Chapter §1.04 Economics of the Patent System

• Jurisdiction: United States

§1.04 Economics of the Patent System

[A] Patent Ownership Versus Monopoly Power

Patents have been described as "large-scale governmental intrusions into the free-market economy" that "involve manipulating social costs and benefits to increase the national wealth."⁶⁴ There is no dispute that patents have a very real impact on our economy. Patents are valuable government-created property rights with the potential to act as powerful incentives for innovation, affect the supply and prices of goods and services, and impact the flow of commerce across national borders. This section introduces some of the most basic economic theory relevant to patents.⁶⁵

Courts and commentators sometimes refer to patents as "monopolies," usually in a pejorative manner to indicate the view that patent rights are being used for anticompetitive purposes.⁶⁶ A better way to think of patents is as time-limited government conveyances of potential monopoly power, which can be put to "good" or "bad" uses from a societal standpoint.⁶⁷

In the days of Queen Elizabeth I of England, patents were handed out as personal favors to royal favorites.⁶⁸ For example, the Queen might award one royal friend the sole right to sell salt, another the sole right to sell vinegar, and yet another the sole right to sell playing cards. These patents were truly "bad" or "odious" monopolies because they took from the public what had previously been widely available from multiple suppliers. Because these "staple" articles of commerce were now available from only one source (the patent holder), their prices went up, and quantities supplied went down. These so-called "patents" merely rewarded personal loyalty rather than innovation.

A patent as understood today is very different from the royal privileges conferred by Queen Elizabeth to her friends. A modern patent conveys a right to exclude others from making, selling, offering to sell, using, or importing only "novel" and "nonobvious" inventions.⁶⁹ Thus a modern patent provides only the right to control new technical contributions, not the ability to extract existing technology from the public domain. Patents do not take from the public any innovations that it already possessed.

Today, the type of harmful patent monopoly with which the law is concerned is the use of patent rights for anticompetitive purposes in a manner that violates the U.S. antitrust laws, including the Sherman Act.⁷⁰ As addressed in further detail in Chapter 19 ("Defenses to Patent Infringement"), infra, an antitrust violation must be premised on anticompetitive conduct by a patent owner with "market power," as defined in the antitrust sense.

Modern antitrust law recognizes that mere ownership of a patent does not necessarily confer monopoly power of the type necessary to establish a violation of the Sherman Act, however.⁷¹ A number of alternatives to the patented invention may exist that consumers would consider acceptable substitutes. Thus the relevant market for antitrust purposes may be much broader than the market for the claimed invention. For example, if the problem is mouse infestation, the relevant market might be defined as all solutions, including not only a patented, proverbial "better mouse trap" but also all old, non-patented mousetraps as well as cats. Economic, not merely technologic, substitutability is the key determiner of relevant market.⁷²

[B] Cost/Benefit Analysis

Our legal system's decision to recognize and enforce patent rights brings with it certain societal costs as well as benefits. Understanding and recognizing both sides of the equation are essential prerequisites to a thorough understanding of the patent system.⁷³

[1] Costs

Patent systems place a number of short-term costs or burdens on the public. At a microeconomic level, this can be understood by comparing a perfectly competitive market for widgets that are not patented with a market in which one person holds a patent on widgets.⁷⁴ The introduction of patent rights will result in a reduction in the quantity of widgets supplied, compared with what that quantity would have been in a perfectly competitive market, and will also raise the price of widgets above that which would have been set in a perfectly competitive market.⁷⁵

Creating and maintaining a patent system also entails considerable administrative costs. The U.S. Patent and Trademark Office (USPTO), a bureau of the Department of Commerce, is the federal agency that grants U.S. patents. One of the very oldest federal agencies, the USPTO in fiscal year 2018 employed almost 12,600 federal personnel⁷⁶ and operated with available budgetary resources of approximately $3.75 billion.⁷⁷ To its credit, the USPTO has been fully "user fee-funded" for several years, although Congress has frequently diverted USPTO income to other government entities.⁷⁸

Another cost of the patent system is duplicative, overlapping expenditures on research and development in the same technical field by different firms. It is not uncommon for multiple firms to focus their research and development efforts on the same or similar technical or scientific problem. If in so doing, two (or more) entities independently invent the same invention, only one can receive a U.S. patent on the invention.⁷⁹ Under the historic U.S. system, the patent is awarded to the first in time to invent;⁸⁰ for patent applications filed on or after March 16, 2013, the U.S. patent generally will be awarded to the first inventor to file a patent application describing the invention.⁸¹ In either case, an independent inventor of the same invention, if later in time (later to invent or later to file, respectively), will not be entitled to the patent, and generally will need a license from the successful patentee to avoid infringement liability.⁸² Thus the research and development work on the invention by the unsuccessful later inventor or filer, respectively, can be viewed as duplicative and wasteful from an economic standpoint.⁸³

The patent system also imposes costs on society in terms of forgone research and development that is not conducted because of existing patents owned by others. These patents may or may not be valid. Like a "scarecrow," extant patents of questionable validity may dissuade others from doing follow-on work in the same area of the invention. When an invalid patent operates in this manner, society bears the cost of losing potentially important innovation that might otherwise have been generated.⁸⁴

Litigation expense represents another cost of the U.S. patent system, particularly when infringement is inadvertent.⁸⁵ Only a small percentage of issued patents are ever litigated in court, but each such litigation is potentially lengthy and expensive. For example, total litigation costs for a patent infringement suit with $10–$25 million at risk averaged an estimated $2 million in 2017.⁸⁶

Policymakers are increasingly concerned about the high costs of patent litigation, which may act as a deterrent to patent enforcement by small firms.⁸⁷ Moreover, although the parties pay attorney fees and litigation expenses, the public also shoulders the costs because taxes support the judicial system. Judicial system resources allocated to protracted patent lawsuits are not available for other types of cases.

[2] Benefits

Costs of the U.S. patent system must be weighed against the many important benefits that it provides the public. As Abraham Lincoln described it, the patent system "added the fuel of interest to the fire of genius."⁸⁸ Patents are fundamentally incentive systems. The time-limited right to exclude others that a patent represents is a powerful incentive for the creation of new innovation from which society benefits.⁸⁹

In addition to the inventions themselves, the public gains new technologic and scientific information about them through the disclosure function of patents. The U.S. Congress has recognized that it "must promote innovation by granting inventors temporally limited monopolies on their inventions in a manner that ultimately benefits the public through the disclosure of the invention to the public."⁹⁰

The specific benefits conferred by the existence and recognition of patents are observable at different stages in the timeline of patent life. When patent applications are published, in most cases 18 months after their earliest U.S. filing date,⁹¹ the public domain is enhanced by the disclosure of the information in the application. The Patent Act requires that this disclosure be enabling, such that it will permit others to make and use the invention (either with the patent owner's authorization during the term of the patent, or after it expires) without undue experimentation.⁹²

Thus patents perform an important role in the dissemination to the public of new technologic information.⁹³ As soon as the application or patent is published, members of the public can read, study, and learn from the information contained therein. Some may even attempt to "invent around" the patent; that is, to develop alternative devices or methods that...