UNIVERSITY OF KENT AT CANTERBURY

KENT LAW SCHOOL

INTELLECTUAL PROPERTY LAW

(LW 556)

DISSERTATION

Innovation and the patent system. Can the current, overly stringent patent system still be an incentive for innovation?

Word Count: 5000 Words

Student Name: Antonios Pantazis (02040726) Seminar Leader/Supervisor: Mr. Alan Story Seminar Group: #4

March 2006

Antonios Pantazis

Intellectual Property Law Dissertation

Abstract Innovations benefit consumers through the development of new and improved goods, processes and services. If one observes all the technological breakthroughs around us, will understand better, the importance of innovation in the life we lead. Undoubtedly, Intellectual Property Rights and more specifically, the Patent System, foster innovation even further. However the fact that patents actually amount to temporary monopolies on very useful inventions, requires careful handling. The number of patent applications filed in the worlds three leading Patent Offices, the Patents and Trademarks Office of the United States, the Japanese and the European Patent Offices, has increased by more than 40% between 1992 and 2002. Therefore, the main question that this dissertation will try to address will be, whether this abundance of patents rather than lubricating the gears of innovation, is instead clogging them. New fashions suggest that patents are more frequently used for huge economic profits. This arrives as a shock to the traditional thinking that the major justification for patents, lies in the fact that they provide an incentive for innovation. Whether innovation is being liquidated for bigger more profitable markets, we will attempt to clarify through this dissertation. Moreover, the potential deficiencies of the monopolistic behaviour that the patent system suggests will be examined. Furthermore, an analysis of the alternatives to the patent system will conclude this dissertation.

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Intellectual Property Law Dissertation

CONTENTS

1. Abstract...page 2. 2. Contents..page 3. 3. Introduction.page 4. 4. The case for patents.page 7. 5. Patents use today; a stimulus for innovation or not....page 9. 6. Innovation without a patent system?....page 18. 7. Conclusion....page 20. 8. Bibliography.page 23.

Antonios Pantazis 1 Introduction.

Intellectual Property Law Dissertation

The patent system has experienced a remarkable increase in the past decade. As statistics suggest, more than 850,000 patent applications were filed in USA, Japan and Europe in 2002, compared to only 600,000 in 19921. These figures independently of the motives that the patent system is said to promote, clearly suggest that nowadays patents have a constantly growing importance to global economy. Since patents even in their simplest sense are a temporary monopoly to the use of an invention, both the private and the public sector are frequently using patents to protect their inventions. This is traditionally based on the view that patents in their turn will foster investment in the innovation area and help in the dissemination of knowledge. The first English patent for a new invention is thought to be Aconicios Patent for a grinding machine granted in 1565 by the Crown2. Throughout history many arguments have been hired to support the existence of the patent system. Without patent rights competitors would immediately copy inventions and the undertaker with the lowest costs would claim the financial reward, and that by its turn would diminish any incentives to invent3. However after many controversies, three broad justifications used for the development of the patent system have survived as the ones being closest to the truth. The first is more of a moral (being about natural justice) rather than an economic justification and thus, not of primary concern to this dissertation. It argues about the patent system offering justice to the inventor. According to this theory, patents reward their inventors based on the principle that every person must have a right to the product of her brain, and, therefore, others should be prevented from free riding on her invention. However even supporters of the patent system admit that these arguments are too minor to make the case, since justice would probably require all the inventors that came up with the same invention to be rewarded for their labour and not the first one to file his invention with the UK Patent Office, contrary, perhaps surprisingly, to the USA

Patents and Innovation: Trends and Policy Challenges, Organisation for Economic Co-operation and Development (OECD), 2004 Report, page 7. 2 Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005, page 25. 3 http://www.eco.utexas.edu/Homepages/Faculty/Norman/long/DII.html , accessed on 28 February 2006.

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where the patent protection goes to the first to invent 4. That is to say that these arguments collapse in these case of simultaneous inventions which happen more or less at the same time, but from independent inventors5. In these instances, the fact of who will get the patent is clearly an issue of luck, preparation, and a matter of who is better connected with the Patent Office. There are also further arguments saying that if the sole purpose of the patent system was to reward inventors then potentially the protection period would be even longer, like it is the case with copyrights6 (life of the author plus 70 years). Nonetheless, as it has already been mentioned these arguments are not of great interest to this dissertation, as one could say that patents are not granted for a social purpose anymore. In the past not necessarily all inventions were patented but only those capable of benefiting the society as evidenced in the British Patent Law of 16247: declaring patents that were mischievious to the State, by raising prices commodities at home, or hurt of trade, or generally inconvenient, as invalid. However, closer to what we are examining here can be the second and third justifications that are clearly of economic nature. These suggest that a strong and efficient patent system can encourage innovation, and that also, pursuant to s14(3)8, which requires the specification of a patent application to disclose the invention in a clear and complete manner for a person skilled in the art, there are hopes that through patents, knowledge will be wider disseminated and grasped from others, who will invent further or compete. This latter case is said to be the exchange of the inventor to the monopoly he is being given9. Judging also from the insistence of the Courts, as shown in the case of Asahi10, that all (valid) patent applications should contain an enabling disclosure11 that will assist the reader of the
4

Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 130. 5 Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005, page 25. 6 Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26. 7 Statute of Monopolies 1624, 21 Jac. 1, c.3, s.6, Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98., page C 117. 8 Patents Act 1977, section 14(3), Christie A. and Gare S., Blackstones Statutes on Intellectual Property , 7th edition, Oxford University Press, New York, 2004, page 431. 9 Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26. 10 Asahi Kasei Kogyos Application. [1991] R.P.C 485. 11 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 151.

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application to reproduce the invention, one could potentially say that this is by far the most convincing argument in supporting the patent system.

Antonios Pantazis 2 The case for patents.

Intellectual Property Law Dissertation

However the third argument of whether patents are promoting innovation, which is the primary aim of this dissertation, has been hotly debated and the results are still not pointing at a clear direction. This principle evolved as early as 1793 by Jeremy Bentham, the father of utilitarianism, who was a strong supporter and articulator of the incentive thesis of intellectual property. This rationale though heavily challenged, remains the most powerful argument in favour of the patent system, even today. Bentham wrote in 1793 that Without the assistance of the laws, the inventor would almost always be driven out of the market by his rival who, finding himself, without any expense, in possession of a discovery... would be able to deprive him of all his deserved advantages, by selling at a lower price12. This is more or less taken to mean that even if the inventor comes up with a marketable innovation, he will need a monetary incentive (a patent) in order to carry on with the marketing of his idea. This is needed as even after the conception of the innovation a sizeable capital investment will be needed to develop, manufacture, market and sell the end product of the invention13. Today, it is beyond doubt that patents are used increasingly day by day, effecting but also sustaining (in their nature) many changes. Even the patent system itself is constantly being modified so to be capable of accommodating this increasing need for new patents. Patents on genetic material, business methods and software, are now granted on many Patent Offices around the world, being potentially enough to say that they are already recognised in the US Patents and Trademarks Office14 (the biggest one currently in the world). These patents are now granted on grounds that were not recognisable by older patent regimes (some still not recognised in the UK)15. This has subsequently led to an enhanced ability of the patent holders to enforce their rights even more strictly that they used to. Since the Federal Circuit Court of Appeals (USA)16 declared in 1998 that technology-based business
12 13

http://aoi.cordis.lu/article.cfm?article=1503, accessed on February 28, 2006 http://www.patenthawk.com/blog/archives/2005/04/patent_economic_2.html, accessed on 28 February 2006. 14 Patents and Innovation: Trends and Policy Challenges, Organisation for Economic Co-operation and Development (OECD), 2004 Report, page 8. 15 Patents Act 1977, section 1(2), Christie A. and Gare S., Blackstones Statutes on Intellectual Property , 7th edition, Oxford University Press, New York, 2004, page 426. 16 Business methods still not recognisable in the UK, section1(2)(c) Patents Act 1977.

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methods, previously considered too abstract to be patentable, are in fact eligible to be patented, thousands of e-commerce companies have submitted their patent applications. It is worth mentioning, that patents in this field are being awarded on almost everything; from data processing systems to methods of creating custom CDs online 17. Undoubtedly this has not happened without a reason, and many people suggest that it is only because of these policy changes, that the patent system was able to cope with changes in the innovation system, as well to attract bigger private sector capitals in the Research and Development area. Despite all these however, many commentators suggest that todays rights are too strict and make even the sharing of knowledge very expensive18

17 18

http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes, 20 January 2006. The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 23.

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3 Patents use today, a stimulus for innovation or not? However and clearly at odds with the past, nowadays, almost every new gadget can be patented. Today the Patent Office will apparently patent anything regardless of its respective novelty and usefulness in its industry. Examples of non-novel ideas that were recently patented can be a patent on swinging on a swing; the peanut butter and jelly sandwich, and a method of transmitting energy by poking a hole in another dimension19! Therefore, the question we need to ask at this point is; do all these really happen because the invention is a real invention and the inventor was pushed further in his job with the patent system being his incentive, or these things happen because of other reasons, simpler and clearly financial ones. Many argue that this tension of over-patenting is primarily noticed because of the ingenuity of the patent attorney in drafting the Patent Application and not because of the inventive step that the inventor took in coming up with the idea20This has subsequently led to having many invalid patents. In addition, the paradox in these cases is that there is no litigation being brought against these (invalid) patents. This can be understood by the fact that the challenge costs and the uncertainties involved in these kinds of actions are rather high. So by not challenging this phenomenon we end up with an increase in the licensing of these invalid patents since the licence royalty per unit costs can be much lower that the aforementioned litigation costs! 21 This seems logical though, since the litigation costs in these cases pose as a serious business decision and have little to do with legal doctrines. Licensing of invalid patents is also encouraged by the recent phenomenon of threatening22 the initiation of costly infringement actions by the patent holder. Such a threat will either enforce the other party to pay the patent holder royalty fees, as the alleged infringer would most certainly want to avoid the very expensive and time consuming litigation, or will succeed in getting the patent holder a Court injunction that will subsequently stop the improper use of the patent. Such an example could be that of Jeff Bezos suing Barnesandnoble.com for
19 20

Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 6. Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98., page C 120. 21 Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98., page C 121. 22 Though there is a provision providing remedies for threats, section 70, 1977 Patents Act, it only covers groundless threats, and not threats that are based on legally granted but otherwise invalid patents.

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infringing on Amazon's 1-Click ordering system patent23. Amazon's patent, titled "Method for System for Placing a Purchase Order Via a Communications Network," is so broad, that it is feared that if the courts continue to support it, the giant e-tailer (Amazon) could make a mint in licensing fees from other undertakers, also keen on getting their own customers quickly in and out the door. Therefore many believe that Bezos, by securing an injunction against B&N's use of its own one-click ordering system, Amazon climbed yet another rung on the e-commerce ladder, and Bezos himself made his most brilliant competitive move to date24. At this point it is important to understand that even if someone wanted to challenge an invalid patent and even if we suppose that he were successful; in the aftermath he would not be the only one able to make the product, but instead everyone, including its competitors, would be able to do this. However, the challenger would have been the only one that borne the litigation costs25. This poses as another strong disincentive against challenging an invalid patent as well as being another form of free riding. This is a quite straightforward example that patents are not always there to foster innovation, but instead can be used even at the detriment of innovation (licensing of invalid patents) so to confer huge financial benefits to their holders. It is also believed that patents with the security and the monopoly they offer to their holder, lower in a sense the psychological barriers to innovation, thus making it easier for people to innovate. People do not have to worry any more if all their time and money spent on Research and Development will pay off or whether the risks taken will result in a profitable product, as Kenneth Arrow rightly observed in the 1960s26. However, if one examines closer the practical operation of the patent system, will notice that much of this positive impact is diminished27. This is because, much of the protection that a patent offers to its holder greatly depends on the language used by the patent attorney in couching the claims of the invention in the specification of the patent application. This renders crucial for all competitors to examine this part for any potential weaknesses. However, recently, it is being noticed that even this process is effectively
23 24

http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes, 20 January 2006. Ibid. 25 Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98, page C121. 26 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 3. 27 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 134.

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ruined by new drafting methods, which achieve patent claims to disclose as little useful information as possible28. Even if an intelligent member of the public reads the specification, she will most probably not comprehend it as the language is addressed only to the relevant industry that the patent refers to. This is also further sustained by the fact that here is no such requirement that the patent specification should be comprehended by everyone (only to the person skilled in the art. This poses a serious attack to the earlier mentioned argument (in favour of the patent system) that patents are there to function as virtual pools of publicly available knowledge. If however, any deficiencies are indeed located, then the competitor could spend a great deal of time and money to invent around29 the earlier specification, therefore, find another way of doing the exact same thing, which the draftsman of the first specification simply did not anticipate and thus did not cover in his specification. Though this strategy is known as an irrational way to allocate scarce resources such as money and time for research, it must not be overlooked, as it is frequently dictated by the market and competition needs. I believe that this is another way of acquiring a perfectly valid patent on a similar or even the same invention already patented, with the sole incentive being the big money returns, as in these cases clearly no inventive step was taken by the inventor. The only thing that was procured was not innovation but rather, an expensive patent race30 to the Patent Office, in the view of big financial returns. Even from a different point of view, if the language used in a patent is vague and general so to cover all contingencies, this could subsequently lead to real patents being refused patent protection as lacking inventiveness. This makes the distinction between making an invention and succeeding in innovation crucial31. This is understood by the fact that many inventions that are not in fact real ones, thus offering no further innovation in their respective field, may be granted patent protection, whereas real inventions which are really innovative in their field, may be refused reward and subsequent protection, not because the earlier invention is novel, but because the draftsman of the earlier patent
28

Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98., page C 123. 29 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 134. 30 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 13. 31 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 133.

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application is ingenious. This means that a real invention will never reach the public, therefore, will never succeed in innovation in its respective field. This demonstrates the huge role of patents in procuring big returns for their holders, rather than fostering innovation. This should not surprise us as almost three-quarters of the value of the publicly traded companies in USA comes from intangible assets, which are thought as the raw materials of intellectual property32. As a confirmation, Alan Greenspan, the chairman of the Americas Federal Reserve admits that The economic product of the United States, has become predominately conceptual33. However, unfortunately even if an invention is a real innovative breakthrough and, therefore, was rightly granted patent protection, this fact under the current market tendencies, will not necessarily mean that further innovation in the field will be procured. This means that we must not omit the fact that many recent significant inventions were only put to circulation, long after they had been discovered34. This could be based on the ill reasoned motives of greater profits, as the patent holder may wish to wait (by upholding supplies) until market prices grow to a point where the price that the patent holder will charge, will cover all the estimated demand and guarantee the biggest possible returns to him. This is better understood by the fact that in all patent instances the inventor is the sole supplier of the new good, service, or process 35, thus having a temporary monopoly. In a sense, everybody loves to be a monopolist, and as quite resoundingly Michele Boldrin and David K. Levine have argued, patents serve only to reinforce monopoly control and not procure innovation 36. But, even if there are genuine reasons for delaying production, like unpredictable time to arrive to a viable product, or high costs in persuading distributors to participate, or in setting up new plants; only because of the fact that the invention is patented, innovation in the field is nevertheless hindered. Patents may be said that they discourage in this way even the slightest form of innovation which is follow on innovation37. Furthermore, patents may not even be used
32

The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 3. 33 Ibid. 34 i.e. long lasting razor blades, Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 133. 35 Rent Seeking and Innovation (2003) Michele Boldrin; David K Levine, page 2. 36 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 2. 37 The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 23.

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in the field of innovation, but rather be hired by big firms in the course of creating a wall of patents around anything that even slightly resembles their product (of course already patented), so to prevent others from entering the same field of their product. This tactic is known as defensive patenting38. I think that it is needless to mention that these efforts, not only they do not procure innovation, but instead they stifle it, especially the innovation coming from small or even middle-sized companies. Many also suggest that the role of the patent system in procuring innovation is constantly changing39. Many do not see any more patents as a tool enabling the transfer of knowledge and fostering innovation. This is taken to mean, that patents are changing in order to create a market of their own, providing, thus liquidity for innovation and not fostering innovation 40. These theories have already started being confirmed by voracious ventures like the company of Mr. Nathan Myhrvold, called Intellectual Ventures41. The business purpose of this corporation is totally different to what we are familiar with. Its purpose is to finance inventors so to keep them inventing and subsequently acquire patents upon these inventions, with the ultimate scope being of course to licence those innovations to the world or alternatively pursue their infringers. As Myhrvold himself says, this venture is for the time being an experiment being itself a cross between a venture capital fund, a law firm and a Research and Development laboratory42 Even if however, a patent is perfectly valid and represents indeed an innovative and novel step in its field, I do not think that this on its own is sufficient to render the whole patent system as one that is protecting the inventors, and stands as an incentive for them (the inventors) to innovate even further. If we add to this that nowadays we do not have only one general category of inventors, we get an indication that the inventors of a patent might not necessarily be the ones reaping off the royalty fees of their patented inventions43. Let us first consider the fact that in an estimated 90% of granted patents the
38 39

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 13. The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 23. 40 The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 23. 41 The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 12. 42 Ibid. 43 So if they are not benefited from the patent (how could it potentially stimulate them) why should they pursue it.

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inventor is employed44. That subsequently means that the inventor has been employed to make the invention, but the resulting patent will belong to his employer. So, on the one hand we have the employed inventor who will invent because he is required to do so, and on the other hand we have an independent inventor (a self-employed inventor) who more often will invent in order to solve a problem of his own rather than to get a patent on his invention45. Though at first, in both cases we see that the patent system is not playing such a great role in procuring those two kinds of inventors to innovate, let us consider these two cases separately. I think that in the case of employed inventors what is of vital importance to consider is the British Legislation itself. In strict terms, the 1977 Patents Act can be seen as a scheme, which recognises that the patent system per se has none or little incentive upon the actual inventor (employed at least) himself46. It is more or less a project that among other things it attempts to give greater financial compensation to employed inventors. This is an implied recognition that the patent system itself has failed to do so, and it, therefore, needs to be supplemented by statute law. If this is taken to be true, it constitutes also a serious strike to the argument in favour of the patent system, that patents are also needed in promoting greater dissemination of knowledge47. This is so, as a potential patent monopoly would be the excellent incentive for the employer of the inventor to innovate or disclose information but surely not for the inventor himself. The employed inventor by being a hired entity will in any case be paid. Even if someone wanted to show good faith and believe that the patent system is still procuring innovation, then, why would the 1977 Patent Statute try to provide further incentives to innovate to the employed inventors under sections 39 to 43?48 The fact that these articles try to promote the position of the employed inventor in the patent field, demonstrates a weakness of the current patent system to promote innovation, rather than a British breakthrough in the area, which attempts to increase the protection of the employed inventors. This is because these principles were already implemented by the Swedish and
44 45

The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-A. The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-B. 46 The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-C. 47 Ibid. 48 The Patents Act 1977, sections 39 43, Christie A. and Gare S., Blackstones Statutes on Intellectual Property , 7th edition, Oxford University Press, New York, 2004, page 439.

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West German legal systems many years ago49. As a matter of fact these principles in terms of the notions they represent are easily comprehensible and very welcome. However, through the way they were incorporated into statute they became rather complex and lost much of their incentive power50. For instance, in order for an employed inventor to succeed in a compensation action against his employer under section 40(1) of the PA 197751, he must be in a position to prove that his employer received or is expected to receive an outstanding benefit, through the patent on the inventors invention. This poses as a practically impossible burden to establish, as there is no clear definition of what is meant by the term outstanding benefit. It certainly does not mean substantive or just some kind of benefit, it has to be great, outstanding, something that on its own makes the whole process very difficult. In addition we must also think of the difficulty that an inventor will face if he tries to gain access to the financial books of the company, as these are not publicized. And even in the rare instance where a company publicizes its financial records, it does not do so in an analytical manner for the inventor to find out the exact benefit accrued solely by his invention52. Something that also needs special attention in this area is the fact that even if compensation is decided to be granted to the inventor, the specific amount of the compensation will depend on non-commercial criteria 53 such as the difficulty of coming up with such an invention, or the peculiarities of it or even whether the inventor received any outside help in carrying out is job 54. But, even the actual statute clause determining the exact amount of the compensation given to the inventor, is itself vague, requiring only that a fair share should be given to him, without at the same time defining what a fair share should be 55. Nevertheless, the requirement of section 40(1) of the outstanding benefit, constitutes an almost impossible burden to shoulder as it is also evidenced by the case law and the cases of GEC Avionics Ltds

49 50

The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-C. Ibid. 51 Christie A. and Gare S., Blackstones Statutes on Intellectual Property , 7th edition, Oxford University Press, New York, 2004, page 439. 52 In order to calculate whether it is outstanding or not. 53 Patents Act 1977, section 41(4)(b). 54 The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-C. 55 section 41(1) Patents Act 1977, Christie A. and Gare S., Blackstones Statutes on Intellectual Property , page 439.

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Patent56; British Steel plcs Patent57 and Memco-Med Ltss Patent58. Therefore, it is sadly observed that the current patent system also supplemented by the Patents Act 1977 still have very little incentive impact upon employed inventors. This is further supported by the respective statistical evidence in the area, which shows that eight years after the implementation of the Patents Act, in 1986, only five claims were lodged with the Comptroller out of which none was successful59. Even more recently now, in 1998, the employed inventors seem to have understood the futility of these provisions as absolutely no claim was lodged this year with the Comptroller60. So, sadly, it is observed that the Patents Act 1977 and the patent system as a whole seem not to procure innovation in the area of employed inventors. The fact that, as seen above, the patent system is potentially diminishing the incentives for employed inventors should not necessarily be taken to mean that it fosters self-employed inventors to innovate. Despite the fact that in these cases we do not observe an employer exploiting the rights of the inventor, or receiving the returns of the patent, in due course other difficulties evolve. We must not omit at this point one very important practical disadvantage of the patent system; it is very expensive and specialised. The costs of obtaining a patent are very high. Additionally, all expertise agents helping in the drafting of the Patent Application and in the subsequent grant of the patent itself, would want to get paid independently of whether the application is successful or not. The use of such agents, like a patent attorney, or the Patent Office, or any commercial and industrial advisers, or even the makers of the prototype, is unavoidable and regrettably very expensive61. Furthermore, even if the patent application itself is successful (and the patent is granted), all the aforementioned agents will have to get paid, well before the inventor gets the first monetary returns from his invention. This could well be a connotation that a patent by itself is not necessarily profitably exploitable, at least for the near future62. This probably shows that also in the case of the selfemployed inventors, the grant of a patent itself is not the crucial element in procuring
56 57

GEC Avionics Ltds Patent[1992] RPC 107. British Steel plcs Patent [1992] RPC 117. 58 Memco-Med Ltds Patent [1992] RPC 403. 59 The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-C. 60 Ibid. 61 The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-A. 62 Ibid.

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innovation. As mentioned above, many people together with some psychologist scholars believe that when people innovate, in most cases they do so in order to solve a problem of theirs63. This means that even if an average person is sufficiently educated and acquainted up to a certain extent with the prior art64 in a technological field, any potential unsolved problems in this area will be the ones that will lead him to innovate and not the patent system per se65. This notion is also more closely related to the public image of an inventor which is believed to be eccentric and not motivated by financial factors66. So finally all these in conjunction with the fact that nowadays the greatest proportion of inventors is employed67, make us see that perhaps the patent system on itself does not stand as sufficient incentive for the inventor to innovate. This is further supplemented by historical records showing that small scale organisations and independent inventors, both being of outstanding quality, produce a gravely disproportionate number of useful inventions when compared to their corporate size and their capital value 68. That is to say, that though they are small in financial terms, as they are not the ones granted the majority of the patents, they nonetheless keep innovating. This is one more example, which separates the patent system from the corresponding fostering of innovation. It is not anymore considered as a given that the patent system will necessarily produce the optimal degree of investment in research and development and innovation.69

4 Innovation without a patent system?

63 64

The patent and legal policy, Chapter 9 The patent as an incentive to invent, page C85-B. Part of the requirement of novelty of a patent section 2, 1977 Patents Act. 65 Ibid. 66 Ibid. 67 Mentioned above, on page 14. (90% of inventors being employed). 68 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 132. 69 Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003, page 132.

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I think that progressively we come to realise that the principle noticed and challenged by Boldrin, stating that innovation will not happen unless innovators receive monopoly rights, is beginning to have many flaws70. In their book Perfectly Competitive Innovation, Boldrin and Levine, argue that the patent system is totally unnecessary and unrelated with the fostering of innovation71, and as none of them is an empiricist they try to bring the relevant evidence so to make their point. They more or less argue about a flourishing innovation system under the auspices of healthy competition, where the monopoly rights of the patent system play no role. However, one must not think of the patent role as totally obsolete in procuring innovation, as there are many suggestions that both competition and patents, when both are kept on a proper balance can foster innovation72. But even if indeed the patent system is actually somewhere needed in the whole process of innovation, we cannot help noticing that historically people have been inventing and innovating without any patent protection73. Many of the most important and major inventions, like penicillin by Alexander Fleming or the vaccine against Polio by Dr. Jonas Salk in 1954, were brought around without a patent system The fashion world at this point should stand as a more contemporary example of a financial sector innovating without the use of the patent system 74. It is an area that is highly competitive and staggeringly innovating, with its designs being largely unprotected by the patent system, but only through the commercial use of Trade Marks. Even the software industry, though it has always attracted some patent protection in many countries like for instance the USA, it has traditionally had a very weak patent protection and sustained major imitation of their products, but it nevertheless remained an industry, which was consecutively innovating. It is worth mentioning at this point that after some major US Court decisions in the 1980s which strengthened patent protection for software, the respective innovation in the field fell sharply75. On the other hand, the fact that pharmaceutical companies make huge profits from the patents they obtain and they subsequently invest huge amounts of money in research, may be misleading and not
70 71

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 7. Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 6. 72 To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, a Report by the Federal Trade Commission, FEDERAL TRADE COMMISSION, October 2003, page 4. 73 Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 5. 74 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 6. 75 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 7.

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necessarily a positive sign that patents foster innovation. We must not omit the fact that a big proportion of the capitals that are used in pharmaceutical research (like the ones used for the anti AIDS drug, AZT) are coming from public funds. If this is taken into account it could potentially show a waste of money coming from patent fees, rather than using this money in fostering innovation. But, even if the situation is not like this and indeed all the money deriving from the use of patents is invested in innovation, this can hardly be the sole incentive for such expensive and speculative projects, as almost all companies know that only rare and exceptional inventions like the anti-impotence drug Viagra will fully pay off76. Additionally, even under these circumstances there are theories arguing that if only the invention was the first to enter the market, the returns would, nonetheless, still be the same as if they had come under a patent77.

5 Conclusion. Boldrin and Levine have also successfully argued that the financial securities industry is also a prime example of a sector making millions, by developing and selling
76

Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26. 77 Ibid.

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complex securities and options, staying at the same time outside the ambit of the patent system. However, recently, this has begun to change, since patents have expanded to include business practices together with the financial securities. In their book, Perfectly Competitive Innovation, they resent this expansion to a great extent, since they believe that this policy change was totally contrary to overwhelming evidence by Tofuno in 1989, demonstrating that the financial industry was positively and enormously innovating under a competitive environment78. What they further argue and can be of vital importance to this dissertation is that, though ideas in a pure sense can be shared freely and be non-rivalrous in consumption, the economic application of these ideas is totally different and inherently rivalrous79. As an example they say that Calculus is economically valuable as long as the engineers and the economists comprehend it and know how to apply it80. As they suggest, if an economic idea is put into a competitive environment then it can subsequently decrease the huge costs of replication of the original product (under a patent system) and mitigate, therefore, the difference between development and replication. In general lines it remains nevertheless very difficult to assess and measure the effects of a particular patent system, since inventions are not made and subsequently introduced always at an optimal rate81. Therefore, they accept that the development of the initial prototype is always far more costly than the production of all subsequent copies82. However, what they suggest is that competition through imitation, though it will not generate totally free goods, it will nevertheless lower the prices considerably (with the prototype always remaining more valuable than all the others83. I believe that what these two scholars mean and is also central to this dissertation, is that giving an inventor monopoly rights under a patent system, is not necessarily the sole way of promoting innovation. The two scholars suggest that through competition even the inventor can make his fortune, despite the fact that no patent is involved. This could simply be done, by selling the first copies of his innovation at

78 79

Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 6. Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 8. 80 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 8. 81 The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005, page 4. 82 Ibid. 83 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 9.

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substantially higher prices84. In due course competition and free copying of the product will lower these prices and bring a balance, making at the same time the products much more affordable for the consumers. Even Romer, a critic of Boldrin and Levine, and a Professor in the University of Rochester85, admits that the current property rights for intellectual goods86are potentially too strong. He says that even music file sharing though hurting the music industry and being at odds with the intellectual property regime, can nevertheless increase social welfare87. However, he also brings into light potential deficiencies of this competitive innovation, as since everyone who buys the product will subsequently be able to copy it, why would people keep buying it at such high prices. This will deprive the product of being sold at very high prices even in the beginning of its circulation88. This can be effected if the time between the making of the invention and the beginning of copying the invention is not as big as Boldrin suggests, but is rather small, a remark put forward by Solow89. Romer further supports that though what Boldrin and Levine suggest can be correct in mathematical terms, it is not practicable however, especially in the pharmaceutical industry90. Finally about the argument of Boldrin and Levine stating that downstream use should be allowed, Romer responds that even if something like that is not restricted under a patent or copyright regime, it can still be excluded, thus restricted, under a contract between the seller and the buyer in a competitive environment. As a final point, we should bear in mind that though Boldrin and Levines competitive innovation system has many critics and potentially many flaws, none of them (the critics) has contested their theory, which is believed to be correct. The only concerns are about the applicability of such a model for innovation, as Lucas of the University of Chicago91 suggests. It is not a theory that is always applicable. In concluding, I think that we have come to realise that the patent system is not fostering innovation so smoothly anymore. Even if a competition model is not necessarily the right one in procuring innovation, we must realise that as long as one wants to remedy the
84 85

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15. Where he was a former teacher of Boldrin. 86 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 14. 87 Ibid. 88 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15. 89 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 16. 90 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15. 91 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 16.

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deficiencies of the patent system in the sector of innovation alternatives always exist. These can be very simple things like the government promoting the technology education92, to more demanding ventures like prizes. We have to mention here that some years ago the World Health Organisation together with the World Bank, used monetary prizes, in order to strengthen the innovation of vaccines that otherwise would not have been developed or distributed widely enough93. Developments like these undoubtedly foster the economic interest in the use of prizes as incentives for innovation. Prizes are pre-set amounts of moneys, posing as a reward for a specific task. Whoever accomplishes this task first, thus coming up with the invention asked, wins this money. We must not overlook the fact that historically the prizes that have to do with Research and Development, R&D grant prizes, have led to many well known inventions like the prize offered in 1714 by the British Government, for the design of an accurate method of measuring longitude, with the top prize going to John Harrison for his chronometer94. I hope that the last parts of this dissertation have helped us understand some weaknesses of the patent system in procuring innovation, and at the same time have shown us that workable alternatives do exist, raising hope for the remedying of the aforementioned deficiencies and the strengthening of the innovation sector.

BIBLIOGRAPHY

92 93

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 14. http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf, accesed on 28 February 2006. 94 Ibid.

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Antonios Pantazis Articles:

Intellectual Property Law Dissertation

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement. Factor Saving Innovation (2001) Michele Boldrin; David K Levine. Factor Saving Innovation 105 J. Economic Theory 18-41 (2002) Michele Boldrin; David K Levine. How effective are Prizes as incentives to Innovation? Evidence from three 20th Century contests, Davis, L., Department of Industrial Economics and Strategy, Copenhagen Business School, 7 May, 2004. - Also on: http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf, accessed on 28 February 2006. Patents and Innovation: Trends and Policy Challenges, Organisation for Economic Cooperation and Development (OECD), 2004 Report.

Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine. Promoting innovation through patents, Green Paper on the Community patent and the patent system in Europe (presented by the Commission). Rent Seeking and Innovation (2003) Michele Boldrin; David K Levine. The Case Against Intellectual Property, The Theory of Innovation without Intellectual Monopoly The Case Against Intellectual Monopoly, Chapter 2 (2003) Michele Boldrin; David K Levine. The Economist Magazine, A survey for Patents and Technology, October 22nd, 2005, A Market for Ideas, issue, October 22nd 28th 2005.

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The Guardian Newspaper, an article by Brown A., Owning ideas. The boom in the intellectual property market will not reap rewards for all of us, Saturday, 19th November 2005, http://www.guardian.co.uk/comment/story/0,3604,1646125,00.html. The Value of Innovation: The Interaction of Competition, Research & Development and Intellectual Property OIPRC (2004) Christine Greenhalgh; Mark Rogers. To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, a Report by the Federal Trade Commission, FEDERAL TRADE COMMISSION, October 2003. Books: Christie A. and Gare S., Blackstones Statutes on Intellectual Property , 7th edition, Oxford University Press, New York, 2004. Cornish W. and Llewelyn, D., Intellectual Property: Patents, Copyright, Trademarks and Allied Rights, Fifth edition, Sweet and Maxwell, London, 2003. Davis J., Intellectual Property Law, Core Text Series, Second edition, Oxford University Press, New York, 2005. Plant A. Selected economic essays and addresses, second edition (first published in 1934), Routledge & Keagan Paul, for the Institute of Economic Affairs, London, 1974. Story A., Cases and Materials Pack, edited by Alan Story, Volume 2: Intellectual Property Today: Of Myths and Paradoxes, Vaver, D. (1990)69 Can. Bar Rev 98. (pages C116-C126)

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The patent and legal policy, Chapter 9 The patent as an incentive to invent. (pages C85A-C85F)

Website:

http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes, January 20, 2006. http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf, February 28 2006 http://www.eco.utexas.edu/Homepages/Faculty/Norman/long/DII.html ,February 28 2006 http://www.timesonline.co.uk/article/0,,923-2056103,00.html, February 28, 2006 http://aoi.cordis.lu/article.cfm?article=1503, February 28, 2006 http://www.patenthawk.com/blog/archives/2005/04/patent_economic_2.html,February 28, 2006.

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