World After Capital: Patents (Informational Freedom)


This post is by Continuations by Albert Wenger from Continuations by Albert Wenger


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NOTE: Today’s excerpt from World After Capital continues the topic of Informational Freedom, discussing overreach in the patent system and offering prizes as an alternative mechanism. This is timely as the patent office has unfortunately issued new rules that will make it easier to obtain software patents undoing the tightening from prior Supreme Court decisions. 

While copyright limits our ability to share knowledge, patents limit our ability to use knowledge to create something. Much like having a copyright confers a monopoly on reproduction, a patent confers a monopoly on use. And the rationale for the existence of patents is similar to the argument for copyright. The monopoly that is granted results in economic rents (i.e., profits) that are supposed to provide an incentive for people to invest in research and development.

As with copyright, the incentive argument here should be suspect. People invented long before patents existed some people have continued to invent without seeking patents. We can trace early uses of patents to Venice in the mid 1400s; Britain had a fairly well established system by the 1600s [106]. That leaves thousands of years of invention, a time that saw such critical breakthroughs as the alphabet, movable type, the wheel, and gears. This is to say nothing of those inventors who more recently chose not to patent their inventions because they saw how that would interrupt the knowledge loop and impose a loss on society. These inventors include Jonas Salk, who created the Polio vaccine (others include x rays, penicillin, ether as an anesthetic, and many more, see [107]). Since we know that limits on knowledge use impose a cost, we should therefore ask what alternatives exist to patents to stimulate innovation.

Many people are motivated simply by wanting to solve a problem. This could be a problem they are having themselves or something that impacts family or friends or the world at large. With a Universal Basic Income more of these people will be able to spend their time on inventing following intrinsic motivation.

We will also see more invention because digital technologies are reducing the cost of inventing. One example of this is the USV portfolio company Science Exchange, which has created a market place for laboratory experiments. Let’s say you have an idea that requires you to sequence a bunch of genes. The fastest gene sequencing available to date comes from a company called Illumina, whose machines costs from $850K-$1M to buy [108]. Via Science Exchange, however, you can access such a machine on a per use basis for less than $1000 [109]. Furthermore, the next generation of sequencing machines is already on the way, and these machines will further reduce the cost. Here too we see the phenomenon of technological deflation at work.

A lot of recent legislation has needlessly inflated the cost of innovation. In particular, rules around drug testing have made drug discovery prohibitively expensive. We have gone too far in the direction of protecting patients during the research process and also of allowing for large medical damage claims. As a result, many drugs are either not developed at all or are withdrawn from the market despite their efficacy (for example the vaccine against Lyme disease, which is no longer available for humans [110]).

Patents (i.e., granting a temporary monopoly) are not the only way to provide incentives for innovation. Another historically successful strategy has been the offering of public prizes. Britain famously offered the Longitude rewards starting in 1714 to induce solutions to the problem of determining a ship’s longitude at sea (latitude can be determined easily from the position of the sun). Several people were awarded prizes for their designs of chronometers, lunar distance tables and other methods for determining longitude (including improvements to existing methods). As quid pro quo for receiving the prize money, inventors generally had to make their innovations available to others to use as well [111].

At a time when we wish to accelerate the Knowledge Loop, we must shift the balance towards knowledge that can be used freely and that is not encumbered by patents. It is promising to see successful recent prize programs, such as the X Prizes, DARPA Grand Challenges, and NIST competitions. There is also potential for crowdfunding future prizes. Medical research in particular should be a target for prizes to help bring down the cost of healthcare.

Going forward, we can achieve this by using prizes more frequently. And yet, that leaves a lot of existing patents in place. Here I believe a lot can be done to reform the existing system and make it more functional, in particular by reducing the impact of so-called Non Practicing Entities (NPEs, commonly referred to as “patent trolls”). These are companies that have no operating business of their own, and exist solely for the purpose of litigating patents.

In recent years, many NPEs have been litigating patents of dubious validity. They tend to sue not just a company but also that company’s customers. This forces a lot of companies into a quick settlement. The NPE then turns around and uses the early settlement money to finance further lawsuits. Just a few dollars for them go a long way because their attorneys do much of the legal work on a contingency basis, expecting further settlements. Fortunately, a recent Supreme Court ruling placed limits on where patent lawsuits can be filed, which should help limit the activity of these NPEs going forward [112].

As a central step in patent reform, we thus must make it easier and faster to invalidate existing patents while at the same time making it more difficult to obtain new patents. Thankfully, we have seen some progress on both counts in the U.S., but we still have a long way to go. Large parts of what is currently patentable should be excluded from patentability in the first place, including designs and utility patents. University research that has received even small amounts of public funding should not be eligible for patents at all. Universities have frequently delayed the publication of research in areas where they have hoped for patents that they could subsequently license out. This practice has constituted one of the worst consequences of the patent system for the Knowledge Loop.

We have also gone astray by starting to celebrate patents as a measure of technological progress and prowess instead of treating them as a necessary evil (and maybe not even necessary). Ideally, we would succeed in rolling back the reach of existing patents and raising the bar for new patents while also inducing as much unencumbered innovation as possible through the bestowing of prizes and social recognition.