Patent in its traditional meaning, is a government-protected monopoly. However, because it is a granted property right that covers wide range of transactions, questionable practices such as patent suppression are invented ever since. By actively applying for patents and passively asking for royalty fee, it now becomes a standalone business mode, companies like Intellectual Ventures and Digitude Innovations are actively seeking legal means to profit from the large patent pools they gathered through acquisitions and bankruptcy liquidations. These business practices failed to address the very principle of patent law, which is to reward patent inventors in order to better promote technology advancement. On the other hand, in today’s world, a competitive market shows great success in allocating resources. If we can create a competitive market for patent through some minor modifications on current patent practice, it would be expected that many bad business practices due to our inefficient patent allocation would go away.
Patent is considered as a property. Thus, it comes with full property rights. In practice, that is usually means companies are the ones who will exercise these rights on patents. It makes sense because individuals usually lack of necessary means to exercise their rights on patents, especially when they need to collect royal fee, investigate patent infringements etc. However, Two differences between corporation and natural person make this situation easier for patent abuse. First, a company doesn’t hold morality value. The purpose of a company is to make profit. Thus, it will operate at the edge of what the law permits when that is to its advantages. Second, a company can be bought or restructured, which will turn its original purpose up side down. In many patent suppression cases, the patents involved are usually bought through bankruptcy liquidations or acquisitions.
The Essence of Competitive Market
A competitive market for patent requires two main components. First, patents that can be used to solve a class of similar problems should be sufficiently many. Second, there is no way for someone to ban a certain product due to patent infringement claims. The first requirement ensures that the price of a patent use (in the form of royalty fee) would be optimal. The second requirement ensures that there will be a price for a patent use (royalty fee) at all. To meet the two requirements, a patent institution should widen its acceptable range of patents and only a limited range of property rights should be granted with patent. Namely, the right to transfer and the right to exclude should be stripped out. It would feel strange that to create a competitive market, a set of stripped-down property rights are needed. The reason is that the competitive market we discussed is not about patent exchange, rather, it is a competitive market on the right to implement a certain patent (patent use).
Stripping-down property rights usually are problematic because many restrictions can be mitigated through specific contract arrangement. For example, if the right to sell a property is restricted, one can still sell the right to use a property through careful contract arrangement, and that normally has the same effect as the right to sell a property. This is not a case for patent because of its unique characteristic. Thus, the restriction on right to transfer can actually be enforced with the premise that the assignee is a natural person (thus, cannot be bought or restructured etc.). On the right to exclude, it is still possible to impose a royalty fee at unreasonable range so that effectively exclude someone from using it. However, such royalty fee would still subject to fairness principle (you cannot do arbitrary price discrimination). Due to the fact that the patent always granted to a natural person (thus, the person needs to license it to some companies in order to make profit), it is hard to implement an unreasonable price to someone that effectively exclude him/her from use the patent and still profit from the patent.
A competitive market means that one can “shop” patents (obtain permission to use with royalty fee) that required for the implementation of a specific product and there will be enough alternatives to pick and choose. For example, in software design, it means (if have to,) to choose a software patent that is more affordable but solves the similar problem. The market mechanism makes sure that the royalty fee for a too broad patent (the kind of patent that usually used for patent suppression) would be driven down significantly simply because there are too much competitions from other more specific patents. In a fully competitive market, the price would be driven down to its original cost (no profit margin), in the case of patent, that will be zero. Thus, for a patent has too many competitors (near fully competitive market), the royalty fee will be zero. Therefore, in a competitive market, low-quality patent will be eliminated (become irrelevant).
Three Proposed Changes to Patent Institution
As we discussed earlier, for a patent institution, granting a set of stripped-down patent rights to a natural person is sufficient to encourage the establishment of competitive market for patent. In following chapter, I will discuss why the three elements can lay the foundation of a competitive market for patent.
A natural person usually doesn’t possess necessary legal expertise in order to enforce royalty fee in case of patent infringement. A delegate is needed for him/her to fully exercise their rights on a given patent. The delegation mechanism may well be a for-profit organization that is capable of representing the interests of that natural person. However, the mechanism is different from previous for-profit organizations that are designed for patent suppression because they don’t actually own the patent, and the end goal of the delegation organization is to collect the royalty fee rather than the infringement settlement fee. In any circumstance, the natural person can always overturn previous judgment made by the delegation organization when their practice is conflicting with certain moral value that the natural person believes. In the essence, the delegation organization serves as a medium to minimize the cost of licensing and obtaining proper license for both parties. The analogy is similar to current patent pool structure we have, which certain companies formed an organization to manage the set of patents on a specific technology so that they can avoid the legal cost and labors of cross-licensing etc. It becomes more evident that patent pool is the only viable way to materialize a complex technology because nowadays, the development of a complex technology usually requires cooperation across various organizations (industry research labs, university research groups, national labs etc.).
Non-transferable requirement makes sure that the natural person can always retain the profit from his/her invention. Such requirement also avoids that certain delegation organization turns to patent suppression by obtaining the patent itself. The requirement of non-excluding serves the same purpose to restrict certain organization/person from patent suppression. Will non-excluding requirement be sufficient enough to avoid patent suppression alone? It seems that once a patent is licensed, with non-excluding requirement and fairness principle, it would be impossible to handcuff certain company from using that patent. However, without “natural person” requirement and non-transferable requirement, it would still be possible to use a patent without licensing it (e.g. the inventor produces instances based on the patent). In that case, they can effectively exclude anyone from using a patent by asking for a prohibitively high royalty fee. In this way, the three requirements I proposed are the essential minimal to prohibit patent suppression.
Prohibiting patent suppression is essential for a competitive market creation. Otherwise, one can always ban a certain license on a patented instance arbitrarily and damaging the consistency of such market. On the other hand, the enabling of new delegation organizations makes the competitive market preferable by offering incentives necessary to form such market. The market that formed by these delegation organizations is competitive on two grounds. First, the delegation organizations will compete for inventors and may provide terms more favorable to inventors depending on the value of patented inventions since the delegation organizations are working in a market that don’t have a particular competition niche to pursue other than legal and negotiation expertise (perfect competition). Second, the patent pool that the delegation organizations collected will also compete with each other if they have similar applications (much like the patent pool in software such as WCDMA v.s. CDMA2000 etc.). If more inventions are patented, more of them will have similar applications. This can be encouraged through lower the application fee and streamlining the application process by patent institution. By competing patent against each other, it will drive down the royalty fee and help to evaluate the value of such invention with market power.
Implication of Proposed Changes
The proposed changes to current patent institution are minor, but the impact can be profound. I will discuss several implications in the following chapter.
The “natural person” requirement exploited the fact that companies can be bought or restructured but not a natural person. Another difference between a natural person and a company that is not discussed in former chapter is the morality. Thus, a natural person possesses higher moral standard than companies. In pharmaceutical patent cases, which by nature operate at higher moral standard than most other patents, this change can be a useful feature. In particular, if a pharmaceutical patent is proved to be invaluable to poor countries, people can always petition to its inventor with expectation of gaining certain exempt terms. It exploited the fact that a person can be more easily persuaded than a company because a company is purely profit-driven. However, it doesn’t solve the problem that particularly interesting to pharmaceutical patents (how to promote health), but does hint a new kind of thinking when higher morality is required in certain patent cases.
Since a patent is bound to a certain “natural person”, would a certain company be incentivized to apply patents and always assign the “natural person” field with a particular person (i.e. CEO or chairman of that company)? For example, if the assignee cannot be Apple Inc. anymore, would it be incentivized to name assignee of all patents it filed to be Steve Jobs? The incentive is true and in such way, the company would be able to retain the patent itself and have a finer control over all the patents it filed. It likely will be the only incentive for large companies to still fund research because the return from research for the company itself is diminished with the implementation of these new modifications. This is the due-diligence responsibility of the patent institution to make sure that the right person is attributed.
Since large companies can neither exclusively produce certain product, nor directly collect royalty fee, the only way for them to still profit from researches they fund is to take a cut from royalty fee revenue of the inventor which would likely to be smaller than they originally can get with monopoly means. The diminished interests for large companies to fund research may negatively affect the research in general for a short time, but it also provides unique opportunities to the rise of independent research groups. An independent research group will also take a cut from the royalty fee revenue of the inventor, but because inventors in an independent research group will likely to license their patent to more people at a more favorable price, the revenue for independent research group will be at least as large as the revenue that large companies would get by funding researches themselves. University research groups and national labs should not be affected by these changes.
The traditional recognition of patent is that by granting patent to its inventor, it will create a temporary artificial monopoly that then will generate enough profit to incentivize the inventor in long-term to continue produce quality inventions. With these new changes especially the non-excluding rule, it is impossible to create artificial monopoly any more. However, the spirit of patenting retains. It is hard to quantitatively assess whether the revenue would decrease or increase with the new scheme to the inventors. But either way, that’s something left for the market to determine.
To make the market competitive on the ground of patent licensing, we should grant more patents than before. It requires some compromises in the way that we evaluate patents. Since we’ve waived the requirement for excluding, any inventions that have meaningful modification on public common should be patentable. It won’t drain the public common, because the royalty fee for patent that is too “broad” (in another word, too close to public common) will be close to zero. The competitive market approach ensures that less meaningful inventions will be ruled out eventually. The new evaluation makes sure that we can patent as much as possible. This process will greatly enrich the patents available on the competitive market, therefore, making the market more competent when determining the right royalty fee for patents.
The proposed new scheme for patent institution is not meant to solve all the problems. For example, this new scheme won’t significantly change the dilemma we have for pharmaceutical patents now. It only hinted that when individuals with higher morality hold such patents, it would be more easily persuaded to give up certain profit for greater good. However, there is no enforcement rule in patent institution side to promote health. But, to solve health problems in poor countries should not be a burden for patent institution. Patent institution couldn’t properly and shouldn’t be able to incentivize researchers to solve health problems. The view that health problems in poor countries are the fault of our current patent system is flawed. Besides patent suppression, current patent scheme incentivizes inventors in proportional to the profit of sales that made on their inventions. Thus, if these incentives are misplaced, it is a fundamental problem with current capitalism social structure for which we only reward people with money.
The proposed scheme may not work well with gene patents too because the proposed scheme makes assumption that there are alternative inventions to solve similar problems (WCDMA v.s. CDMA2000, LCD TV v.s. plasma TV etc.). Due to the unique encoding of a gene, for gene patent, it is less likely to be the case. However, lacking of applicability, the current gene patent won’t affect much on the new scheme since the proposed scheme focus on application rather than protection. As for the other invention that solves a problem no alternatives available yet, the scheme permits a higher royalty fee. But as long as it has been licensed, others will be able to obtain license indiscriminately (by the non-excluding rule). As for the inventor, he/she won’t be able to profit from his/her invention unless it gets licensed. Thus, he/she lacks incentives to protect his/her invention from public. In fact, he/she cannot even protect their invention for being reproduced once they filed the patent application (with specification). Once someone implemented their invention with the publicly available specification, they are forced to enter negotiation stage. With this new scheme, the true secret creation can only be protected as trading secret, which is more appropriate than passive patent protection.
In this paper, I proposed some minor modifications to current patent institution practice. The three modifications: assigning patent to “natural person”, non-transferable and non-excluding patent right focused on to make patented inventions viable to general public. As small as these modifications seem to be, through the discussion of this paper, they should have profound impact on our current structure around patent system as a whole. They will help to prevent patent suppression, eliminate passive patent protection, enabling a more efficient royalty fee negotiation process and more promptly rewarding to the original inventors.