Economic Rationales for Patents in the Current Context Jay P. Kesan, Ph.D., J.D. Professor & Workman Research Scholar University of Illinois Outline • Ex Ante (Traditional) Patent Rationales • Ex Post Patent Rationales – Coordination Value – Signaling – Monetization Value • Private Ordering – Standards – Patent Pools – Non-Traditional Licensing – Patent Pledges Traditional Ex Ante Justifications • Incentive to create • Incentive to invest in R&D • Incentive to finance Ex Ante Rationales-Still Relevant? • Other motivations to invent – First mover advantage – Trade secret protection – Reputational gains/Professional recognition • Patents are an important mechanism to protect technological innovation, even if one of many. Heterogeneous mix needed. • Other reasons to patent – Ex post rationales – Defensive patenting Ex Post Rationales for Patenting • Patents give rights holders control & ability to engage in numerous activities with confidence that their interest is protected • Prospect Theory: Patent rights motivate the holder to continue to invest (commercialize, improve) in the invention • Tragedy of the Commons: Technological innovation is likely to be used inefficiently unless one rights holder has an individual stake in the efficient use of the technology Ex Post Rationale: Coordination in the Value Chain • Patents allow inventors to specialize and collaborate – E.g., University research & TTOs • Especially important in growing number of fields dominated by cumulative technology – E.g., Cell phone components • Modularity is efficient and favored in many sectors Coordination Value & Signaling • Signal to firms--ready for commercialization • Signal to complementary asset holders • Signal to industry/other inventors regarding the status of research • Signal to partners/investors/markets as patents correlate with other less measurable firm attributes (e.g., knowledge capital) Ex Post Rationale – Monetization Value • Patents permit one to assign a value to an intangible asset in a particular market • Licensing • Legal bargaining chip • Appropriation among collaborating rights holders Private Ordering: Standards • Standard Setting Organizations (SSOs) – Rights holders contribute their patents towards creation of a standard to be used across the industry. • Very important in fields such as IT where interoperability is crucial. • For example, the LTE Standard LTE Standard Contributors Private Ordering: Patent Pools • Patentees cross-license complementary patents to one another; then offer the pool of patents to others • “In a case involving blocking patents, such an arrangement is the only reasonable method for making the invention available to the public.” Int’l Mfg. Ct. v. Landon • E.g., LTE Standard LTE Standard Licensors • AT&T • China Mobile Communications Corp. • Clear Wireless LLC • Deutsche Telekom AG • DTVG Licensing • Hewlett-Packard Co. • KDDI Corp. • NTT DOCOMO • SK Telecom Co. • Telecom Italia • Telephonica • ZTE Corp. Non–Traditional Licensing • Patents give rights holders the ability to license as they see fit—which can include factors not typically considered in the open market – E.g., Cohen/Boyer patent – E.g., Global Access Licensing Framework Cohen/Boyer Patent “Stanford and the University of California wanted the terms of the license agreement: (a) to be consistent with the public service ideals of the universities; (b) to provide the appropriate incentives to industry to bring genetic engineering technology forward to public use and benefit in an adequate and timely manner; (c) to minimize the potential for biohazardous development; and (d) to provide income for educational and research purposes.” “No genetic engineering research, academic or industrial, was to be inhibited by Stanford’s licensing program.” “Royalty-bearing sales have been divided into four categories: Basic Genetic Products (10% royalty), Bulk Products (1-3%), End products (1/2 – 1%), and Process Improvement Products (10%).” Global Access Licensing Framework “Every university-developed technology with potential for further development into a drug, vaccine, or medical diagnostic should be licensed with a concrete and transparent strategy to make affordable versions available in resource-limited countries for medical care. Licenses are complex and each will be unique. Universities should therefore implement the Global Access Policies that adhere to the following principles…” Patent Pledges • Some firms have pledged not to assert their patents under certain circumstances to facilitate access, develop their own markets, and the like. – E.g., Google – E.g., Tesla Motors “Google is committed to promoting innovation to further the overall growth and advancement of information technology and believes that Free or Open Source Software is a very important tool for fostering innovation. Google is therefore pledging the free use of certain of its patents in connection with Free or Open Source Software on the “Tesla Motors was created to following terms…” accelerate the advent of sustainable transport. If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” Conclusions • Traditional justifications still apply in many industries. • Ex post justifications explain how patents define and assign value to an innovation, allowing rights holders to more efficiently license, invent complementary assets, collaborate, and appropriate benefits from their innovation. – Leads to greater interoperability and increased access to technology • We still need patents! For more information… • Stuart J.H. Graham et al., High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 24 BERKELEY TECH. L. J. 1255 (2009). • Petra Moser, Innovation Without Patents: Evidence From World's Fairs, 55 J.L. & ECON. 43 (2012). • Petra Moser, Patents & Innovation: Evidence from Economic History, 37 J. ECON. PERSPECTIVES (2013). • Julien Penin, Patents Versus Ex Post Rewards: A New Look, 34 RESEARCH POLICY 641 (2005). For m For more information... • Thomas Hellmann, The Role of Patents for Bridging the Science to Market Gap, 63 J. ECON. BEHAVIOR & ORG. 624 (2007). • Jay P. Kesan, Intellectual Property Protection & Agricultural Biotechnology: A Multidisciplinary Perspective, 44 AMERICAN BEHAVIORAL SCIENTIST 464 (2000). • Mark Lemley, Ex Ante Versus Ex Post Justifications for Intellectual Property, UC Berkeley, Public Law and Legal Theory Research Paper Series, No. 144. • Clarisa Long, Patent Signals, 69 U. Chi. L. R. 625 (2002). • Daniel F. Spulber, How Patents Provide the Foundation of the Market for Inventions, Northwestern Sch. L., Law & Econ. Series, No. 14-14. For more information... • F. Scott Kieff, Property Rights and Property Rules for Commercializing Inventions, 85 MINN. L. REV. 697 (2001). • Mark Lemley, Intellectual Property Rights & Standard-Setting Organizations, 90 CAL. L. REV. 1889 (2002). LIAR nomics Coming in 2015 How Similar are Copyrights and Patents? Stan Liebowitz University of Texas - Dallas What is protected by P&C? • Copyright is narrow, the “expression” of ideas. • Does not rule out independent identical creation, although highly improbable. • Patent goes to the first “winner” to file. This punishes other independent creators. Is it fair? Is it efficient? Perhaps it should allow all independent creators to “share” patent? Different holders could be allowed to collude. Economic logic is similar • Provide ownership [“monopoly”] over creative/innovative works. • Ownership allows the possibility of price staying above average cost, allowing creator/innovator to cover costs (including cost of creation) and possibly earn a profit. • Increases in profits presumably increases the number of works/innovations. • Period of ownership is limited. The famous “balance” between incentives and consumption levels. • Some claim the main purpose of patents is to ensure optimal commercialization of the innovation, avoid a “tragedy of the commons” type of problem. The Similar Criticisms of P&C • Based on the similar criticisms of each, you would think they were identical. • The extreme version of criticisms: The Similar Criticisms • Based on the similar criticisms of both, you would think P&C were identical. • The extreme version of criticisms: • Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly The Similar Criticisms • Based on the similar criticisms of both, you would think they were identical. • The extreme version of criticisms: • Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly, Monopoly • Creators/inventors would do it for free. • P&C hinders follow-on creations. Nature of the “Monopoly” created. • EVERY PROPERTY RIGHT PROVIDES A MONOPOLY! • But copyright does not restrict entry. It does not provide an economic monopoly. • Copyright critics tend to whine thoughtlessly about monopoly. • Patents, unlike copyrights, keep out independent creators. Patents can provide a viable monopoly, depending on the breadth of the patent. Are Rewards Needed? • The assumption that higher profits (prices) increase production is not usually controversial. But critics are unwilling to apply it to intellectual products. • After all, don’t inventors, writers, composers, just create for the fun of it? Unlike, say, athletes. – Autonomous creation, according to Plant