27 March 2009

Patents are evil, part 2

My previous blog on patents triggered some interesting discussions. A particular idea came from D. Hamel.[a] who suggested that instead of a complete ban of 1-2 years (or whatever time period is appropriate), a system of gradually decreasing royalties could be implemented instead.[1]

Hamel's original idea

In that conversation, Hamel suggested to give patent holders the exclusive rights to commercialization of the patented product for a "buffer period" of 5 years,[b] after which a system of gradually decreasing royalties would be used to restore competition. I personally find 5 years to be excessive, but since this is only to illustrate what is meant, let's roll with Hamel's tentative suggestion that after 5 years the patented idea would be accessible to other companies. For example, in the 6th "post-patent" year, the patent holder would received royalties amounting to 60% of the competitor's income generated, 40% in the 7th year, 20% in the 8th year and the patent would expire at the end of the 8th years.[c]

Alternative idea

I find the idea of a system of gradually decreasing royalties very appealing, much more than giving the exclusive rights of commercialization for any periods of time, especially those greater than two years. And I also like that there is a transition period; the original business can adapt to changes in the market and cannot be instantly undercut by competitors. So instead of having an outright ban on competition, I'd would propose an initial period where 100% of income (or more) has to be paid in royalties.

This way, if someone believes they have a long-term advantage if they get in the game very early on, they can do so with the handicap that every sell they make translates in an incredible bonus for the patent holder. This would also help some patent holders to raise capital, and might actually create/sustain/expand businesses that wouldn't otherwise be created/remain in operations/be expanded. Which in turn would result in an increase of competition in both the short and long-term.

Another feature of a system of the gradually decreasing royalties is that it allows for a more dynamic free market. For example, let's say the "economic value" of an idea is $5M. In terms of "when to go in", this might translate into going in the market on the 7th year, with 40% royalties. But now everyone can join in. In the current system, you would have to wait for the patent's value to diminish as the expiry date draws closer, and then someone would buy it at $5M. But this does not drive competition, as you've only transfered the monopoly from one business to another.

What do you think?

Is the current patent system (exclusive rights of commercialization for 20 years) broken? Is the solution simply flat out getting rid of patents? Drastically slash the duration of patents? Introduction a system of royalties? Leave your comments below.


[a] Full name withheld
[b] A tentative suggestion by Hamel, made with the provision that the actual amount of years should be carefully determined after studying potential impacts
[c] A tentative scheme by yours truly, also made with the provision that the actual scheme should be carefully determined after studying potential impacts


[1] D. Hamel (15 March 2009). Private conversation. Translated and slightly edited [grammar, flow] from the French by yours truly.
I believe that a better solution would be to regulate how much you need to compensate someone for a patent. You develop something, sure you get the patent. However, if another company wants to commercialize the patented idea, you must let them. In return, they must give you x% of the generated income (not profits, as business would sell at lost to kill small businesses). The x% could be a function of elapsed time since the patent has been issued. For example, you could have a five year period where no one could use your patent. But after this period, other companies could commercialize your patented product, provided they pay you gradually decreasing royalties.

1 comment:

  1. Randomly landed on this blog post today; interesting discussion.

    You and Hamel are probably quite right in thinking there is a better system than the current 20-year rule. I think you may be neglecting one issue, which is the competition between intellectual property that is patented and that which is held as a trade secret. Patents offer an incentive for inventors to *fully disclose* how their invention works, for the benefit of society- supposedly, from your patent document anyone can manufacture or implement your solution. An inventor (or, unfortunately in most cases, the company (s)he works for!) has to decide whether it's better to disclose that information and take the 20 year protection, or to not disclose it and continue making money off of it until someone else figures out what you're doing. If you've found a way to economically synthesize a new drug, and the process isn't likely to be cracked in the near future, I don't know what company in their right mind would disclose what they're doing, for a meager 5 years of protection... something to think about.

    As an inventor, I'd love to see a declining royalty system where the minimum rate is 20%! :) Current royalty agreements are typically 5% of net sales, rarely larger than 10%... there's no set standards, it must be negotiated. If I understood correctly, on average, your plan gives ~70% royalties for 10 years. I'll take that any day over 5% for 20!