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A Case Study: Are patents a help or hindrance to innovation?

About The Author

Chris Bridges (Executive Editor)

Chris is a trainee solicitor at a top 20 full service firm and the founder of Keep Calm Talk Law. He is primarily interested in privacy, technology/IT and construction, also contributing to Computers & Law and other industry specific publications.

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Criticism of patent systems around the world has been rife in the last few years, so much so it is getting to a point where many are beginning to question the benefits patents actually bring to innovation.

However, this criticism is not always well placed. Yes, patents have caused issues for many companies, and almost certainly stopped many innovations from ever being made, but this would be only focusing on the negative. There are some companies, and indeed some industries that would struggle to function without a strong patent system. One of these in particular would be sorely missed if it were to go under – the pharmaceutical industry, our case study.

Despite the criticism the pharmaceutical industry gets for alleged unethical practices, we would arguably be a lot worse off without it. If pharmaceutical companies were to stop innovating, who would fund the development of the drugs we have come to rely on that keep us healthy, or in many cases save our lives. The taxpayer. But would drug development receive as much investment? I suspect not, when even justice seems to be dispensable during periods of austerity.

Back to basics – An overview of patents

Before we get in to the case study, I will go back to basics to clarify what patents are, and what purpose they were intended to serve. It is important to keep this in mind when assessing whether patents are a help or hindrance to innovation.

What is a patent?

Patents are a form of intellectual property. They grant the owner the exclusive right to produce an invention for a specific period. In the UK and the USA, the maximum life of a patent is 20 years. Patent requirements differ from jurisdiction to jurisdiction, however they usually require a ‘specification’ identifying what the invention does, and how it does it. In the UK, patents are governed by the Intellectual Property Office (IPO) who assert that an invention must be something new, that has “an inventive step that is not obvious to someone with knowledge and experience in the subject” and it must “be capable of being made or used in some kind of industry”.

In the UK, a patent cannot cover a number of specific things, for instance a scientific or mathematical discovery, theory or method or a literary, dramatic, musical or artistic work. Interestingly, in the UK and the rest of the EU, software cannot usually be patented unless it makes a technical improvement to something else. The IPO give the example of a computer program that improves the control of a car braking system. (For further reading on this interesting differentiation, see Macrossan’s Application [2006] EWCA Civ 1371 and the IPOs case studies.) However, in the USA, patents can cover software.

A patent will apply only in one jurisdiction. Therefore registering a patent in the UK will not protect your invention in the US or any other country. There are however, ways to apply for patents across Europe, and there are plans to introduce a European Union Patent that would have unitary affect across the EU, currently being ratified by members.

Like other forms of intellectual property, patents can be sold.

What is the purpose of a patent?

In the UK, the roots of patents can be traced back as far as Tudor times. In those days, they were the subject of abuse, often granted to royal favourites. However, in modern times at least, patents are intended to promote innovation by ensuring an inventor is able to cover the costs of his research, the argument being that there would be no incentive to innovate if others could steal your idea leaving you unable to profit.

I hear you ask – so what is the problem?

In short – patent trolls, or ‘non-practicing entities’ (NPEs) if you want to be kind. These organisations acquire patents for the sole purpose of selling them on at a profit. The patents they acquire are often excessively wide or unspecific, meaning they can be applied to a multitude of implementations. For unfortunate inventors, this may mean they invest in a project, take it to market and a few months down the line receive a letter demanding a licence fee be paid or the patent be bought. Pay or bin your investment and product. Sounds like extortion, does it not?

The problem is particularly rife in the USA where patents filed can often be much wider than in the UK. It is estimated that patent trolls cost US businesses US $29 billion in legal fees and settlements in 2011 alone. While these costs may be possible for multinational giants, the small and midsized business are the worst affected. 66% of businesses targeted by trolls have an annual revenue of less than US $100 million – this is incredibly damaging, as many smaller businesses are unable to pay the legal fees required to fight off these trolls. For a start up to fight outside court, it costs on average US $168,000, in court this rises to an average of US $857,000 and an average settlement, US $340,000. How can start-ups even get off the ground with this sort of barrier?

Moreover, the problem is getting worse. In 2007, patent trolls accounted for 23% of patent lawsuits. In 2012, a staggering 61% of patent lawsuits were filed by patent trolls. When over half of patent lawsuits involve a patent troll, it really does beg the question whether patents are doing more harm than good to innovation.

(All statistics apply to the USA only, credit to Lindsay Blakely for the statistics.)

Whilst the problem is not at the same level in the UK, largely due to the unavailability of software patents, it is, none-the-less, a problem, and one that undeniably causes a great deal of damage.

Why keep patents then?

Many industries are reliant on patents to maintain profitability. In these industries, patents promote research and innovation, as innovative ideas will give the inventor an edge on the market for 20 years. Whilst this may sound like a legalized monopoly, it starts to make sense when you do the maths.

The pharmaceutical industry is a prime example of an industry that would simply stop innovating if a strong patent system was not in place. Why? Because the fail rate of new drugs is exceptionally high. Out of every 5,000-10,000 medicinal compounds that are discovered, only one will make it to market. This is a staggering statistic. Furthermore, due to the extensive testing a medicinal compound must undergo, a drug has on average only 11 or 12 years of patent protection remaining, as it took 8 or 9 years to have the drug approved (the patent must be filed on discovery to protect its future). Some drugs take 15 years to reach market, leaving only 5 years to cover its cost.

The diagram below illustrates the drug development pipeline in the USA. Other countries have equally lengthy processes.

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The cost of getting a single drug from stage 1 to stage 4 is on average $953 million when one drug is being produced per decade. As the size of the pharmaceutical company increases, and the number of drugs in the pipeline increases, this reaches a staggering $5998 million per drug for companies that have ten to thirteen drugs approved in a decade. (Statistics from Matthew Herper, Forbes).

Why is this cost so high? Because for every drug that makes it, 5,000-10,000 fail, effectively making any expense on failed drugs a cost of the drug that makes it to market.

It is clear from these figures that the pharmaceutical game is an incredibly risky one. If a pharmaceutical company were unable to obtain a patent after spending this much on research and development, they would have to fight against competitors battling for a place in the market. It simply would not be possible to make the kind of profit needed to make the development of the drug worthwhile.

It is hard to come to terms with the fact that a pharmaceutical monopoly should be legal, as it essentially increases the cost of healthcare for the patient. However, you must bear in mind the vast levels of investment required to get these drugs to market. Without this incentive, we simply would not have the lifesaving drugs we have today, unless the taxpayer was willing to shoulder the burden of the investment.

It must also be remembered that this is just one industry of many that relies on patent protection to incentivise innovation. Whilst governments would likely fund drug development to some extent, it would not be as substantial. Furthermore, many industries do not have the public benefit to attract any public funding, so a lack of patent protection would be even more damaging.

Can you really imagine the government investing in the technology that the games consoles you have come to love rely on? Or perhaps that weight machine you love at the gym? Or the fancy all singing, all dancing smartphone that is attached to your body?

So what is the solution?

Since weakening the patent system is simply not an option if we wish to maintain our 21st century lifestyles (and life expectancies), we must crack down on patent trolls before they tarnish the patent system beyond repair. The patent system is already tarnished as evil by many small businesses and innovators as it has stopped them from ever going to market, has put them out of business, or has dramatically decreased their profits due to paying licence fees.

Even if the problem is largely on the other side of the Atlantic, it still affects us on this side. The USA is one of the largest markets in the world, and if an innovator is unable to market his product there, he may decide it simply is not worth investing in.

Thankfully, US President Barack Obama has recently issued executive orders to reform the patent system, including proposals to award costs of litigation to the winners of cases where the judge believes the lawsuit is abusive. Whilst this may dissuade trolls from charging millions for licences of ‘penny patents’ that are essentially too simple to be worth something, it does not completely remove the problem. Should speculative buying of patents be allowed at all when it is such a barrier to innovation?

Furthermore, Obama did not suggest that the IPO’s equivalent body receive greater funding so it can examine patents in greater detaial, preventing meritless patents from being filed. Would this not nip the problem at its bud?

Would the optimum solution not just be to implement a policy of ‘use it or lose it’? For instance, impose a requirement that to keep a patent, you must be using it, or at the very least working towards using it (e.g. pharmaceutical companies) within five years of filing, otherwise it is taken off you. This would not mean removing the possibility of licencing a patent if the owner was also using it, it would simply prevent non-practicing entities from abusing a patent for 20 years. This policy would equally solve many of the UK’s problems with patent trolls.

Whatever the solution, it is clear that something must be done about patent trolls, sooner rather than later. Long live intellectual property, but just make sure it is used correctly.

Further Reading

Intellectual Property Office, What is a patent?

Intellectual Property Office, Patenting computer-implemented inventions (software patents).

Macrossan’s Application [2006] EWCA Civ 1371

Intellectual Property Office, Applying the Aerotel / Macrossan test.

Intellectual Property Office, Patent Protection in Europe.

European Commission, Unitary patent – ratification progress.

Lindsay Blakely, How Much It Costs to Fight a Patent Troll.

Matthew Herper, Forbes, The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change.

Charles Arthur, The Guardian, Obama takes aim at 'patent trolls'.

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Tagged: Commercial Law, Intellectual Property, Technology

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