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.

Notes

[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

References

[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.

Patents are evil

Wikipedia writes "A patent is a set of exclusive rights granted by a state to an inventor or his assignee for a limited period of time in exchange for a disclosure of an invention".^[1] That, in and of itself, is not evil. What is evil is that patents prevent society from using good ideas because patent holders generally do no care to build and sell their inventions as much they hopes to be able to sue the crap out of anyone who makes something remotely similar.

What patents are supposed to do

The reason why patents exists is because someone thought it was a good idea to protect inventors' intellectual right and to ensure that they could benefit from their ingenuity.^[2] For example Jimmy who invents a fusion-propelled skateboard in his basement applies for a patent to ensure he can raise money and build a fusion-propelled skateboard factory without getting one-upped by someone who heard of the idea, but already has the money. Patents are meant to give those with less resources a fighting chance at success. Or so we're told.

What patents actually do

Patents are an idea which came from the 1400s or so (according to Wikipedia at least).^[3] They guaranteed some people the exclusive rights to sell or trade certain commodities. Back then, the intentions behind issuing patents was not the noble "giving Jimmy a chance at success"; their purpose was to enforce cartels and monopolies. As monarchy fell, so did state-sanctioned monopolies. Capitalism and free market gradually spread, competition thrived, and everyone was happy. However, the definitions of patents haven't changed. Patents are still things that guarantee the exclusive right to sell or trade a commodity. They are not designed to help inventors protect their rights in a market, they are designed to help inventors hog the market for 10–20 years (if not more).^[4-5] Or rather, patents define the rights of inventors to be those of monopoly.

Now there are two things at play here:
• Most patents are not filed by "Jimmy the neighbour". Most patents are filed by research corporations and already-established businesses.^[6]
• Most patent-holders don't care about turning their patented idea into products, they simply want to be able to sue anyone who tries to, or to be able to sell their idea to someone who wishes to do it.

What these two factors accomplish is that it removes things from the "economic pool of ideas". Let's take two scenarios to illustrate this.

First scenario: Someone holds on to their patents to make money by selling it.

Let's say someone (or some business) holds a patent for a more energy-efficient lawnmower and doesn't do anything with it other than hold on to it in the hopes that someone will buy it from them. Now suppose these energy-efficient are worth quite a lot, say a profit of 20 million dollars per year could be made selling them. Because the potential profits are so high, the company asks 3 million for the patent. However, say the company that is actually interested in making these lawnmowers doesn't have that sort of money. Maybe a compromise can be reached, maybe not. The consequence is that you either pay a lot of money because some guy who doesn't give a damn about turning an idea into something real is hogging the idea, in the hopes that those who give a damn will pay him, or that nothing gets done.

Second scenario: Someone holds on to their patents to immunize themselves against competition.

Let's say you've found the cure for AIDS. This is obviously worth a lot of money, so you could sell the patent for a bundle. However, if you possess two cents' worth of intelligence, you'll hold on to your patent? Why? Because their are hundreds of millions of people whose lives depend on your product. If you have no competition, then you can basically decide at what price you're selling your pills, and you're guaranteed that people will buy them. So even if these pills cost 3 cents each to make, you'll still sell them at prohibitively expensive prices just because you can. Prices are unnaturally high, and consumers pay more than what they would otherwise. Plus the incentive for research is removed, as you have a working solution and no competition to force you to improve your product. Who cares if your pills work only 90% of the time instead of 95%? People will buy them just as much one way or the other.

The real problem, and the solution

The real negative impact of patents is that they prevent society from implementing ideas for very long periods of time, and allow some people to control the market for equally long periods of time. Meaning that inefficient designs and ideas stay in society a lot longer than they should or otherwise would. However outright banning patents would have some negative impact; Jimmy the neighbour not having time to raise money before someone else copies his idea.

The solution to these problems is to drastically slash the duration of patents. This works very well in science. For example, in astronomy, people make proposal to get observation times from telescope (point this telescope at this star for this amount of time for these reasons). If they get selected, then they are guaranteed exclusive access to the data for one year, as they came up with the ideas and thus deserve to have recognition for it.^[7] After one year, the data become public domain, and anyone anywhere in the world may analyze it however they like. The advantage of the proposal makers is having a one-year of expertise headstart over other people.

Patents should be like this. Guaranteed exclusive rights for one to two years (depending on the complexity of implementing the idea), after which the idea becomes public domain. If you have an idea, you have one or two years of expertise headstart on your competition, you have your marketing advantage (original brand, inventors, more experience), and you've had time to raise money to turn an idea from concept to reality. People would stop hogging their patents and would stop asking ridiculous prices for them. Those interested in making better things now can, competition is now healthier and society benefits from better products at cheaper prices.

References

[1] Wikipedia: Patent
[2] World Intellectual Property Organisation. "Why are patents necessary?", FAQ. Accessed 14 March 2009
[3] Wikipedia: History of Patent Law
[4] World Intellectual Property Organisation. "What does a patent do?", FAQ. Accessed 14 March 2009
[5] Wikipedia:Canadian Patent Law
[6] World Intellectual Property Organisation. The International Patent System in 2007. Accessed 14 March 2009
[7] JPL/CALTECH. "Cassini-Huygens mission FAQ", Equinox mission. Accessed March 14 2009.