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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The patent system is criticized today by some practitioners and economists. In fact, there is a partial disconnection between patent demographics and productivity gains, but also the development of actors who do not innovate and who develop business models that their detractors equate with a capture of annuities or a dangerous commodification of patents.
This book provides a less Manichaean view of the position of patents in the system of contemporary innovation. It first recalls that these criticisms are not new, before arguing that if these criticisms have been revived, it is because of a partial shift from an integrated innovation system to a much more fragmented and open system. This shift accompanied the promotion of a more competitive economy. The authors show that this movement is coherent with a more intensive use of patents, but also one that is more focused on their signal function than on their function of direct monetary incentive to innovation.
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Table of Contents
Cover
Title
Copyright
Introduction
1 The Purpose of Patents
1.1. Introduction
1.2. Patents as an incentive mechanism
1.3. Patents as intangible assets
1.4. Case study: Intellectual Ventures Inc
2 The
Imprimatur
of Patent Offices in the Face of Reforms
2.1. Introduction
2.2. The exponential demography of patents
2.3. The impact of regulatory factors and legal decisions in the United States
2.4. Regulatory developments in Europe
3 The Judiciarization of Patents
3.1. Introduction
3.2. Should patent trolls be tracked down?
3.3. Standards and patents: a necessary but tense coexistence
3.4. Case study: sovereign patent funds
4 A New Place under the Sun for Patents?
4.1. Introduction
4.2. The patent as one innovation policy instrument among many
4.3. Patents in support of open innovation strategies
4.4. Case study: “My patents are yours” – development in the Tesla case
Conclusion
Bibliography
Index
End User License Agreement
List of Tables
3 The Judiciarization of Patents
Table 3.1.
Summary of decisions regarding FRAND royalties
List of Illustrations
2 The Imprimatur of Patent Offices in the Face of Reforms
Figure 2.1.
Evolution of the number of patent requests at five main offices globally (Source: Patstat© data extracted and treated by the authors (2017))
.
For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.2.
Evolution of success rates for patent requests at five main offices globally (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.3.
Evolution of patent requests by geographical area (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.4.
Evolution of the number of patent families worldwide (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.5.
Evolution of the composition of patent families worldwide (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.6.
Co-evolution of patents filed and average labor productivity (Source: Patstat© data extracted and treated by the authors (2017) and OECD iLibrary data). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.7.
Co-evolution of patents filed and total-factor productivity (Source: Patstat© data extracted and treated by the authors (2017) and OECD iLibrary data). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.8.
Comparison of patent filing and granting procedures at the European Patent Office and the US Patent and Trademarkk Office
Figure 2.9.
Evolution of patent requests from the USPTO and the success rate for class 705 (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 2.10.
Evolution of patents grants for Work Group 3690 (finance) from the USPTO following the Alice decision of the United States Supreme Court on June 19, 2014 (Source: Patstat© data extracted and treated by the authors (2017))
4 A New Place under the Sun for Patents?
Figure 4.1.
Number of patent families for automobile manufacturers from 2006 to 2016 (Source: Patstat© data extracted and treated by the authors (2017))
Figure 4.2.
Ratio of multi-patent families (vertical axis) as a function of the number of families (horizontal axis, logarithmic scale) for automobile manufacturers from 2006 to 2016 (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
Figure 4.3.
Average part of partners in families with co-patents (vertical axis) as a function of the ratio of families with co-patents (horizontal axis, logarithmic scale) for automobile manufacturers from 2006 to 2016 (Source: Patstat© data extracted and treated by the authors (2017)). For a color version of this figure, see www.iste.co.uk/baudry/patents.zip
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Smart Innovation Set
coordinated byDimitri Uzunidis
Volume 12
Patents
Prompting or Restricting Innovation?
Marc Baudry
Béatrice Dumont
First published 2017 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc.
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address:
ISTE Ltd27-37 St George’s RoadLondon SW19 4EUUK
www.iste.co.uk
John Wiley & Sons, Inc.111 River StreetHoboken, NJ 07030USA
www.wiley.com
© ISTE Ltd 2017
The rights of Marc Baudry and Béatrice Dumont to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
Library of Congress Control Number: 2017949782
British Library Cataloguing-in-Publication Data
A CIP record for this book is available from the British Library
ISBN 978-1-78630-118-5
Introduction
It is tempting to see the debate about the relevance of patents for supporting innovation as a contemporary, updated version of the tongue anecdote from Aesop, the famous ancient Greek fabulist who was also a slave. When his master asked him to go to market to buy the choicest dainties to honor some special guests, Aesop only bought tongues, which he served with different sauces. When his master questioned his choice, Aesop responded, “There is nothing better than the tongue, the connection to civil life, the key to science, the organ of truth, reason and prayer. Through it, we build cities and govern them, we teach, we persuade, we hold assemblies, and we carry out the most important of all work, which is to praise the gods”. Offended by this answer, Xanthos, Aesop’s master, asked him to choose the worst meal for the same guests to try the next night. Again, Aesop bought only tongues, and served them with different sauces. To his puzzled master, he responded: “There is nothing worse than the tongue, the mother of all disputes, the source of all conflict and wars, the organ of error and slander, blasphemy and impiety. Through it, we destroy cities, we convince people of evil things, and we utter blasphemy about the power of the gods”1.
Patents are at least as ambivalent as Aesop characterizes the tongue. This ambivalence has long been recognized. When concluding his report for the U.S. Senate about patents, Machlup [MAC 58, pp. 79–80] wrote: “No economist, on the basis of present knowledge, could possible state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society. The best he can do is state assumptions and make guesses about the extent to which reality corresponds to these assumptions. […] If one does not know whether a system as a whole 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 long 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”. After emerging in England, as a system of exceptions in the context of laws to counter monopoly rents, patents were conversely consecrated as a natural right of all men over what they produced following the French Revolution in 1789. Over the course of the 19th Century, calls to put an end to the patent system increased. In Great Britain, the news magazine The Economist openly took a position in favor of abandoning them in an article published in 18512. In France, the Saint-Simonian economist Michel Chevalier wrote as early as 1862 that “the legislation of invention patents is harmful to industry today” (Chevalier [CHE 62]). Some countries, such as Switzerland, refused all protection by patents, a system judged in principle to be “pernicious and indefensible” in itself3. The Netherlands abandoned the legal protection of inventions between 1869 and 1912 (Schiff [SCH 71]). The movement in support of abolishing the patent system – its “reform” as it was called – nearly carried the day between 1850 and 1875, but those in favor of maintaining the system were victorious in the end owing to the “protectionist reaction” at the turn of the century (Machlup and Penrose [MAC 50]).
The inability, for more than a century and a half now, of industrialized or industrializing countries to develop a sustainable mechanism that encourages innovation that could substitute for patents and displace them may be seen as “default” proof that patents are the best system. Even though the academic literature has considered, and continues to actively consider, the question of the best support mechanism for innovation, it must be said that no alternative solution seems able to fully eclipse patents. So, we can justify maintaining the patent system in light of Oliver Williamson’s criterion of “remediableness” [WIL 96], which is to say that an existing practice for which there exists no feasible better alternative, which can be described and implemented with a reduced net gain, is presumed to be efficient. This does not mean that the patent system does not have a certain number of flaws and quirks, only that the alternative solutions are not exempt from those either. Because of this, several economists defend the system as being the lesser evil, somewhat in the manner of Winston Churchill, who said that democracy was the least objectionable of the political systems. Therefore, according to a law and economics logic, strong patents are indicative of a system of intellectual property, just like property on tangible assets, that is indispensable for the good working of the economy (Kitch [KIT 77], Posner [POS 05]).
The demography of patents, however, compels us to be somewhat alarmist. In the last four decades, the increase in the number of patents requested and granted around the world seems out of control. Just as a population living in too great a concentration in a given space generates stress, illness, aggressiveness, and conflicts, the system seems to be becoming “ill.” Some people see evidence of this in the overlap of rights conferred by patents, generating “patent thickets,” which would lead to a prolific rise in litigation or blocking the dissemination of innovations by a stacking in license fees. Similarly, some authors indicate the weakness of empirical evidence regarding the link between the demography of patents and productivity growth, and only see an unhealthy outgrowth of the system, almost like a cancerous tumor, in the increase of this demography. The typical agent, according to this perspective, would be the “patent troll” who hides behind patents that are superficial in substance, only to capture rents at the expense of “real” innovators. For instance, Boldrin and Levine [BOL 08], who are at the forefront of the contemporary movement of patent contestation, criticize the idea that patents would lead to a higher rate of innovations. Based on the number of innovations presented at international trade fairs, they argue that in the 19th Century, countries that did not have a patent system were no less innovative than the countries that did have one. According to economists who support this slightly Manichean approach to patents (and they are no less numerous than their opponents), the staggering growth of patents is negative. For them, we must, at the very least, practice a technological “Malthusianism” by drastically narrowing the qualifying conditions for patents, or even abolish the patent system itself.
What can we contribute to such a polarized debate about the relevance of patents? First of all, we can trace the events and reasoning that led to this polarization. We can also re-situate it in a larger context. The last three decades of the 20th Century were marked by a number of economic changes. At the end of the 30 glorious years, the economic system characterized by a kind of capitalism that was tightly regulated by the State, has been replaced by a new economic system where the prevalence of markets is affirmed. It consists of goods markets based on the development of international trade and the advent of globalization. It also involves financial markets with unprecedented mobility for capital. It is not at all surprising that the model for innovation also changed in such a context. Confronted by markets for goods and services where competition is stimulated by new actors struggling to gain entry, the model of innovation necessarily led to change in the 21st Century. More actors also means that smaller actors cannot exist without specializing, including in the production of innovative solutions intended for others. However, smaller actors are also more subject to financial constraints. In order to bypass these constraints, what is more logical than to turn to the financial actors for whom obstacles were removed regarding the possibility of involvement? More actors can also mean more interactions among them. What we see emerging in this systemic logic is a shift away from a vertically integrated model of innovation “à la Schumpeter” where large firms create inventions internally, fund R&D themselves, and attempt to produce and commercialize innovations by themselves, toward a fragmented and intermediated model where a large number of actors interact with each other. These interactions require guarding against imitation as best as possible, but also sharing inventions while still being able to protect them. Patents can respond to these requirements. They ensure what economists call the appropriability of returns from inventions, and thereby encourage innovation. Aside from this traditional perspective on their role, patents also make it possible to demonstrate inventive capacities and reduce information asymmetry in transactions concerning new technologies, in partnerships forged to design these technologies, or in the access to external funding for R&D to support these technologies. This does not mean that the new system guarantees more innovations. It is only said that, while the vertically integrated system of innovation could more easily do without patents, the new fragmented system of innovation is much more constructed with, and even around, patents. That is what this book will attempt to demonstrate.
To understand this logic, it is important to start by recalling the purpose of patents. This is the goal of Chapter 1, which begins by reiterating the incentivizing role of patents. As the right to forbid others from exploiting an invention, in cases of successful inventions, it provides a rent that compensates ex post the inventor for having taken ex ante a risk and dedicated the means to develop the invention. The patent is therefore basically a sequential compromise for according a return ex post by creating an incentive ex ante. However, this right of intellectual property must not only be enacted by public authorities, it must also be defined. This delimitation is much more complex than for other property rights, especially land-related ones. It relies on the choice of multiple parameters and because of this, it can give rise to the best or the worst results, as the devil is often in the details. Aside from the incentivizing role of patents, which is traditionally emphasized, patents also have a transactional role. Chapter 1 discusses this as extensively as the incentivizing role. It shows how patents are intimately connected to the move by certain actors to specialize in the design of inventions, and then their transfer to other actors. The transactional role of patents is not limited to the transfer of innovative technical solutions. It also concerns access to external funding for R&D, as soon as it is subject to information asymmetry. In the sense of the economy of information, the patent becomes a credible signal of the capacity for innovation by young companies that are not yet well known. It facilitates the introduction of start-ups to venture capitalists. This shift is significant because it is no longer what the patent protects that is the most important, but the signal that it sends, whether or not the patented invention is developed.
The different facets of the delimitation of patents presented in Chapter 1 all offer room for a patent office to maneuver. Chapter 2 focuses on demonstrating how legal and institutional adjustments can have serious consequences on patent demography. This chapter begins with a factual analysis of the evolution of this demography and its connection with the evolution of productivity increases. It not only confirms a certain disconnect between the two evolutions but also indicates that the idea of an uncontrolled demography without the tangible benefits of patents is to be nuanced depending on the patent office under consideration. The problem is not only first and foremost an American issue, but also increasingly a Chinese issue, that is recent but whose scale will multiply several fold. Chapter 2 then focuses on a comparative study of American and European cases and their recent developments to highlight how different approaches and problems hide behind apparent procedural similarities. Today, it is well known that the European Patent Office does not easily grant its imprimatur. In this sense, it is representative of what we can characterize as “top of the line” in terms of requirements on the part of a patent office. In contrast, the US Patent and Trademark Office is known for its principle of “rational ignorance”, which consists of relying heavily on the legal system to regulate the question of patent delimitation and assertion.
From the principle of “rational ignorance” employed by the patent office, there logically follows a phenomenon of litigiousness around patents. The full extent of this phenomenon is detailed in Chapter 3. Often perceived negatively, this litigiousness is addressed by presenting the so-called “hold-up” problem concerning, on the one hand, the development of patent assertion entities (including the infamous “patent trolls”) and, on the other hand, the case of patents that are essential for a standard. The position taken in Chapter 3 is to consider that patent trolls are to patents what arbitrageurs are to finance: they play the maligned role of exploiting the flaws in the system, but in doing so, they prevent these flaws from developing. They are therefore all the more useful when patents are delimited vaguely and have a considerable risk of overlapping, which also explains why they “prosper” primarily in the new world, not the old one. The case of patents that are essential for a standard illustrates how the road to hell is paved with good intentions. Standards are a common reference point on which potentially competing companies can rely to develop a technology while guaranteeing compatibility for users, regardless of the technology provider. However, when standards are constructed around patents, the market power of the patent holder can be increased or even amplified by supposedly anticompetitive conduct. So-called FRAND (Fair Reasonable And Non-Discriminatory) licenses are supposed to remedy this. Even if, in reality, they can prove complex to implement because they are too imprecise, they demonstrate the ability of the system to adapt to problems it encounters.
To paraphrase a famous quote in American jurisprudence, “everything under the sun that is made by man can be patented”4. Chapter 4 addresses the emergence of a new “place in the sun” for patents in the context of a system of innovation that is not vertically integrated but fragmented between multiple actors. To this end, it supports the idea that there are other tools to support innovation besides patents. More specifically, it addresses prizes in innovation competitions that are often presented as alternatives to patents while still constituting, like patents, a tool to compensate inventors. It demonstrates that these competition prizes do not represent more of an alternative to patents than financial support tools for R&D. Rather, Chapter 4 argues that these tools are complementary to patents. Chapter 4 then goes further, supporting the idea that patents are paradoxically useful in a system of innovation that is not only fragmented and intermediated, but also open. Indeed, the notion of open innovation is often presented as contradictory to the “proprietary” approach generally illustrated by patents. A significant part of the academic literature tends, on the other hand, to show that an open innovation approach often requires spreading information about inventions while protecting them, and that patents allow for this better than other protection strategies, such as the secret. A more systematic use of patents could thus support the development of open innovation.
Throughout these chapters, this book seeks to inform the reader about a “middle ground” regarding patents. It moves away from a “traditionalist” conception which, by insisting on the incentivizing role of patents, tends to neglect their informational role, especially as a signal. Without contesting the relative disconnect between the upward demography of patents and the significantly more moderate productivity gains, this book proposes an alternative interpretation to that of the “abolitionists”. It suggests that the position of patents within the system of innovation is renewing itself, with the shift toward a more fragmented, more intermediated innovation that is also more open and which guides the contemporary evolution of the most developed economies.
1
See Mayvis [MAY 06], Chapter 8.
2
See
http://economist.com/news/business-and-finance/21660769-second-leader-1851-about-patents-amendment-patent-laws
.
3
Patent protection dates from 1888 in Switzerland, with an extension of the breadth of the protection in 1912.
4
See Case Diamond v. Chakrabarty 447 US. 30 (1980) and the opinion of Chief Justice W. E. Burger declaring “Congress had intended patentable subject matter to include anything under the sun that is made by man”. For a discussion of the origin of this expression, see also Kauble [KAU 11].
1The Purpose of Patents
1.1. Introduction
Proponents of a patent system for inventions often present it as indispensable for supporting innovation, in the sense that innovation would not be fully realized without patents. From the outset, this perspective relies on the assumption that innovation cannot emerge from a “laissez faire” situation, or at least not in a complete and satisfactory way. Even before questioning the relevance of the patent system, it is important to consider the necessity, or lack thereof, of promoting innovation. This does not mean questioning the social utility of innovation, although technology divagations can sometimes lead us to consider some innovations to be more harmful than beneficial to society and call for a kind of precautionary principle. Without denying this problem, it is not the focus of our reflection here. Rather, we intend to discuss why public intervention would be necessary and, more particularly, if patents are in fine a more or less appropriate mode of regulation.
The discussion has two stages. In a first stage (section 1.2), the traditional approach to the role of patents to incentivize innovation is presented. By articulating the non-rivalry and non-excludability properties of patents in the use of ideas and inventions that result from them, it is shown that a lack of private incentives for innovation affects the economy. The emergence of the patent as an intellectual property right in response to this lack is discussed. The specificities of this type of property right are emphasized in order to provide a first glimpse into the debate about the relevance of patents. In a second stage (section 1.3), patents as intangible assets are addressed. Their importance as intangible assets is twofold. Not only are they assignable and make it possible for companies to specialize in the production of innovations, but they also play a facilitative role in the access to external funding for innovating companies. Reflecting a relatively recent development in the literature, the role of patents as a signal for innovativeness appears just as important as their role as an incentive. Above all, the recognition of this role leads us to consider the debate about the relevance of patents differently, even if it means shifting to other questions inherent to this movement of financialization.
1.2. Patents as an incentive mechanism
The main idea that is generally put forward to justify public intervention in matters of innovation is that innovation results from “flashes of genius” which are not subject to rivalry in use. This means that once an individual has developed an idea in the form of an invention, that invention can be used almost without cost by others. This is a simplistic view of things, because an effort to understand the ideas that led to the invention is generally required to mobilize it, but the main principle is that the cost of understanding with the view of reproducing the invention is minimal, compared to the cost of the rediscovery ex nihilo of the invention. It is therefore collectively desirable to spread the idea and its realization in the form of an invention to everyone. This prevents wasting resources, even if only time, in the economy1.
Nevertheless, non-rivalry in the use of ideas has economic consequences that are quite different if it intersects with another property: the possibility of precluding use (or not). The impossibility of preventing use can result in a potentially strong disconnect between the private valuation that the economic agent who came up with the idea can expect from the invention he or she created and what the invention contributes to the community. Pushed to an extreme, such a disconnect eliminates all monetary incentives that endeavor to support innovation. It therefore greatly slows the rate at which innovations appear, limiting them to innovations that occur by chance or through motivations other than the pursuit of private interest. Long recognized by public authorities, this problem is at the root of the patent system, which is supposed to respond to it by establishing a right of intellectual property over inventions that result from flashes of genius. It is this incentivizing role of the patent that has long prevailed, and still largely prevails, over the debate about the relevance of the patent system. If there is a debate, it is because patents do not establish a property right like any other. This is what the first section intends to demonstrate.
1.2.1.The key question of appropriability of returns for innovation
What economists call “club goods” are the result of the combination between non-rivalry and the possibility to preclude usage. The economic model of club goods consists of requiring payment in exchange for access to the good. It is therefore possible for the individual or company who produces a club good to receive a part of their return from the use by each individual to whom access to the good has been granted. The compensation for the producer of this kind of good is therefore proportionate to the number of individuals who are willing to pay the asking price, and when applicable, the number of units that each individual wants. A live performance is generally a club good. Provided that the number of spectators does not damage the perception that each individual has of the performance, there is a non-rivalry. It is also possible to exclude individuals from accessing the location where the performance is occurring. On the other hand, when it is not possible to exclude usage, the individual or company who produces the good finds themself unable to derive returns from individual beneficiaries through an appropriate price structure. It is therefore not a viable economic model in the context of private production. An air show is an example of this. Even if, like the live performance, there is indeed non-rivalry as long as the number of spectators remains limited so that no one interferes with one another while watching the air show, it is generally impossible to prevent individuals outside of the airfield from watching the show. In the absence of market incentives to produce them, goods that have both properties of non-rivalry and non-excludability are produced either directly by public authorities or indirectly by public commission of private actors. What about innovations? To answer this, it is necessary to distinguish different steps in the process of creating innovations and, at the same time, clarify the term “innovation”.
Innovations are a link in a larger process of knowledge creation in which we can identify three major steps:
– the domain in which they are implemented;
– the primary activity that characterizes them;
– the result that they produce.
The first step falls under the domain of science and is characterized by research that can be either purely speculative or oriented toward a concrete goal but its result is always a kind of scientific discovery. The application perspectives are generally too distant in time to be correctly predicted or even suspected. Their production therefore cannot rely on a market process. As scientific discoveries are a base for the following steps, it is nonetheless necessary to ensure their production with adequate incentives. The economics of science tends to highlight the role of peer evaluation in the careers of scientists, even simply the personal satisfaction derived from moral recognition by others or from the very fact of having solved a problem2. The absence of rivalry in the use of scientific knowledge is obvious. There is a possibility of direct excludability, for instance by controlling access to conferences or to publications that present discoveries. In contrast, there is generally an impossibility for indirect excludability, in the sense that we cannot often prevent a person who has had access to the discovery from passing on the discovery to others. Consequently, scientific production is essentially supported by public funds.
The second step falls under the domain of technology and is characterized by the production of inventions that make it possible to solve a practical problem. The concrete character of the problem solved makes it possible to consider a more or less short-term application for the invention and therefore a potential market value. There is no rivalry in the use, as one application can be developed without preventing other applications. The possibility to exclude is, however, subject to discussion. It can be imposed by force3. It also partly depends on the technological field under consideration and the possibility for reverse engineering in that field. This consists of finding the concept for the invention by examining what is produced thanks to the invention. This is a common practice in the engineering industries. It is more difficult in the tire industry, which relies on tacit knowledge, appropriable with difficulty, as opposed to explicit knowledge. Where the possibility of excludability is not imposed by the very nature of the inventions, notably by the difficulty to proceed with reverse engineering, it can be imposed by law. This can happen through prohibitions. Over time, the law has moved more toward the attribution of rights. This is how the issue of patents, the subject of this book, emerged. Before discussing this issue in more detail, we will present the third step of the process.
The third step falls under the domain of the economy, and is characterized by the creation of value within a society. The creation of value can be achieved in a marketable form, such as through the successful commercialization of a new product, or a non-marketable form, through the dissemination of best practices regarding how to produce a good. It is only when the creation of value becomes effective that we are talking about innovation. It then becomes important to distinguish innovations, which are inventions that have created value, from inventions in general that have not, or not yet, led to the creation of value. In addition, innovations are not exclusively technological. A typology by object, directly inspired by the definition given by Schumpeter [SCH 11], led to the present distinction between four types of innovations (Oslo Manual [OEC 05]):
– Process innovation (implementation of a new production technique). Thanks to this kind of innovation, a company can produce an existing good for a lower cost than its competitors. This type of innovation follows a logic of vertical differentiation in production tools. A classic example is the process invented and patented by the English engineer and inventor Henry Bessemer in 1855 to manufacture steel in a more efficient way.
– Product innovation (commercialization of a product that offers new features or responds to needs that were hitherto not satisfied or poorly satisfied). Thanks to this kind of innovation, a company can be the only one to supply the new good on the market. This type of innovation follows a logic of differentiation that is at least as much horizontal as vertical. A relatively recent example is the development of mobile phones in the 1990s and then smartphones in the 2000s. The
iPhone
from
Apple Inc
., commercialized as of June 2007 in the United States, was the first smartphone with a touch screen interface available at that time.
– Organizational innovation (rethinking the organization of tasks, human resources, decision procedures, and client and supplier relations). Thanks to this kind of innovation, a company can reduce its production inefficiencies or informational inefficiencies. This type of innovation is the responsibility of management and can be paired with an engineering logic. One widely documented example is the Taylor system adopted for the assembly-line production of the Model T by the
Ford Motor Company
from 1908 to 1927.
– Marketing innovation (modification to the design of a product or the way of selling it). Thanks to this kind of innovation, a company can succeed in attracting new customers. This type of innovation follows a marketing logic. The site
Amazon.com
introduced the idea of an online library in 1994.
The different types of innovation are not incompatible. It is possible to combine a product or process innovation, an organizational or marketing innovation. For instance, it is with the batteries developed by its subsidiary Batscap that the Bolloré group produces the Blue Car, the iconic model of the car-sharing service known as Autolib’ implemented by the city of Paris. In this example, there is a product innovation based on batteries. However, to create value from this product, rather than selling the batteries to automobile manufacturers, the group decided to offer a turnkey solution to the city of Paris that included a network of charging stations and the supply and maintenance of the vehicles for that network. This is an organizational innovation that makes it possible to circumvent the issue of the critical mass of users beyond which a network becomes profitable. This organization breaks with the strategy of automobile manufacturers who are often content to offer electric car models without getting involved in setting up charging stations networks, with the noticeable exception of Tesla Motors. The organizational innovation led to a marketing innovation because the firm generates its income not through vehicle sales but through automated, short-term rentals to customers.
The problem of the impossibility of excludability raised by the second step of the development of applications takes on its full meaning when inventions are likely to result in innovations, meaning the creation of value. However, it should be emphasized that the impossibility of excluding is contingent on the application; for instance, it is stronger where reverse engineering is simple. When this impossibility prevails, it is very difficult for inventors to get financial compensation through the commercialization of their invention even if it has a high value for the community. This difficulty, referred to as the problem of appropriability of returns from the innovation, comes from the early entrance of competitors copying the invention at low cost, so that the rent of the inventor is very quickly eroded4. The competition forces the selling price down to a level that covers the production or reproduction costs of the invention, but does not often allow the inventor to cover her own costs for research and development. Since the inventor is the only one to be subjected to the cost of R&D, she can find herself in a paradoxical situation where imitators earn profits, even small ones, while she is losing money. If this problem is anticipated by the inventor, she may refrain from engaging in the activity of R&D. The community will then suffer from a lack of incentive because innovations whose social value exceeds the cost of R&D will not be created. The problem of the appropriability of returns from the innovation by the inventor is at the heart of the economic analysis of patents5. In order to best understand the importance of patents to respond to this, it is important to highlight two points. The first point is, as noted by Schankerman and Schuett [SCH 16], that a good patent system is able to only target innovations that are appropriable with difficulty, and which would not be created without this system. Innovations that are not subject to this difficulty not only do not need a patent system, but also should not solicit one in order to avoid it serving to claim undue rents. The second point is that there are alternatives to the patent system to remedy the flaw of appropriability. It is essentially information imperfections that create a context where the patent system appears a priori to be more specifically appropriate.
1.2.2.Patents as a solution for the lack of appropriability
In a utopian world where information would be perfect, public authorities would be able to identify the innovations that suffer as a result of this lack of incentive and to plan for their realization. They would also be able to identify which inventors are capable of realizing a given innovation at the lowest cost of R&D and to precisely evaluate that cost. In such a world, the public authorities could thus overcome the lack of incentives with the planning of inventions and the efficient allocation of funds for R&D. But the real world is made of imperfections, especially in the quality of information and its distribution among economic agents. In many ways, it is these information flaws that are at the basis of innovation policy and that underlie the patent system.
The first fundamental flaw comes from the inherently random character of any R&D activity. It is difficult for any person other than the researchers themselves to determine if an R&D program fails because the researcher encountered insurmountable difficulties or whether the absence of results reflects a lack of effort or skill on the part of the researcher. This problem is one variation among many in economics of the so-called “moral hazard” phenomenon. To encourage an appropriate level of effort on the researchers’ part, it is essential to implement incentives, to make their compensation and career somewhat dependent on obtaining results. In the case where the research in question occurs upstream in the process of innovation, and therefore more in the domain of science, the incentive is necessarily largely disconnected from the value created, which is itself highly uncertain. It therefore generally takes the form of a job promotion and an increase in autonomy at work. In the case where the research in question occurs downstream and where its impact in terms of value creation is more explicit, the incentives are generally more tied to profit-sharing6. The exact forms of this profit-sharing can a priori be very diverse, and notably, nothing makes it possible to say at this stage whether an innovation prize is more or less appropriate than a patent. The arguments to choose between one or the other are based on a second informational problem.
The second informational flaw that it is important to consider in matters of innovation is linked to the social returns created. Unless a specific scientific or technical problem has been clearly identified as an obstacle to be overcome in order to implement one or several applications that create value, the returns generated by an innovation are most often only correctly understood, and assessed, after the invention has been developed. Similarly, different competing solutions are often studied simultaneously until one of them manages to take the lead. When the automobile was being developed at the end of the 19th Century, it was not clear that the internal combustion engine that ran on liquid fuel would win out. Natural gas, electricity and steam were all considered as options for power before proving less interesting7. It is also the case that inventors often have a better idea of the advantages and disadvantages of their inventions, if only through the prototype testing that they carry out, and consequently of their chances of success. There are three consequences to this. First, innovators may be more inclined to take on the risks inherent to an invention, based on a more favorable belief in its success. Second, it is generally more difficult for the community to evaluate what is worth supporting or not before the invention is available and begins to spread. Third, inventions can have belated success, unforeseen applications, or a context that is favorable for their development may not emerge until later8. It is therefore often admitted that the incentive mechanism must operate ex post, must moderate compensation as a function of the observed value and not only the predicted value, and must be generic, in the sense that the compensation need not be negotiated for every invention. This perspective advocates for a technological neutrality for incentives, in the sense where they must support innovations but without making an a priori choice between the various options initially considered. The patent system responds to these different criteria and also offers a solution for the problem of temporal inconsistency that is likely to affect support for the innovation.
Like the moral hazard mentioned above, the problem of temporal inconsistency applies in economics to many more questions than simply innovation. Applied to innovation, it refers to the idea that it is in the interest of public authorities to incentivize innovation ex ante, before an innovation has emerged, by committing to compensate inventors when they are successful, but not to respect this commitment ex post. Indeed, once an innovation is available, the collective interest would be to spread it as widely as possible at the lowest cost, and therefore promote its free imitation by the inventor’s competitors. The problem is that if they anticipate this reversal, inventors will not trust commitments formulated ex ante and the incentive will be ineffective. To avoid the problem of temporal inconsistency in incentives, it is essential that commitments made ex ante be binding. For this, they must pass through mechanisms in which the discretionary power of public authorities is low. To do this, the support system must be established at a high level in the hierarchy of standards, which is the case for patents, which rely on a system of intellectual property rights (IPRs). IPRs are basically a bundle of legal standards used as a means of protection, compensation, conservation, and valuation of rights related to an “intellectual creation”. As will be detailed later in this text, because this type of right has major particularities, it is a public institution or independent administrative authority, namely the patent office, that grants and regulates intellectual property titles9. It is this relative independence vis-à-vis the legislative and executive powers10 that limits the issue of temporal inconsistency and guarantees a certain efficiency of patents as an incentivizing tool11.
A third information issue pertains to the apparent contradiction of designing a support system that is generic, but should only address innovations that, without such a system, would not be created. It is important to remember that a “good” patent system is a system which is only solicited for this type of innovation. However, a patent office cannot immediately identify innovations that it should target and rule out the others. For this, a mechanism encouraging inventors to self-select has to be put in place. One strategy to achieve this is to make the inventor pay to obtain a patent, through filing12 and processing13 fees, for example. The appealing feature of a patent is to allow for the appropriability of returns from the invention in case of success. When appropriability is already high, the gain supplement provided by a patent is relatively low and there is a strong chance that it will be canceled out by the filing fee if that fee is expensive enough. Conversely, when the appropriability is initially low, the gain supplement provided by a patent is relatively high and it has a good chance of staying positive once the filing and processing fees are subtracted. These fees therefore serve to discourage filing patents on inventions for which the appropriability is initially high, while encouraging it for inventions whose appropriability is initially low. This view assumes, however, that appropriability is an exogenous factor in every invention. In practice, appropriability is constructed and, more specifically, the ability to exclude competitors is not totally independent from the inventor. A protection strategy based on secrecy, for example, can consist in dividing the activity of R&D between different centers, even different countries, in order to prevent a competitor from easily copying the invention by poaching researchers. Such a strategy is costly and, in the presence of a generic patent protection mechanism, the trade-off could be made in favor of the latter. This means that patents tend to lessen the excludability effort by other means, such as secrecy or lead time, and are therefore subject to the moral hazard phenomenon which fuels the belief that patents would be obtained for inventions that do not require them. Patents also have another quirk that has long attracted attention: they confer a market power to their holder, and this power is exercised to the detriment of the community and must be balanced with the incentives created. From this point of view, patents (and beyond that, intellectual property rights) contrast strongly with more classic property rights, such as land ownership rights.
1.2.3.Patents and their design
The controversy over the merits of patents is old, as it struck most European countries between 1830 and 1870. Some authors refer back to the origin of patents to highlight the ambiguities to which they are subject. In this vein Frumkin [FRU 45], recalled that in different countries of Western Europe, kings granted privileges (“Litterae Patentes”) in the form of rights to economic exclusivity in very varied domains14. An opposition developed against these rights, particularly in England, due to the obstacles that they presented to the freedom to pursue economic activities. Rights protecting inventions, or more generally the development of new industries, were a notable exception to this opposition. The Statute of Monopolies adopted in 1624 in England is often considered to be a founding act for the modern patent system (Holdsworth [HOL 45]), especially because, as highlighted by Machlup and Penrose [MAC 50], it proposed the idea of granting exclusive rights to the first inventor. France, in 1791, followed closely by the United States in 179315, also instituted the patent system for inventors and would be imitated by most European countries over the course of the 19th Century. Two important elements appeared in the historical analysis conducted by Machlup and Penrose [MAC 50]. The first element involves the way in which patents were perceived. Although for the English, patents emerged as an exception to the rule of the limitation of monopolies, for the French, inspired by the Revolution of 1789, they were considered to be the “natural”16 right of every individual to freely dispose of their person and their work17. This brings up the question of the nature of these property rights which, as we will explain later on, cannot be considered “standard” rights even if some authors like Demsetz [DEM 69] make that argument. The second element concerns the seniority of an anti-patent movement based on the absurdity of their presence in economies that promote free trade18. Thus, citing costs to obtain patents, and the uncertainty of obtaining them, demand grew for laws that were more favorable to inventors in England. This provoked a hostile counter-attack to patents that almost led to their abolition in the second half of the 19th Century, based on the argument of Chevalier [CHE 62], according to which an invention is a collective phenomenon, and whatever one inventor may have found, another person could have discovered19. This contestation failed because of a return to protectionist ideas, starting from 1873. The adoption of patents was delayed during the 19th Century in Germany. Conversely, the Netherlands voted to abolish patents in 186920 and joined countries like Denmark, Switzerland21, Mecklenburg, Turkey, and Greece, who would do without invention patents22. It is therefore false to think that questioning patents is a recent phenomenon. On the contrary, patents have long been considered ambivalent and economists have questioned their relevance, including during the 20th Century23. As Machlup [MAC 58, p. 80] noted, “on the basis of present knowledge, [no economist] could possible state with certainty that the system [of IP] as it now operates, confers a net benefit or a net loss upon society. […] 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”.
From the modern perspective, patents can be defined as exclusive rights to exploit a patented invention. This means that a patent confers to its holder the possibility of forbidding others to use, produce, import or sell within the territory where the patented invention is protected without the consent of the patent holder. From a legal point of view, the patent is an industrial property title that provides its holder not with the right to exploit, but the right to forbid third parties from exploiting a patented invention. Patents confer the right to use (usus), profit from (fructus) and to dispose (abusus) of the patented invention for a certain duration and in one (or more) determined territories, within the limits of the claims contained in the technical description of the invention, in exchange for disclosing the invention. Among other things, the usus implies that the patent holder can choose not to develop or attempt to commercialize the invention, but simply make use of a patent to prevent others from doing so24. Combined with the fructus, it also allows the patent holder to share a market while controlling the product price. In practice, the company can grant the use of licenses25, which is to say they can allow third parties to develop and commercialize the invention in exchange for financial compensation. Finally, the abusus allows the patent holder to sell or decide to terminate the patent by not paying the renewal fees. Patents are not de facto rights but de jure rights and, aside from different parameters detailed later which make it possible to delimit them, the conditions required for their issue play a fundamental role in assessing the social advantages they can offer and their disadvantages.
In order to have a real incentivizing role for innovation and preventing them from resembling undue privileges to the detriment of the community, patents are not granted unless they satisfy three criteria26:
– novelty, which means that an invention must not have been achieved before
27
;
– non-obviousness (United States) or inventiveness (Europe), which means that the invention must not be obvious for a person skilled in the art;
– utility (in the United States, Australia, and Canada, among others) or industrial application (Europe)
28
, which means that the invention must be complete, so that it can be used and applied.
The first criterion requires that what is patented does not already exist before it is patented or that its existence was not known to the applicant, the patent office, or more generally, specialists in that field. The first major implication is that this excludes anything that exists naturally from being patented. In this sense, the applications of scientific discoveries can be patented but the scientific discoveries themselves cannot be because they only reveal the laws of nature that already existed, even if they were not known. Similarly, living organisms have long been kept outside of the field of what is patentable29. This principle was initially illustrated in the United States by the Ex Parte Latimer decision of 188930. The patent filed in 1873 by Louis Pasteur on a yeast was an exception, but at that time, yeast was not considered a living organism. On the other hand, since the 1980 decision in Diamond v. Chakravorty, that which is living but has been transformed by a person or obtained through the intervention of a person can be patented in the United States (Darr [DAR 81]). Although this rule was applied in some European countries in the past, the European Patent Convention (EPC) in 1973, which is still in effect, excludes it, despite several attempts to find loopholes (Llewelyn and Adcock [LLE 06]). The implementation of the criterion of novelty requires defining the state of the art when the request is filed, which is partly the responsibility of the applicant, who must indicate relevant pieces of information in the application, and partly the responsibility of the patent office, which must conduct anteriority searches in order to establish the state of the art in the technical domain of the invention. Today, in Europe as well as the United States, the principle of first to file applies in case of a dispute over two patents on the same invention. Prior to 2013, the principle of first to invent applied in the United States. This meant that a patent filed at a later date by an inventor who could provide proof of the prior existence of the invention could prevail over a patent filed earlier by a competitor. It should be noted that the principle of first to file is only valid if the invention was not disclosed by people other than the applicant before the filing, even without filing for a patent, in which case the criterion of novelty would not be satisfied.
The criterion of inventiveness means that the patented invention must not be obvious to a person in the field or, more generally, for a “person having ordinary skill in the art” (shortened to the acronym PHOSITA). The idea is that a substantial effort of reflection and codification should be necessary to create something patentable. In this way, we avoid patents on inventions that would have had a very strong chance of emerging without needing to be generated by a new patent. Eisenberg [EIS 04] highlights a subtle difference between simply ensuring that the invention is not obvious to a PHOSITA and the criterion of inventiveness. A PHOSITA can never be an inventor, which suggests that the degree of effort that underlies the concept of inventiveness is more demanding than the notion of non-obviousness for a PHOSITA.
The third criterion can be interpreted differently depending on whether the concept of utility or industrial application is applied. At first glance, the American concept of utility refers to the fact that the invention responds to a need. As noted by Machin [MAC 99], however, it is only the broad understanding of this criterion (general utility) alongside which other meanings coexist, such as specific utility, practical utility and moral utility. The concept of general utility can pose a problem, notably because it requires that what the invention contributes to society be proven from the time of the patent application. Machin [MAC 99] argues for an interpretation that is more in line with the highly uncertain nature of the innovation through what he calls prospective utility. This consists of assessing the probability and scope of any advantages provided to the community by the invention. For Erstling, Salmela and Woo [ERS 12], who discuss the different interpretations of the utility of an invention by different patent offices, the European approach is very similar to Machin’s prospective utility (Machin [MAC 99]). One notable difference is that, if it does indeed suggest that the invention must have the potential for application, then the European approach limits these applications to the industrial domain, and consequently to only product or process innovations. This does not mean that, in the European approach, there is no other kind of innovation than industrial innovation, but rather that the patent system is only adapted for this type of innovation. In Europe, software and business methods are not patentable as such but can, at least for software, be protected by copyright. In both Europe and the United States, the applications considered by the patent applicant are included in the patent description document in the form of what are called the patent claims. By describing and detailing a specific foreseeable application, each claim implicitly identifies a potential market for the invention. In this sense, the claims contribute to delimiting the patent, but they are only one component of the delimitation.
Establishing criteria that make it possible to say whether an invention can be patented is not enough to define patents. What is covered by the patent must also be delimited. The delimitation takes place in three dimensions: i) length, ii) width, and iii) height.
