What is a Patent?

The patent system is bursting at the seams. In many areas, if not in all, the patent system no longer accomplishes what it is designed to do, mainly, to to promote the "Progress of Science and useful Arts." For evidence of this fact, look no further than the crumbling music industry or the broken pharmaceutical system. Given that the system is breaking down, other than dismantling the patent system in its entirety, is there a way to fix it? This is a question I'd like to explore.¹

Patent holders have the right of possession, right to sell, and the right to exclude. But that right, like most rights, is deeply qualified. The law that giveth and the law may taketh away. But, unfortunately, the penumbras of capitalism pollute government patent policy that is inevitably deferential to large corporate-patent Megatrons.

Patents--Some Theory

The theory behind patents largely derives from capitalism and can be concisely summarized as such: 1. Patents give rights to future profits. 2. Thus, patents create incentives to research, to develop, to invent, to produce, to expend resources to bring the patented item into being.

In economic terms, the fixed monetary cost of bringing a product to market is offset by the prospects of profiting off of that good. The cost for Pfizer to produce a single pill of Viagra may exceed a billion dollars. But, from there, the cost of each additional dose of "Boner Juice" is trivial, less than a penny perhaps. The (often obscene) markup compensates from the billion dollar accounting loss from the first pill. Abstractly, I see no ethical problem with this business strategy.

Questions must be asked about the ethics of the practice, however, when the parenthesis in the preceding paragraph disappear, when profit margins fly through the glass ceiling.

The purported benefit of a patent may be over-matched by accompanying harms. Patents can be quite obstructive and create gridlock when rights are fractured among too many parties, creating an "anti-commons." Bargaining and transaction costs may become prohibitive when patent owners each individually own their own stop signs with the power to halt development. Here, the patent system works backwards. The latest and greatest Viagra may be stuck in a lab somewhere because the costs associated with its development are too prohibitive. Even more fundamental and less theoretical are systemic costs required to maintain an intricate patent system. These costs include the cost of maintaining of a regulatory agency, litigation costs, and other legal costs.

It happened here. And here. Here too.

"patent breaks" are rare and the entire too deferential to patent-dependent corporations.

How are we fixing the the System?

Various methods of curing these defect have been employed. One such solution are patent pools where companies agree to cross-license their patents. The key in any solution is to strike a balance between the “patent” framework and the “no patent” framework. Patents are designed to protect the gains an inventor will receive in order to incentivize investment. Perhaps, patents aren’t supposed to protect profits, primarily. Patents should, in theory, only do so insofar as is necessary to promote innovation. Such a justification is rooted in the fact that there is a social gain from new and better iPads (pick your favorite gizmo). But, clearly, at some point we tread into the realm of the “anti-commons” where we are protecting too many rights and social welfare declines due to obstruction. On this side of the continuum, the patent system mainly functions to line the pockets of the elite. In many areas, this consequence is unfortunate but not tragic. However, in health care, the consequence is absurd—people are dying because companies want to get rich. This must change.

This seems like a restatement of the problem, or an expansion of its scope. People are dying, true, but how can this be changed? It would be cool to hear an explanation of the administration of a patent pool, or the mechanisms it provides for overcoming blockages. The way I understand it, a patent pool has the goal of mediating autonomy (patent rights and associated profits) with collaboration (licensing and sharing technology). I’d be interested in hearing how this works in practice.

Also, according to Heller, a patent pool must control entry and exit to guarantee fair play. I’m not sure how one includes all those who wish to make use of the technologies in a patent pool, while also excluding those who will not contribute to the welfare of the pool. Isn’t a patent pool like an illegal trust, fundamentally anti-competitive? And yet, if no one is excluded, the patents lose meaning. The idea of a patent pool seems self-contradictory.

Another way to change the System

Let me suggest an alternative tactic that is being bandied about by academics but is rarely used by the holder of the tactic. Take or threaten to take people's patents back. Patents are only good if they are being used. Pharmaceutical drug patents are only good if the drugs they produce are affordable to the people that need them. Patents for drugs that are in production are being used. Just not enough. As the profit margins of drug companies expand to appalling levels, the government should threaten to take the lifeblood out of these companies' balance sheet: their patents. This would be real health care reform. Because the root problem has never actually been coverage but the fact that people need coverage because health care is so damn expensive.

Doctor visits, hospital procedures, and outpatient care are all very expensive, and these costs do not turn on drug prices. Legislation to create public insurance has always been needed for these reasons, too.

True enough. This comment prompted me to look up data on health care expenditures and see that drugs were only ~30% of health care expenditures. Perhaps my above statement was made in a bit of ignorance. Drug prices may or may not be, however, more inflated than the above mentions. There are, indeed, other problems with our health system. I do not know (and I don't think it can be stated) if public insurance is the solution.

Another point to consider is that patent monopolies in healthcare allow a patent holder to set the supply curve for a drug wherever the patent holder wants. In seeking to maximize price times quantity, the patent holder distorts the intersection point of the supply curve with the (socially and medically determined) demand curve, raising prices. A taking would not solve this pricing problem, but would make the public foot the bill. Competition between drug makers would, however, solve the pricing problem, and this is possible if patents are eliminated.

Employing such a tactic could bring about a revolution in health care practices. The Government could (but realistically will not) strong arm Merck, Pfizer, and the like into affordable drugs. The decree would be as follows: lower the price on Drug X or I will own drug X. Equally important, the Government could broker cross-licensing agreements and avoid the gridlock Heller deplores. The decree would be as follows: license your patent to company X or I will do it for you. Both of these decrees seem to be well within the Constitutional definition of “public use.” Is there anything more important and more used by the public use than health care? These intrusions would also be well protected by statutory language as use for the “United States.”

This forced price reduction did actually occur with AIDS drugs in the early 2000s, but only with respect to Africa and developing countries. The way that this was accomplished was not through takings, but through Clinton’s promise that the US would not enforce US patents against African countries that chose to infringe by buying generic drugs. The solution was not a taking, but the abolition of the right through abolition of the remedy. This abolition of patents could be accomplished generally, provided that the government creates a mechanism to pay for clinical trials for drugs. As I mentioned above, the basic research is done at universities, and is government funded. Also, Switzerland’s pharmaceutical industry flourished without patents on pharmaceutical products, only processes, until 1978. Also, other mechanisms besides patents exist can yield profits for innovation. The cost of copying a technology through reverse-engineering is estimated to be somewhere around 50%, on average, resulting in a partial advantage for innovators. A significant further advantage accrues to first-movers in a marketplace. I’m not sure that these mechanisms are enough to cover the cost of clinical trials, but with government funding for that, they would suffice to make almost all patented technologies producible, and the innovations profitable, including information technology.

These are very interesting and pertinent points and have sparked a new thought and direction for where I want this to go. A much longer, more controversial direction I might add.

For a number of political reasons this revolution will probably be deferred to another generation's future. Nevertheless, such a vision would be consistent with the Constitution's decree to protect the “general welfare.” It would strike that delicate balance between protecting the inventor's enterprise and ensuring public benefit.

It sounds almost like you’re admitting that inventors “deserve” to profit, a common misinterpretation. Inventors should have profit only so far as that increase in profit incentivizes innovation whose benefit exceeds the harm of increased prices. Patents are often used quite openly for rent-seeking by patent holding companies, as well as corporations that want to show off their financial strength to investors.

With regard to anti-commons, Bill Gates once said, “If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Even today, his company evaluates strategic decisions based on how incompatibilities and technological barriers will be created with its software releases. Patents make the financial winners those who prevent innovation, not those who create it. I think the best solution may be the elimination of patents altogether. This only requires a congressional majority.

I just want to mention that I really enjoyed reading and commenting on your paper. Having thought about the Heller article and your other points, including the takings idea, I have some new ideas for how the patent system could be improved if it can't be eliminated. I hope my suggestions haven’t been too disheartening. Thanks for writing a new second paper that’s easy to comment on. Best of luck with revisions.

Sam Wells - 26 April 2010

Still wading through some of the comments, but, I like them so far. They have provoked a number of thoughts. Just some stuff on the paper as a whole.

I'm not sure that the abolition of a patent system in its entirety is desirable. I read your paper, some of Eben's stuff, and a number of articles and I'm just not convinced. I'm okay with this position of uncertainty--I don't know if it is the right position, but I also don't know how it would ever be possible to have a right position (of course, I could say this on about practically any issue, legal or otherwise). I think we may agree that a person's position on the matter seems to be predetermined by their perception of societal good and how it is created. I think this is evident with Eben and your criticisms. Personally, I think I have views that slightly diverge from those articulated in this paper. However, the goal of this paper was to try and find a middle ground that is possible to enact, tailored to various goals, and not to bound by rules and procedures. I think some areas need more patent protection than others and that part of the problem is that we have a system which is applied across the board, regardless of the community/area involved (a different patent system may be needed in pharma/tech than inventing post-it-notes). I'd like to find a solution that allows discretion.

In sum, (1) I do not think the abolition of the patent system is politically possible. (2) I'm not convinced that abolition is desirable, either. (3) If the existing structure has potential, I'd like to exploit that potential. (4) If some system is necessary, I want to advocate for a patent system that is human nature oriented. I think, using "eminent domain" practices on patents may alter the human calculus of pharma companies in their other practices. This will create more social good and rebalance the equation (between social good and profit).

Finally, I apologize that this paper did not receive as much attention as it probably should have. And I want to thank you for putting such extensive thought into the paper. I am genuinely interested in the issue and your specific comments and paper (regarding clinical trials, marketing) have helped spark a new idea regarding pharmaceutical companies, patents, and controlled substance policy: the place where I think this idea is going. Unfortunately, I think I need to put the brakes on it for a few weeks.