© The Author (2007). Published by Oxford University Press. All rights reserved
Editorial |
The patent lottery
A recent study by Boston academic economists James Bessen and Michael Muerer has argued that many patents are simply not worth having. Their case is based on the analysis of a large body of data. As James Bessen says, in a comment posted in response to criticism on the IPKat weblog,
"We derived our estimates of patent rents after reviewing 16 different papers published over 25 years, involving 17 different authors and several different methodologies. We chose the highest estimate from these to use in our comparisons (which happened to be from one of our own papers). We also checked this estimate against various data such as patent auction results, known licensing revenues, and Big Pharma financial statements".This writer is unimpressed by the employment of past papers, some of which are clearly relics of a bygone age when patents were used in a very different manner from that which characterises them today. Nor is he convinced by the choice of data which Professor Bessen mentions: auction data is too small and the very means of disposal may reflect on the value placed on the property sold, while both known licensing revenue and the financial statements of pharmaceutical companies reflect many other criteria from which the worth of patents cannot easily be disentangled.
Notwithstanding his deep and possibly ineradicable prejudice against the attempts of economists to get to grips with patents, this writer is reluctant to take issue with the conclusions reached by the Boston Two. This is because, though personal and anecdotal evidence is not a proper basis upon which to extrapolate grand generalities, the conclusions seem quite correct.
The value of the patent is in some respects comparable with that of the lottery ticket. Each is acquired for a sum of money; each has a limited life expectancy; each has the potential to confer great wealth upon its holder; and the value of each is uncertain at the point at which it is acquired.
But at this point the analogy breaks down. Once a lottery ticket is purchased, its validity is unimpeachable and it remains current until the winning numbers are drawn. A patent, in contrast, may cease to possess any force or vitality on account of the unearthing of some prior art at any time before its expiration. Worse, while the purchase of a lottery ticket is a one-off expense, a patent may be the cause of a steady outflow of funds: renewal fees, the cost of dealing with alleged infringers, the expense of defending it against those who seek orders of cancellation, declarations of non-infringement or damages for the tortuous making of wrongful threats against those falsely believed to be infringers. Expenses may even be incurred from outside the realm of intellectual property law, where competition authorities consider that the holder of the right occupies a position of power that facilitates market abuse.
Even once the patent is secure from challenge, factors entirely outside the control of the patent owner will erode its value to him. The invention encapsulated within its claims may not work; it may work but not very well; it may work well but not offer any advantage over complementary or rival technologies with which it competes for consumers' money; it may be dependent on other technologies that become obsolete or on raw materials that are scarce or unavailable. One statistic that bestrides the crowded population of patent data like a colossus is the attrition rate for granted patents: while it varies between jurisdictions and industries, it appears to be most patents are not renewed into the second half of their potential lifespan.
Are patents then of no value? This cannot be said either. It is plain that there are individual patents which, by themselves or in combination with other patents or intellectual assets, generate massive profit. That their commercial success cannot be predicted in advance or repeated under laboratory conditions is not an indictment of the patent system. As anyone who reads the trade mark registers will know, the vast majority of registered trade marks are of little or no value; the same can be said for copyright-protected material too.
But patents must not be dismissed. Their strategic value in developing markets, in shaping cartels and international standards, their potential for securitisation, the incentive value of those that do succeed (just as with lottery tickets) and even the feelings of comfort, confidence and security which they often falsely implant in those who trust them, are all advantages that are easier to experience than they are for an economist to quantify.
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