Patent

The Pros & Cons of Patents

A patent grants an inventor the rights to exclude others from making & using the invention for 20 years. Patents are critical in protecting the intellectual efforts of inventors, and thus in encouraging and promoting inventions. Such a 20 year monopoly, however, may impose disproportionately high social costs, particularly because the patenting mechanisms are often imperfect and may be abused. In addition, in the information age, where economical & commercial activities transact in a much faster pace than in the industrial age, the values of patents and thus the incentives they provide are often insufficient to justify the associated costs.

To better appreciate the roles of the patent system in the information age, I have discussed generally some of its pros & cons in this posting. Hopefully, I’ll be able to elaborate on some of the specific points in future postings.

Pros

  • Provide incentives to invent: This is the primary goal of patents, explicitly authorized by the US Constitution to “promote the progress of science and useful arts”. Because of the high upfront costs to obtain patents and the uncertain returns on the investments, however, the incentives can be weak. (In the finance parlance, the present value of potential future cash flows from a patent is very small, because the discount rate applicable to the cash flows needs to be high enough to adequately factor in the high uncertainty in rewards. See, “Fixing Patent Boundaries” by Tun-Jen Chiang, accessible here.)
  • Encourage invention disclosure: An inventor may not have to disclose her inventions, if it’s viable to keep them as trade secrets. Invention disclosure, however, benefits the society by allowing others access to the invention. Therefore, called the “patent bargain”, an inventor is awarded a 20 year patent monopoly in exchange for disclosing her invention. For the information industries (ie, software), it is generally difficult to reverse engineer a software and thus feasible to effectively maintain trade secrets. (See, eg, here.) The flip side of the coin is that it will be difficult or costly for a software patent holder to detect infringements of the software invention, deterring inventors from seeking patent protections. The patent bargain therefore may not be sufficient to effectively encourage disclosure in the software industries.

Cons

  • High costs: Obtaining a patent may cost tens of thousand dollars. (See, eg, here.) Enforcing a patent by litigation can cost millions. (See, eg, here.) Such prohibitively high costs effectively price most small inventors out of the patent system, further weakening the patent pros discussed above — the patent incentives and bargains.
  • Defective and prolonged patent examinations: The application backlogs in USPTO have been notoriously large, generally taking multi-years to prosecute a patent application. And, the examination quality leaves much to be desired, particularly in the software and business method areas, where no clear legal guidelines are available from the courts, and it is often difficult to assess the merits of a patent invention. Several efforts, however, have been initiated at USPTO to resolve the issues, including a program where patent applicants can expedite the application process by paying hefty fees (see here), and improving software search strategies and resources (see here).
  • Vague, overly broad, or uncertain scope: A patent is required to include one or more claims “particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.” Also, the patent must describe the invention “in such full, clear, concise, and exact terms as to enable any person skilled in the art […] to make and use” the invention. These requirements notwithstanding, most patent documents are difficult to understand, not only because of the technical jargons but also because of the vague language used. To make the matter worse, the scope of a patent may be changed through the life of a patent by amending the claims (through reissue, reexamination, or continuation practices, see, “Fixing Patent Boundaries” by Tun-Jen Chiang, accessible here), increasing the uncertainty in properly determining the scope of an issued patent.
  • Secret prior arts: A patent application typically will not be published until 18 months after its filing. In some instances, an application may never be published before a patent is issued. This period of “secrecy” is necessary to give the inventor sufficient time to market the invention before any patent is issued and before competitors learn about it. However, during the period of “secrecy”, the public has no knowledge of the patent application, which increases the uncertainty in the patent system and the social costs.
  • Monopoly: Even for a limited time of 20 years, the social costs of the patent monopoly in lessening competition can be high. The high social costs have been exemplified in the controversy respecting so-called “non-practicing entities” (“NPEs”, also pejoratively called “patent trolls”), which hold patents but do not engage in practicing the patents. In recent years, NPEs holding patents with questionable qualities have sought to enforce the patent monopoly by demanding royalties from those actually engaging in the commercialization of the patented processes or products. Since the NPEs do not themselves practice the patents, they don’t stand behind the values of the claimed inventions. For them to prevent others from actually marketing the inventions, even if the patent qualities are not questionable, resulted in complaints of extortions and outcries of unfairness. (The laws, however, do not require a patent owner to actively commercialize the patented invention. To some patent right advocates, therefore, the public challenges against NPEs have been engineered by large established corporations to avoid paying for the intellectual creations of the others, primarily small inventors. See, eg, here.)

Sufficient budget, trade secrets, first mover’s advantage

The above general overview shows that patents may not be the best choice for everyone, particularly software companies. For those software companies that still find patent protections attractive, it will be necessary to secure sufficient capital for their patent programs. Some firms, on the other hand, will likely find other alternatives, such as trade secrets or first mover’s advantage, more cost-efficient or effective in protecting or commercializing their inventions.

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