Tradable patent rights.

• Author: Ayres, Ian

INTRODUCTION I. PATENT THICKETS AND THEIR COSTS A. Patent Thickets B. The Cost of Patent Thickets C. Extant Academic Responses II. PRICES V. QUANTITIES A. Using Renewal Fees to Weed the Thicket B. Should Government Choose the Quantity Instead of the Price? C. Regulating Both Price and Quantity III. How MIGHT A TRADABLE LICENSE SCHEME BE IMPLEMENTED CONCLUSION INTRODUCTION

According to a famous academic anecdote, in the 1960s Ronald Coase was invited to participate in a panel discussion on pollution. His copanelists (who since that time have fallen into oblivion) were a radical environmentalist who passionately argued that pollution is the worst problem to ever face humanity and an equally extreme conservative who vehemently denied that pollution even exists. When it was Coase's turn to speak, he reportedly slowly turned his head and said, "I am sure that pollution exists, I know that much; what I do not know is whether we have enough of it." (1)

A substantially identical question to that which bothered Coase about four decades ago now preoccupies patent theorists. But, unlike Coase, who did not know whether we had enough pollution--or, more precisely, enough of the underlying activities from which pollution results--patent scholars seem to believe that we have too many patents. Patents are supposed to promote innovation, and virtually all economists agree that "innovation is the main driver of economic growth." (2) But there is a growing concern that the modern patent system actually chills, not promotes, innovation. In recent years, aggressive filing patterns by private firms and excessively loose standards of review at the United States Patent and Trademark Office (USPTO) (3) have combined to produce an unprecedented proliferation of patents. (4) A particularly disconcerting result of the increase in the number of patents is the emergence of patent thickets: multiple patents that cover a single product or technology. (5) Patent thickets can be found in several key industries, such as semiconductors, biotechnology, computer software, and the Internet. (6)

Patent thickets are especially harmful in cumulative innovation settings. In such settings, the need to secure licenses from multiple patentees, each possessing a veto power over the production of new innovation (1) dramatically increases bargaining costs between patentees and subsequent innovators; (2) creates a potential for hold-ups; and (3) lowers the profits of the original patentees. Patent thickets also harm regular users of patented products and technology by making it more expensive for users to gain access to the relevant product or technology.

Economists and legal scholars have advanced various mechanisms to mitigate the harmful effects of patent thickets. Carl Shapiro has suggested that cross licensing and patent pools can be effective in reducing patent thickets and has called for the relaxation of various antitrust doctrines to accommodate those arrangements. (7) Other economists, such as Adam Jaffe and Josh Lerner, and legal scholars have focused their search on solutions for the USPTO and recommended various reforms in the standards of patent examination in order to better screen for valid patents. (8) Finally, Dan Burk and Mark Lemley have called for different application of equitable rules in different industries. (9) This proposal would lead to a dramatic shortening of patent terms in various industries, which in turn, would reduce the overall number of valid patents.

In this Article, we seek to explore two alternative mechanisms that may be used to weed out patent thickets. Both mechanisms are intended to reduce the number of patents in our society. The first mechanism we discuss is price-based regulation of patents through a system of renewal fees. Renewal fees are already being used in the United States and foreign countries. (10) Empirical studies show that even very modest renewal fees have prompted patentees to abandon patents, (11) thereby reducing the number of patents with which subsequent innovators need to contend. The discussion of renewal fees will therefore focus on ways to improve the workings of the existing system.

The second and more innovative mechanism is quantity-based regulation through the establishment of a system of tradable patent fights. The formalization of tradable patent fights will essentially create a secondary market for patent permits in which patent protection will be bought and sold. While this proposal may seem at first radical and far-fetched, it should be borne in mind that a similar system has been implemented in the context of industrial pollution. (12) The introduction of tradable emission permits for sulfur dioxide (S[O.sub.2]) in the 1990 Amendments to Title VI of the Clean Air Act resulted in a dramatic improvement in air quality and is viewed by economists and environmentalists alike as a success story. Furthermore, it is widely believed that the use of tradable permits can solve other environmental problems such as depletion of ocean fisheries. (13) Tradable rights systems induce actors to behave in a more socially desirable fashion by imposing quantity limits and inducing voluntary rights transfers from less efficient to more efficient users.

A similar mechanism may be adopted to reduce the "informational haze" produced by patent thickets. Policymakers can set a cap on the overall number of patents (14)--or, more precisely, the overall number of years of patent protection--and institute a system of tradable patent rights. Doing so will induce holders of low-value patents to sell their rights to higher value inventors, thereby improving the efficiency of the entire patent system. Likewise, such a system will prompt new patentees to purchase the tight amount of protection. Patentees will be able to acquire one, five, or fifteen years of protection depending on the commercial success of their inventions. Valueless patents will be abandoned, clearing the path for newer, more valuable inventions. Over time, this process will weed out patent thickets, as valueless and low-value patents are relinquished.

Implementation of the proposed solution will effect a dramatic shift in the existing patent system. While patentees will continue to submit their applications to the review of the USPTO, approval will no longer mean an automatic fixed term of twenty years. Instead, successful applicants will need to purchase tradable patent licenses either from the USPTO or on the secondary market and will be able to tailor the protection term to their specific needs. (15) The price of the protection will be determined by the forces of supply and demand, not by administrative flat.

The remainder of the Article consists of three parts. Part I discusses the burgeoning phenomenon of patent thickets and its adverse effect on innovation. Part II explains how price- and quantity-based regulation may arrest the development of patent thickets. We first assess each of the mechanisms on a stand-alone basis and then consider the possibility of combining them in order to achieve optimal weeding. Part III addresses the issue of implementation by proposing a way to introduce a tradable patent rights regime. A short conclusion follows.

1. PATENT THICKETS AND THEIR COSTS

   This Part explores the burgeoning phenomenon of patent thickets and its adverse effect on innovation. It then surveys the academic responses to the problem.

   1. Patent Thickets

      Recent years have seen a dramatic change in patent scholarship. Traditionally, patent scholarship focused, by and large, on the price effects of patent protection. The main problem theorists noted was that patent protection allowed patentees to engage in supracompetitive pricing, generating a social deadweight loss. This line of analysis suggested that patent protection involves a fundamental tradeoff between dynamic and static efficiency: patents spur innovation but only at the cost of distorted pricing. The normative challenge, therefore, was to design policy mechanisms that would minimize the market power of certain patentees without unduly diminishing research and development (R&D) incentives. (16)

      Through time, patent theorists gradually turned their attention away from static to dynamic efficiency costs. That is, they adjusted their focus away from the deadweight loss generated by patent protection and shifted it to a different problem: the chilling effect of patents on innovation. The dramatic growth in the number of issued patents has prompted a concern that the modern patent system hinders technological progress, and hence retards dynamic efficiency. In particular, the desire of patentees to build strong patent portfolios, coupled with the poor quality of review by the USPTO and the laxity with which it grants patents, have dramatically increased the cost of follow-on innovation in our society. (17)

      Between 1990 and 2003, the number of U.S. filings more than doubled from 176,264 to 366,043, and the number of issued patents grew from 99,077 to 187,015. (18) Importantly, the dramatic rise in the number of filings and patent grants is not fully attributable to greater investments in R&D. Rather, it stems in large part from a conscious effort by firms to maximize the number of patents per R&D dollar. (19) The case of IBM is illustrative. From 1994 to 2003, IBM received a total of 24,685 U.S. patents, (20) setting new records for the most U.S. patents received in a single year, (21) despite the fact that over the same period IBM slashed its research budget. (22) As befits an industry leader, IBM set the standard for other companies. Realizing the importance of elaborate patent holdings, firms began to seek patents on various aspects of the same product or technology. For example, the technology underlying Adobe's Acrobat Reader 6.0 is protected by as many as forty-one different patents (which you can see scroll by each time the software loads). Worse yet, some companies...