direction of Economic Activity: Economic and Social Factors, Princeton NJ, Princeton University Press, 1962 and http://www.nber.org/chapters/c2144.pdf, 614-616. Known as the “information paradox.” 317 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 49, 51. 318 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 56. 319 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 80-83. He does remark that many features of the patent system are not consistent with the facilitation of technology transfer. Admitting that that does not mean patents play no role in technology transfer (evidence suggests developed country companies are more willing to license to third world country companies in third world countries that have some effective level of patent protection), he denies that the theory can fully explain the licensing pattern and enforcement behaviour as it exists today. See further in the Section on Patents and the Technologies Exchange. 320 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 59-60. 321 For more information, see E. KITCH, “The Nature and Function of the Patent System”, 20 J.L.&Econ. 265, 1977.

74 person to invest in improving an invention, he needs central control of the improvement activity.322 It is believed that the patentee will have every incentive to improve his invention, thereby maximising the value thereof. It is doubtful whether a monopolist has optimal incentives to invest in improving an invention.

b. Commercialisation Theory

According to the commercialisation theory, patent protection looks after the need to invest in creating new markets. In this theory, it is assumed that, absent some sort of market exclusivity, people lack the incentive to market a new product.323 Patent law is said to provide the required market exclusivity. The exclusivity here focuses on the supposed undercommercialisation of any new product for which competition exists.324 A person would lack the incentive to invest in commercialising an invention, if he does not have the central control of the commercialisation.325 The question that rises is whether this theory justifies broad patent rights even though the patent did not induce the invention itself. Lemley ‘thinks’ no, but empirical evidence is not available to back any opinion.326

There are strong arguments against these theories. Hayek maintains that the prospect of exclusivity or supracompetitive returns are generally not required to encourage a person to market an existing invention.327 Lemley refers to the ‘ordinary economic rents’, coupled with advantages such as lead time. As seen, surveys show that these are seen as effective mechanisms to market innovations. He states that market entry in the majority of industries occurs before patents are even granted - in line with the industry lifecycle. Patents are for example not responsible for the emergence of software.328 Finally, even if there is undercommercialisation of inventions, and patents would indeed be effective to resolve it, the costs might exceed the benefits.329

It appears the commercialisation theory might justify patents in the pharmaceutical industry. As mentioned, pharmaceutical companies invest enormous amounts in the marketing of new products -

322 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 62-63. 323 For more information, see M. ABRAMOWICZ, “The Danger of Underdeveloped Patent Prospects”, 92 Cornell L. Rev. 1065, 2007; M. ABRAMOWICZ and J. DUFFY, “Intellectual Property for Market Experimentation”, 83 NYU L. Rev 337, 2008 and T. SICHELMAN, “Commercializing Patents”, 62 Stan. L. Rev. 341, 2010. 324 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 61-62. Lemley notes that in this theory, the new and non-obvious requirements can be abandoned, since the theory would also incentivise old and obvious inventions to be marketed, contra the view of Sichelman. 325 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 62-63 326 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 62. 327 See F. HAYEK, “The Use of Knowledge in Society”, 35 Am. Econ. Rev. 519, 524, 1945. 328 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 63-64. 329 For a more in-depth criticism of the two theories, see M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 62-72 and references there.

75 often even higher amounts than actually developing the product. However, the need for a special incentive to market drugs is a consequence of strict regulation which makes the making and marketing of drugs extremely expensive, and not a consequence of the need for an incentive to innovate.330

Bottom line is that neither prospect nor commercialisation theory has been empirically proven to justify a patent system. Moreover, evidence suggests that strong patent control would in fact be detrimental to the improvement and commercialisation of follow-up technologies.331

4. Optimising Patterns of Production

According to this argument, patent systems play an important role in signaling consumer wishes to potential producers of technological innovations. This way, innovative activity is most likely to occur in areas that enhance consumer welfare.332 Fisher points out that the optimal legal doctrine, when it comes to products of the mind, may be one that confers a very generous set of entitlements upon inventors. However, this doctrine proves very problematic since in no field of economic activity can innovators obtain the whole social value of their innovations. The optimal approach in this theory is far from clear.333

5. Rivalrous Competition

This theory seeks to eliminate as much as possible the tendency, provoked by the prospect of patent protection, of uncoordinated and parallel innovative activity. One viewpoint is that competition among firms complicates the impact of the patent system upon innovative activity and economic waste can occur at three stages of the innovative process.334 First, seduced by the prospect of patent protection, an inefficiently large number of firms are lured into a ‘patent race’ to be the first to reach an invention.335 Second, a similar race can occur at the secondary level, i.e. to develop an improvement. And third, patented inventions may be circumvented through the development of functionally identical inventions that do not constitute an infringement of the first patent, i.e. ‘inventing around’, and conversely, patented inventions may be prevented to be invented aroundby the patentee of the first

330 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 73. 331 Note that Lemley says ‘new’ technologies. This however, will in my opinion not be the case in general. M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 73-74. 332 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 8, reference to H. DEMSETZ, “Information and Efficiency: Another Viewpoint”, Journal of Law and Economics 12, 1969, 1. 333 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 9-10. 334 See e.g. Y. BARZEL, “Optimal Timing of Innovations”, Review of Economics and Statistics 50, 1968. 335 W. LANDES and R. POSNER, The Economic Structure of Intellectual Property Law, Cambridge MA, Harvard University Press, 2003, 296, 301.

76 solution to a problem, by looking for and patenting alternatives to block competitors from the market.336 Others emphasise the way in which patent races accelerate the rate of investment and create pressure for continuing advancement.337 Another benefit of rivalrous competition is that more inventors working on the same problem is more likely to result in different valuable inventions.338 Reforms of patent laws have often sought to mitigate the dissipation of resources at the different levels. The problem, however, is that reducing the cost at one level, generally produces an increase of cost at another level. A lack of information, combined with theoretical tensions, makes this theory as indeterminate as any other.339

6. The Overarching Theory

A theory that integrates the previously discussed - and other, such as philosophical - theories, is non- existent. Oddi compares the search for such a theory to the search for a unifying scientific theory of the universe.340 The overarching - unanswered - question is how the patent laws should be altered so the justification arguments are optimally supported.341 In what form would patent law confer the benefits the patent system is supposed to confer according to the different justification theories, and would those benefits outweigh the costs. Lemley considers the possibility that there is no one unified theory that explains all of patent law.342

B. Patents and Competition Law

Some say patent protection is excessive and is too restrictive on competition. Posner says that “when patent protection provides an inventor with more insulation from competition than he needed to have an adequate incentive to make the invention, the result is to increase market prices above efficient

336 A ‘justification’ for ‘inventing around’ is ‘serendipity’, i.e. that in the search for alternatives, other valuable findings may be done by accident. While Machlup recognises that these happy accidents often occur, he notes that “the use of scarce research resources for seeking alternative solutions to satisfactorily solved problems can hardly be justified…no matter how well serendipity works.” F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 51-52. 337 P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 138 and references there. 338 P. MENELL, “Intellectual Property: General Theories” in B. BOUCKAERT and G. DE GEEST (eds.), Encyclopedia of Law & Economics, Vol.II Civil Law and Economics, Cheltenham, Edward Elgar, 2000 and http://encyclo.findlaw.com/1600book.pdf, 147. 339 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 9-10. 340 A. ODDI, “Un-unified Economic Theories of Patents - the Not-Quite-Holy Grail”, 71 Notre Dame Law Review 267, 1996, 2. 341 W. FISHER, “Theories of Intellectual Property” in S. MUNZER (ed.), New Essays in the Legal and Political Theory of Property, Cambridge, Cambridge University Press, 2001 and http://cyber.law.harvard.edu/people/tfisher/iphistory.pdf, 10. 342 M. LEMLEY, “The Myth of the Sole Inventor”, Michigan Law Review, Vol. 110:709, 2012 and http://ssrn.com/abstract=1856610, 106.

77 levels, causing distortions in the allocation of resources; to engender wasteful patent races[…]; to increase the cost of searching the records of the PTO in order to make sure one isn’t going to be infringing someone’s patent with your invention; to encourage the filing of defensive patents[…]; and to encourage patent “trolls”, who buy up large numbers of patents for the sole purpose of extracting licensee fees by threat of suit, and if necessary sue, for infringement.”343 He points to the fact that many new products have only a short life expectency (e.g. software), much less than the 20 years of protection patent law provides. The difference between the 20 years and the shorter useful life of the product, confers no real benefit, but it enables the patentee to extract license fees from companies who want to make a different product that incorporates the patented invention.344

Intellectual property law and competition law are seen as complements that must be balanced. Protecting inventions too strongly and enforcing competition law too weakly threatens competition and ultimately innovation. On the other hand, protecting inventions not strong enough and enforcing competition law too strictly also threatens incentives to innovate.345 To counter the distorting effects of patent law (e.g. monopolistic rent-seeking, blocking competitors, patent races, etc.), some say competition law could play a role to remedy the abuses and excesses of patent law, and reduce the power of a patent when deemed excessive, e.g. through the compulsory granting of licenses.346 However, most economists do not recommend competition law to function as a tool to “fine-tune” patent rights ex post because it creates legal uncertainty, which reduces incentives to innovate.347 Also, patent offices appear to be in a better position than antitrust authorities to assess optimal patent scope (although in fact, they too lack the knowledge required to determine optimal patent scope).348 For these reasons, it is better to reform patent law itself rather than to use competition law and policy to take on the abuses and excesses.349

343 R. POSNER, “Do patent and copyright law restrict competition and creativity excessively?”, 30 Oct 2012, www.becker- posner-blog.com/2012/09/do-patent-and-copyright-law-restrict-competition-and-creativity-excessively-posner.html. Posner calls for major reforms, moving away from the “one-size-fits-all” of patents, creating industry-specific protection. 344 R. POSNER, “Do patent and copyright law restrict competition and creativity excessively?”, 30 Oct 2012, www.becker- posner-blog.com/2012/09/do-patent-and-copyright-law-restrict-competition-and-creativity-excessively-posner.html. 345 R. PITOFSKY, “Antitrust and Intellectual Property : Unresolved Issues at the Heart of the New Economy”, Address delivered at Antitrust, Technology and Intellectual Property Conference, Berkeley Center for Law and Technology, University of California, Berkeley, 2 March 2001, cited by F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 82- 83. 346 Economic theory views licensing favorably. F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 88-99. 347 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 87. 348 See Organisation for Economic Cooperation and Development, Competition Law and Intellectual Property Rights, Journal of Competition Law and Policy 3.2, 2001, 141-223. 349 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 87.

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C. Costs of the Patent system

As difficult as it is to accurately measure the impact of the patent system on levels of innovation and the value of other purported benefits, so too is it with the calculation of the purported costs the patent system brings with it. Jeremy Bentham once said that the patent system “produces an infinite effect and costs nothing.”350 Being the great economic thinker he was, he should have known that nothing ever comes free. In short, the benefits of the patent system can be described as the increase in national product, resulting from the technological innovations for which the patent system is responsible,351 i.e. the innovations that would not exist or would only at a later time be developed if it were not for the patent incentive. There are also the supposed disclosure benefits, and one should definitely not forget the benefit of facilitating trade in technologies. Now, I will briefly point out the most relevant costs.

Machlup categorises several negative effects of the patent system.352 He identifies the cost of:

- inventing. Beyond a certain treshold, the cost of inventing increases rapidly (because the return on the “production of inventions” diminishes and the supply of talented inventors becomes highly inelastic). Also, costs stemming from the fact that more investment in inventive activity, necessarily means less investment in other activities or assets, which might also have (or even more) social value. Another cost is produced by the phenomenon of circumventing or ‘inventing around’ existing patents,353 looking for substitutes for an already solved problem without infringing. There is also the cost of wasteful duplicative patent races;

- innovating. High rates of innovation resulting in e.g. costs of replacing quickly ageing technologies, educating personnel to operate the new technologies, technological innovations pushing people into unemployment;

- immanent restrictions in the use of patented inventions, i.e. public goods becoming excludable and taxed, leading to a lesser use thereof than there would be if the invention was not patented, i.e. deadweight losses;

- operating the patent system, such as administrative and legal costs;

350 See J. BENTHAM, “A Manual of Political Economy (1785)” in J. Bowring, Works of Jeremy Bentham, vol. III, Edinburgh, 1842, 71. 351 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 64 352 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 64. 353 The issue here is that the patent system might induce too much investment - instead of being a tool that prevents too little investment. Just how much investment in inventive and innovative activity is ‘optimal’ is not yet determined.

79

- transcendent restrictions upon production as a result of general monopoly control strengthened through patent positions, such as costs through tying the sale of other products to the sale of the product that incorporates the patented invention;

- obstructions and encumbrances to potential inventors and innovators, such as the costs resulting from the search to what is patented or the fear to be sued for infringement (evidence suggests that the growth in patents has been accompanied by a more than proportional increase in IP litigation and legal activity354) and/or blocked from continuing inventive or innovative activity. Investing in patent litigation necessarily redirects resources away from more useful activities. The cost of the more recently identified “tragedy of the anticommons” (supra) can also be located in this category.

Worth mentioning are the opportunity costs: the inventors/innovators and inventions/innovations that never were because of the existence of the patent system.

There is also the cost resulting from abuses of the patent system. Abuse of the system occurs when, by the way it is used, the purpose it is intended to serve, is threatened. This is the case when the boundaries of the patent protection are crossed and the patentee is able to extend the protection in time - e.g. through incomplete disclosure, or through the successive patenting of strategic improvements, making the unimproved invention commercially worthless (as e.g. Xerox did) - or in scope or strength - e.g. “umbrella” or “blanket” patents (illegitimately broad or ambiguous claims)355. Another ‘abuse’ is the strategically constructing of patent minefields around an innovation, patenting several components, fencing out others to make a substitute product or block them from improving the product.

A final abuse I will mention is the wrongful non-exploitation of patented inventions, which has many crying for reform. Some companies only have a patent portfolio, not to produce anything themselves, but to sue anyone who infringes. These are called non-practising entities (NPE’s) or “patent trolls”356.

Penrose maintained that these ‘abuses’ are merely some of the social costs “inherent in the patent system and are only rarely connected with any malpractices on the part of patentees.”357 However, a long period has passed since this statement, and it is unclear whether this statement is true today - as it is unclear whether it was actually true at the time it was expressed. Many in the software industry - an industry that did not exist at the time - would appear to beg to differ.358 But, of course, the first system

354 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 12, reference to W. LANDES and R. POSNER, The Political Economy of Intellectual Property Law, 2004, 2-3. 355 The patent offices are under pressure and sometimes, overly broad or vague patents slip through. These can then be used to threaten infringers, who might not want to take the case to court and pay for a license. They are then paying for the use of a patent that should never have been granted. 356 The most notorious example being Intellectual Ventures. 357 E. PENROSE, The Economics of the International Patent System, Baltimore, John Hopkins Press, 1951 and www.jstor.org/stable/1054781, 153. 358 E.g. Interview with Kristof De Spiegeleer, “Patenten Afschaffen?”, Knack, 10 Oct 2012, 12, an IT entrepreneur, stating that the aberrations are too widespread and too much money is involved and consequently calls for abolition.

80 in which absolutely no abuse occurs, is yet to be developed. That does not mean, however, that we shouldn’t strive to keep abuse at a minimum.

D. Alternatives to the Patent System

Several mechanisms are in or could be in place with the goal of promoting innovation. There is of course government subsidisation, in the form of endowments to public entities - usually bound to broad objectives, e.g. space programmes - and grants to private companies or associations - usually bound to precise specifications, e.g. academic medical research. However, public funding occurs at the expense of the tax payers at large, which means other goods or activities will be taxed higher, resulting in distortions elsewhere in the economy.359 One should also not forget the costs of monitoring whether the subsidies are put to good use.360 This sort of funding can also be done by private benefactors, i.e. sponsor contracts.361

Another innovation-spurring instrument are contests or prizes, although less frequently used than subsidies. By offering inventors a payment to compensate not receiving an exclusive right to exploitation, the invention is open to public use, thus the deadweight loss is eliminated. Recent studies found that prizes provided a ‘significant’ boost to innovation, and that especially non-monetary prizes were effective, which is in line with the findings discussed in the section Incentives and Psychology.362

The main problems with subsidisation and prize mechanisms are that the government or other financers may not have accurate information available on innovation opportunities. Publicly funded innovative projects will be inefficient when information on expected costs and benefits is scarce, so it is more likely that wrong initiatives are funded.363 Patent law on the other hand, allows companies who have private information, and are thus better placed, to calculate costs and benefits of the development of a certain innovation. However, if several or many companies have information on a potential innovation, a wasteful patent race is likely. Also, in the patent system, monitoring costs are not

359 F. LÉVÊQUE and Y. MÉNIÈRE, The Economics of Patents and Copyrights, Berkeley, Berkeley Electronic Press, 2004 and http://www.cerna.ensmp.fr/Documents/FL-YM-eBookIP.pdf, 8. 360 For example, Intek spent € 2 million it received from the Arkimedes Fund on Porsches and such. De Tijd, Oplichters verbrassen miljoenen ARKimedesgeld, 25 April 2014. 361 See M. KREMER and H. WILLIAMS, “Incentivizing Innovation: Adding to the Toolkit” in J. LERNER and S. STERN (eds.), 10 Innovation Policy and the Economy 1, 2010. 362 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 20-22, and references there. For more information on prizes, see e.g. L. BRUNT, J. LERNER and T. NICHOLAS, “Inducement Prizes and Innovation”, 60 J. Indus. Econ. 657, 2012 and M. ABRAMOWICZ, “Perfecting Patent Prizes”, George Mason Law and Economics Research Paper No. 01-29 and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292079. 363 N. GALLINI and S. SCOTCHMER, “Intellectual Property: When Is It the Best Incentive System?” in A. JAFFE, J. LERNER and S. STERN (eds), Innovation Policy and the Economy, Vol. 2, Cambridge MA, MIT Press, 2002 and http://www.nber.org/chapters/c10785.pdf?new_window=1, 6-11. They maintain a term-by-term comparison of the patent system and the subsidisation mechanism does not allow to conclude one system is better than the other, and their efficiency will depend on the circumstances, not in the least how well informed the government is.

81 incurred by the public financer.364 Shavell and Van Ypersele also note the information problem with reward systems compared to IP systems. They indicate that the investment in research incentive is flawed in both systems. They conclude that patents do not possess a fundamental social advantage over reward systems and that optional reward systems in which innovators can choose between rewards and patents, are superior to patent rights. 365

Another alternative is a patent buyout mechanism, in which the government commits to paying a certain margin over the private value of a technology, which is established using a public auction.366 Here, as with subsidisation, the deadweight loss is spread out across a larger number of consumers.367

Hemel and Ouellette note the importance of tax incentives (tax breaks for R&D spending). R&D tax incentives have the benefit of information being held by private persons, like patents. They also reduce social-welfare costs, like grants, by spreading out the deadweight loss. They point out that non-patent mechanisms generally require the public at large to subsidise R&D expenditures, whether or not they all use the resulting innovations. In a patent system, on the other hand, the R&D costs are recovered from the users of the resulting innovation. The ‘user-pays’ mechanism of the patent system does not always sit well with the public, e.g. in the pharmaceutical industry, especially for life-saving drugs, and alternative systems are deemed a viable alternative. In other industries, such as the luxury goods industry, on the other hand, the ‘user-pays’ mechanism seems more justified than an alternative system that spreads out the cost to all members of the public, users or not. The duo argues for an innovation policy in which patent law, tax incentives, prizes and government grants work together to spur innovation.368

364 F. LÉVÊQUE and Y. MÉNIÈRE, “Patents and Innovation : Friends or Foes?”, CERNA, 2006 and http://ssrn.com/abstract=958830, 18-19. 365 S. SHAVELL and T. VAN YPERSELE, “Rewards Versus Intellectual Property Rights”, 44 J.L. & Econ. 525, 2001 and http://www.law.harvard.edu/faculty/shavell/pdf/44_J_Law_Econ_525.pdf, 525-545. 366 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 20-22, reference to M. KREMER, “Patent Buyouts : A Mechanism for Encouraging Innovation”, 113 Q.J. Econ. 1137, 1138. 367 T. NICHOLAS, “Are Patents Creative or Destructive?”, Harvard Business School Working Paper 14-036, 2013 and http://www.hbs.edu/faculty/Publication%20Files/14-036_88022f59-a293-4a6f-b643-b205304bce91.pdf, 20-22, reference to H. WILLIAMS, “Innovation Inducement Prizes: Connecting Research to Policy”, 31 J. Pol’y Analysis & MGMT 757, 2012. 368 D. HEMEL and L. OUELLETTE, “Beyond the Patents-Prizes Debate”, Texas Law Review, Vol. 92:303 and http://www.texaslrev.com/wp-content/uploads/HemelOuellette.pdf, 303-304, 381-382.

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PART V. THE WORLD WITHOUT PATENTS

In this last part, I conclude my research by answering two basic questions: first, is abolition of the patent system desirable (A); and second, is abolition feasible (B). In section B, I will also discuss how we can work toward abolition of the patent system, if indeed deemed desirable.

A. Desirability of Abolition

Is the patent system as a whole beneficial or detrimental to society? Are we to conclude that it is desirable to do away with the patent system?

To answer this question, all the benefits of the patent system must be weighed against all its negative effects. The problem is that, all available research in spite, conclusive, accurate estimates for neither the benefits nor the costs are available. This makes trying to weigh them against eachother somewhat of a mockery. It appears the famous “inconclusive conclusion” of Machlup still holds: “No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society.”369 From the ignorance, he inferred that the safest policy conlusion is to “muddle through” with the patent system. He decided that, since the patent system had long been in place, it would be irresponsible to abolish it based on the (lack of) knowledge of its economic consequences. He noted, on the other hand, that had a patent system not been in place, it would be irresponsible to introduce one, based on the (lack of) knowledge of its economic consequences.370 The fact that the European Union institutes an EU-wide patent protection can thus, in light of Machlup’s statement and recent studies indicating the potentially detrimental effect of a patent system, be viewed as quite irresponsible.371

Should the same inference still be made, seeing that we are still unable to state with certainty whether the patent system as a whole confers a net benefit to society, almost sixty years later? Some observers, like Boldrin and Levine, strongly oppose. Considering that in this long period of sixty years, no conclusive evidence has been produced that having a patent system does indeed yield a positive net overall effect - quite on the contrary, a growing number of empirical studies points in the opposite direction -, their call to reconsider Machlup’s conclusion does not seem strange.

369 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 79. 370 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 80. 371 Note that, if e.g. software patents would not be allowed on an EU-wide scale, this might even allow the region to catch up with obvious forerunners. However, the damage this could do to international trade relations make this not such a good idea.

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There is no conclusive answer to the question whether abolishing the patent system is desirable. However, a growing body of studies indicates the patent system might actually be detrimental to society. The results of those studies offer a strong argument to at least decrease patent protection. This is even in line with Machlup’s consideration that economic analysis provides a sound enough basis for competent decisions about ““a little more or a little less” of various ingredients of the patent system.” In gradually decreasing patent protection, toward its full abolition, it is possible to identify a potential drop in the rate of innovation. The decrease of protection can even be organised industry-specific once an innovation drop takes place in a certain industry. If a drop in innovation would indeed occur, it would probably occur first in industries where patents are deemed effective, such as the pharmaceuticals industry.

However, already in 1958 Machlup noted “[…] that the patent system, because of certain scientific and technological developments of the time, favors certain types of industry, such as chemical and electronic, and that this occasions both the accumulation of masses of patents and the intensive search for new patentable inventions in these industries. But even this explanation probably exaggerates the role of patent monopolies in industrial research. It seems very likely that even without any patents, past, present, or future, firms in these industries would carry on research, development, and innovation because the opportunities for the search for new processes and new products are so excellent in these fields that no firm could hope to maintain its position in the industry if it did not constantly strive to keep ahead of its competitors by developing and using new technologies.”372 Indeed, also patents eventually expire. He also remarked that business leaders in industries such as the chemicals industry declaring that their firms could not remain operational if it were not for patent protection, should probably be “discounted as self-serving testimony.”373

If no drop in innovative activity occurs, the end result will indeed be the abolition of the patent system as a whole. It should be noted that the decrease in patent law should be done over a sufficiently long time period, so the decrease is not held responsible for conjuncture-related drops in innovation.

Similarly, Johnson accepts that it may turn out that a persuasive case could be made to justify patent law, once sufficient data has been collected. Yet, up to this day, no such persuasive case has been made and patent law is currently unjustified. Therefore, he says, patent law should be sunsetted, i.e. phased out entirely. Instead of intervening if, when and where innovation levels drop, it appears Johnson would first abolish the whole system, and then, “going forward, only very targeted, industry- sector-specific, application-specific rights should be developed and only then upon a showing of

372 Italics added for emphasis. F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 78. 373 F. MACHLUP, An Economic Review of the Patent System, Study no. 15 of the Subcommitte on Patents, Trademarks and Copyrights of the Committee on the judiciary, United States Senate, 85th Congress, 2nd session, 1958, available at http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 79.

84 compelling evidence for why they are needed.”374 This approach does indeed allow alternative mechanisms to take the place of patent law - as it is often suggested that prizes or subsidies systems would be better in e.g. the pharmaceutical sector; it gives ‘a world without patents’ a fighting chance to prove whether progress is promoted in the absence of patents. If a drop in innovation is encountered, the complete abolition can easily be reversed and (if appropriate, industry-specific) patent laws can be adopted.

Still according to Johnson, once patent law is abolished, the specific rights - this could be patent protection but does not necessarilly have to be that - that would be developed if needed, should have a “sunset provision”, i.e. the system itself should be limited in time. Note that Machlup remarked that the patent system favors certain industries because of developments “of the time.”375 Temporary innovation-spurring mechanisms can be designed to take both economic and technological developments into account and react to them. Temporality makes sense because (macro)economic circumstances and technology change, thus so should our means of promoting them. It should not be assumed that a government-provided incentive would remain justified for all time.376

The crucial importance of innovation for technological development and economic growth justifies a thorough debate on the reform of patent law. Abolition might seem a harsh proposal, yet it should be kept in mind that unjustified interferences with the free market are not a minor problem. If innovation is approached the wrong way, we are endangering our wealth. This becomes all the more important as we shift more and more to a knowledge-based economy and mental labour overtakes physical labour. Although one must consider the cost of reform (from the time to discuss change and studies to justify reform - since surveys, studies and experiments will have to be (re-)done to have up-to-date information on the patent system -, to uncertainty it creates with the different market players), if the potential economic gain of reduction/abolition is large enough, it is worth it. Given the importance of innovation, it seems wise to start over. The patent system may indeed turn out to be useful, but let’s put it to the test.

374 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 675. 375 F. MACHLUP, “An Economic Review of the Patent System”, Study no. 15 of the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd session, 1958 and http://mises.org/document/1182/An-Economic-Review-of-the-Patent-System, 78. 376 E. JOHNSON, “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623, Vol. 39:623, 2011, and http://ssrn.com/abstract=1746343, 676.

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B. Feasibility of Abolition

1. The Obstacles

To answer the second key question of this master’s thesis in one word: no. I believe the abolition of the patent system - at least as a whole - is not within reach, for several reasons.

First and foremost, although studies indicate that patent scope and strength has probably been extended too much, we cannot say with certainty whether abolition of the whole system is actually desirable. The lack of an objective indicator that the patent system as a whole is detrimental, makes it hard to make a strong case for abolishing the whole system. Jaffe and Lerner maintain that economic analysis does not support the abolition of the patent system.377

Second, stakes are high and incredible amounts of money are involved. Lobbying power of large corporations - especially in the pharmaceutical/chemical and ICT industries - to strengthen patent protection should not be underestimated. How else can one explain the increase in patent protection, agreed upon by politicians, when conclusive results on the actual necessity of patent protection were and are not available.378

A third obstacle to abolition is that their seems to be some sort of ‘collective faith’ in the need for a patent system. This is reinforced by the fact that innovation levels are high, investments in R&D are high, and society is quite prosperous. Although evidence does not suggest that the patent system is actually responsible for this, most people believe it has played a (big) part. This collective faith might cloud our ability to evaluate the patent system objectively and may keep us from recognising that patent law might actually be deterring innovation or steering it in the wrong direction.379 Note that this collective faith is diminishing due to public discontent about e.g. patented life-threatening disease treatments and the current patent war in the high-tech sector.

A fourth obstacle is the globalisation of patent law. International agreements such as TRIPS (WTO), impose the binding obligation on the parties to the agreement to adopt minimal levels of patent protection, such as 20 years of protection (art. 33 TRIPS), making it nearly impossible for a single country to downsize its patent system, since not complying with the TRIPS agreement may cause retaliatory measures in international trade. Far-reaching patent-decreasing reforms must be agreed upon on an international level, and as seen, parties to the negotiations are strongly influenced by a

377 A. JAFFE and J. LERNER, “Innovation and its Discontents” in A. JAFFE, J. LERNER and S. STERN (eds.), Innovation Policy and the Economy, Vol. 6, Cambridge MA, MIT Press, 2006, 27 and http://www.nber.org/chapters/c0204, 1. 378 See S. SELL, Private Power, Public Law. The Globalization of Intellectual Property Rights, Cambridge, Cambridge University Press, 2003. Sell argues how the TRIPS agreement is the result of lobbying by twelve CEOs powerful multinational corporations, grouped in the Intellectual Property Committee (IPC), who wanted to shape worldwide law to protect and expand their markets. 379 P. SAMUELSON, “Innovation and Competition: Conflicts over Intellectual Property Rights in New Technologies” in V. WEIL and J. SNAPPER (eds.), Owning Scientific and Technical Information - Value and Ethical Issues, New Brunswick, Rutgers University Press, 1989, 179.

86 powerful lobby, who sees (strengthening of) patent protection as a way of securing their market positions.380 But the lobbying efforts might not even be as important as the first obstacle to reform an international agreement: the effort and time it takes to simply gather the parties, properly informed so they can engage in serious negotiation. It appears that stronger intellectual property rights are “a permanent feature of the new global economy.”381

If we are to clear the path for the abolition of patents, the TRIPS agreement should be fundamentally revised - in the sense that abolition of patents is either left to the competency of the separate countries (this would require patents to be left out of the agreement) or that the gradual decrease of patent law (toward abolition with possibilities to reverse if necessary to safeguard innovation) is mapped out in the new agreement, binding for all parties. The first option is easier and allows for different approaches among countries, allowing them to learn from eachother.

2. Route to a World Without Patents

Although patent laws will probably continue to exist, economists - and others - agree that the patent system is flawed, confers overprotection, thereby hindering innovation, and should thus be reformed. Laws relating to innovation policy should be in continuous evolution to address technological change and changing industry circumstances. While it is true that simplicity (one-size-fits-all) and standstill have their benefits382, innovation is simply too important to be approached simply. Reform is thus quite easily defended and thus feasible. As Thurow - although a strong defender of patent rights - already said in 1997: “Squeezing today’s innovations into yesterday’s system simply won’t work.” He opines the time has come for designing a new system “from the ground up”. He advocates moving away from the ‘one-size-fits-all’ patent system towards a differentiated system. According to him, the right approach to reform would be to examine the underlying economics of each industry to determine what incentives are necessary to promote its optimal development. He maintains the optimal patent system will differ across industries, types of knowledge and types of inventors (e.g. individual vs. corporate).383

I will now provide several, less far reaching suggestions for reform than abolition, which might be more feasible. These suggestions are offered based on empirical studies that indicate that it is economically beneficial to reduce (certain aspects of) patent protection. These can be read as if they were proposed in a framework to work toward abolition. If and when it becomes clear that the

380 Keep in mind the industry lifecycle as discussed in part III. 381 The World Bank, World Development Report 1998-99, Oxford, Oxford University Press, 36, download available at http://wdronline.worldbank.org/. 382 Such as certainty and no cost of reform. 383 L. THUROW, “Needed: A New System of Intellectual Property Rights”, Harvard Business Review, Sep-Oct 1997, 95-103 and and http://hbr.org/1997/09/needed-a-new-system-of-intellectual-property-rights/ar/1.

87 downsizing of patent protection has a positive impact on innovation, political support for abolition will grow, making it feasible.

First, further strengthening of patent protection should not be allowed, this should be quite feasible. I say ‘should be’, because although Machlup suggested in 1958 that it is unclear whether the patent system yields an overall beneficial result, patent protection has only been increased. This includes, among other things, not extending the period of protection and not expanding the patentable subject matter.

Second, it should not be allowed that an inventor who independently comes to a previously patented invention, is prohibited to exploit it. Nor should he pay any reimbursement to the patent holder. Eventually, the nature of patent rights should be shifted from property to liability. The patentee should no longer be allowed to prohibit the exploitation of his patented invention by third parties, he should only receive a reimbursement/damages for it, except from the independent inventor. In other words, a very far-reaching licensing obligation.384

Third, patent offices should be given the means and the time to effectively examine whether the requirements of novelty, non-obviousness and disclosure (allowing the invention to be effectively rebuilt by a skilled person/group of persons) are met. Less ‘bad patents’ would be granted.385

Fourth, the period of protection should be gradually shortened. The time-limitation of patent rights is what makes it relatively easy to sunset them. Conversely, it is what makes it easy to reverse the shortening of the period if and when innovation levels drop.386 This can be done in general, or, if innovation problems arise in certain industries, industry-specific.387 That way, eventually, less and less subject matter will be patentable, resulting in an ever smaller patent system, easier to evaluate and to replace by alternative mechanisms.

Fifth, patents should only be awarded when strictly required on economic grounds, i.e. when evidence indicates that the patent is justified because of inappropriability of the investment.388

384 In line with recent study, see A. TORRANCE and B. TOMLINSON, “Property Rules, Liability Rules, and Patents: One Experimental View of the Cathedral”, 14 Yale J. of L.&Tech. 138, 2011, and http://ssrn.com/abstract=1991453, 159. 385 Holders of patents that are actually invalid, but of which it is not absolutely certain that they would be declared invalid, can try to extract as much royalties as possible from startup firms, that may not have enough resources to go to court and either settle or quit. This has detrimental effects on innovation. See in this way and for more prescriptions for reform: A. JAFFE and J. LERNER, “Innovation and its Discontents” in A. JAFFE, J. LERNER and S. STERN (eds.), Innovation Policy and the Economy, Vol. 6, Cambridge MA, MIT Press, 2006 and http://www.nber.org/chapters/c0204. For a recent example of an eyebrow-raising granted patent: Amazon’s patent no. 8,676,045B1 for pictures in a studio against a white screen. 386 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 20. They raise the interesting point that the US and the EU should stop exporting patent law, since the “balance of trade in ideas” with Asia might soon tip over. 387 D. BURK and M. LEMLEY, “The Patent Crisis and how the Courts Can Solve It”, Stanford Public Law Working Paper No. 1349950, 2012 and http://ssrn.com/abstract=1349950, arguing for different policy levers across industries. 388 M. BOLDRIN and D. LEVINE, “The Case Against Patents”, J. Econ. Persp., Winter 2013, and http://research.stlouisfed.org/wp/2012/2012-035.pdf, 21.

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Finally, more alternative mechanisms should be installed. These could come in the form of a fund to buy out important patents, higher subsidies for academic medical research, tax breaks, monetary and non-monetary prizes, etc. These could produce incentives to innovate to mitigate the fear during the reduction of patent protection, which could produce a rationally unjustified drop in innovative activity. Also, inventions resulting from any of these alternative mechanisms should not be patentable.

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NEDERLANDSE SAMENVATTING

Verschillende theorieën zijn ontwikkeld om octrooirecht te verantwoorden. Het bestaansrecht van octrooien wordt soms gebaseerd op filosofische argumenten, zoals Lockeaanse natuurlijke rechten of distributieve rechtvaardigheid. Toch wordt het octrooirecht vooral een economische grondslag toegeschreven. Het octrooirecht heeft tot doel innovatie aan te moedigen om economische groei te stimuleren en ontwikkelde kennis publiek te maken. De argumenten klinken logisch, maar studies en enquêtes hollen hun overtuigende kracht meer en meer uit.

De ontstaansgeschiedenis van octrooien toont aan dat octrooirecht niet is ontwikkeld op basis van economische argumenten. De economische argumenten zijn pas ontwikkeld na het ontstaan van het octrooirecht. Historische analyse van innovaties ingeschreven voor wereldtentoonstellingen en octrooiregisters tonen aan dat veel van de innovaties niet geoctrooieerd waren, en dat landen zonder octrooirecht even veel en even kwalitatieve innovatie kenden. Enquêtes van R&D managers geven aan dat geheimhouding en eerste-op-de-markt sterker scoren als bescherming van innovatie. Dit verschilt sterk naargelang de industrie. Onderzoek naar hervormingen van octrooirecht doorheen de tijd geeft aan dat wanneer octrooibescherming voorbij een bepaalde grens wordt versterkt, innovatie wordt gehinderd.

Het netto effect van het octrooisysteem op maatschappelijke vooruitgang is zeer moeilijk te bepalen, en het is niet zeker of het wel degelijk een positief saldo oplevert. Het systeem brengt zeker voordelen met zich mee, waarvan het vergemakkelijken van handel in innovatie zeer vermeldenswaardig is, maar het is onzeker of ze de kosten, zoals bv. ‘deadweight losses’, overstijgen.

Het lijkt wenselijk om het octrooirecht geleidelijk af te bouwen, mogelijks zelfs tot algehele afschaffing. Een recent experiment suggereert immers dat een systeem van open innovatie (in afwezigheid van octrooibescherming) meer innovatie, productiviteit en maatschappelijk nut oplevert. Dit wordt echter bemoeilijkt door lobbywerk van machtige bedrijven. Minimumbescherming is gebetonneerd in de TRIPS-overeenkomst. Deze minimumbescherming zou uit de internationale overeenkomst moeten worden gehaald zodat landen bescherming, desgevallend industriegericht, kunnen verlagen. Innovatie is simpelweg te belangrijk voor economische groei om niet na te gaan of een afbouw van het octrooirecht meer innovatie toelaat.

Maar het feit dat studies niet duidelijk kunnen aantonen dat het octrooisysteem in zijn geheel genomen een negatief effect hebben op de maatschappij, gecombineerd met de internationalisatie van het octrooirecht en sterke en geconcentreerde belangen van gevestigde bedrijven die drukken naar alsmaar

99 meer bescherming, maken het nagenoeg onmogelijk om zelfs maar naar een afzwakking van de octrooibescherming te komen, laat staan de afschaffing.

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