Intellectual Property Rights (“IPRs”) are hot in the media these days.
This is good, because there are obvious problems with our IPR system. It seems that most observers are agreeing that the current IPR system risks preventing, rather than promoting, innovation and creativity.
In my analysis, there are two key causes for this.
The first is that lobbyists for existing businesses have succeeded in convincing law-makers that “ever stronger IP protection = more innovation”. Because IPRs are, in essence, monopolistic rights, this position is fundamentally untrue. But it does give government the possibility to protect existing champions against innovators and new developments; in return the existing champions can subsidize the politicians’ election campaigns.
It is clear that only to the extent the inherent anti-market monopolistic entitlements granted by copyright and patents turn out to generate more innovation than a normal free market would, would they be justified.
And that brings me to the second key problem with current IPRs. They are extended all over the value chain, and apply not only to development, but also to reproduction (manufacturing) and distribution, up until first end-user sale (and sometimes beyond, e.g. for the software on your smartphone). And that is patently stupid.
Distribution (and, arguably, manufacturing) processes should be driven by market efficiency, not by government picked monopoly. Otherwise, you get lazy distributors, raking in monopolistic rents, and desperately trying to prevent innovation or others to enter the market.
Until recently, the problem was not felt very clearly.
But with the current patent wars in mobile telephony, and the rise of the patent trolls, who now charge billions of dollars in “private taxes”, paid by innovators to existing (i.e.. old) technology, it is clear that the current patent system is hindering innovation, not promoting it.
One of the causes that keeps being mentioned is the low quality of patents, and the fact that patent offices (often the USPTO) grant ever more ridiculous patents that obviously don’t comply with the non-obvious requirement (let alone the inventive step and the disclosure requirements).
But tackling this problem is not easy; the system seems to have built-in drivers reducing the quality of patents, and hence increasing their cost to society and innovation.
“But”, argue the defenders of the patent system (and patent trolls) “the IPR system rewards innovators, and is necessary”.
That may or may not be true, either in practice or in theory (there seems to be an amazing lack of economic empirical data supporting this position), but it is actually completely besides the point, and does not address our current problem.
Our current problem is not that innovators don’t get paid (although it seems in reality they actually don’t, under the current system), but that manufacturers and distributors also enjoy the monopolistic protection granted by IPRs. This is where the current system prevents market efficiency, and prevents or blocks innovation.
Luckily, there is a very simple and efficient solution to this problem, which would completely safeguard innovators’ rewards.
For patents, the solution is to make compulsory licensing and non-discriminatory and transparent pricing a condition of patentability.
How would that work? Well, when an invention is granted a patent monopoly, one of the conditions we (i.e. the law) attach to it is that the patent holder cannot refuse anyone a license, i.e. the right to use the invention. The patent holder is entitled to set a fee against this, but (and this is crucial), that fee must be the same for everyone, and freely accessible.
In other words, we remove the power of the inventor, or their assignee, to project his/her monopoly at unknown or random pricing into the manufacturing and distribution parts of the value chain.
The effect is to tremendously increase price stability and market transparency. Rather than allowing patent trolls to threaten anyone with extremely expensive law suits unless they pay ridiculous amounts of what is in effect a protection racket, we establish clearly what the cost is for an invention AND ensure that the inventor, but not the distributor, is properly rewarded.
This way, we will also resolve the issue of what the value of a patent is: that value will be determined by the market, on a continuous and transparent basis.
What does that mean? It means we would re-introduce market efficiency into the manufacturing and distribution process, as well as in the valuation of innovation and patents.
For copyright, a similar system can be easily set up (see my earlier blogs here, here, here and here). The key point is registration – which will also solve the problem of “orphan” works. Compulsory licensing is probably also the answer for copyright.
One of the legal instruments to do this, is the much under-valued relationship between competition law and intellectual property law. Let’s recognize exclusive licenses as anti-competitive by default, because that’s what they are.
Will such a system be perfect? Probably not, no system ever is. One potential issue of discussion will be price-setting, and whether it should be fixed or allowed to change over time. If you can think of others, please comment on this blog.
What about patent trolls? Well, I would suggest we simply convert them into collecting societies – we know that that can work. And it would probably introduce competition there as well, which would in turn bring down the management cost of all that IPR.
To conclude, let me quote the US constitution’s IP clause. It says it quite well: “To promote the Progress of Science and useful Arts,…”.
That is, of course, the whole point of IPRs: they don’t aim to protect innovation, they aim to promote it. Exclusive protection should only be allowed to the extent it ensures more innovation and creativity.
So, we need to find the right level of protection, which effectively promotes innovation and creativity. The current system massively overshoots on protection, and, as a result, prevents innovation and creativity. This goes against the original purpose for which IPRs were set up.
Let’s re-invent IPRs so they do what they are supposed to do.