The Forgotten Costs of the Patent System

Update: The published piece is here: The Forgotten Costs of the Patent System.

From my Mises blog post in 2005:

[To be published without footnotes in IP Law & Business, a trade publication for IP attorneys (now IP Insider); this version includes references and links. Note: I here took for granted the utilitarian criterion normally used to argue for IP rights, without directly challenging that entire flawed approach. For a more elaborate version of the material in this short piece, see my There’s No Such Thing as a Free Patent, Mises Daily (Mar. 7, 2005)]

In “Don’t Believe the Hype” (Feb. 2005, IP Law & Business), authors Benassi & Gillespie argue that our patent laws continued to “foster innovation.” But the benefits that flow from the patent system are only half the story, since the system also comes with costs. We must compare the costs to the benefits to know whether the system is worth having at all.

If costs are not taken into account, there are no limits to what could be done to encourage innovation. Some, for example, have proposed replacing the patent system with a federal commission that gives taxpayer-funded rewards to inventors deemed worthy.¹ This would no doubt “foster innovation,” but would the marginal innovation thereby stimulated be worth the cost?

Measures could also be taken to strengthen patent rights. The patent term could be extended to 100 years, for example. The promise of four decades of additional monopoly profits would arguably stimulate even more innovation by pharmaceutical companies. Patent infringement could be made into a criminal offense, punishable by jail or even capital punishment; or treble damages could be awarded more frequently. The doctrine of equivalents and the scope of means-for equivalents could be legislatively expanded. Each of these changes, viewed in a vacuum, make patents more valuable and thus establish additional incentives to invest in R&D. Why not adopt all these innovation-encouraging measures, and more?

If the patent system is to be a net benefit to society, the gains it provides (the extra wealth and innovations the system stimulates) should be greater than its costs, according to standard “law and economics” “wealth-maximization” reasoning.

And there are clearly costs to the system. Indeed, some of the purported “benefits” cited by Benassi and Gillespie may really be costs. They note, for example, that venture capitalists insist on a strong patent portfolio. But this is, in part, because such portfolios are necessary to defend against other companies’ portfolios. If there were no patent system, one would not need to defensively spend money building up a mountain of patents to use in counterclaims or cross-licensing negotiations, and perhaps they would not be so important to VCs.

Other costs can also be noted. Companies pay patent attorney salaries, patent filing and maintenance fees, and significant litigation costs, as well as higher insurance premiums due to the risk of being involved in patent infringement litigation. Some even argue that innovation is diminished by a patent system: perhaps companies would have an even greater incentive to innovate if they could not rely on a near twenty-year monopoly.² Also, patents can be obtained only for “practical” applications of ideas, but not for more abstract or theoretical ideas. This skews resources away from theoretical R&D and toward practical gizmos and applications,which surely has some cost as well.³

I am not here claiming that the patent system costs too much. But I do believe it is incumbent on those who claim the patent system bestows benefits on society to be forthright in acknowledging the costs of obtaining the desired results. They should enumerate the costs, and the benefits, and explain why it is clear that the latter exceeds the former. This is, unfortunately, something patent advocates never do. They simply assume that the amount of wealth or innovation or other social benefit proxy that the patent system facilitates is necessarily much greater than the (obviously non-zero) costs of such a system. Why this assumption? To my knowledge, studies do not conclusively established that the benefits of the patent system outweigh its costs.⁴ It is just assumed. Should it be?

Stephan Kinsella, BSEE, MSEE, JD, LL.M., former partner in the IP Dept. of Duane Morris, and author/editor of numerous books and articles on IP law, international law, and other legal topics, is General Counsel and VP-Intellectual Property for Applied Optoelectronics, Inc., in Houston. Website: www.KinsellaLaw.com.

1. See “Intellectual property and its discontents,” Tom Giovanetti, Washington Times, 14 Oct. 2004; also Rewards Versus Intellectual Property Rights, Steven Shavell & Tanguy Van Ypersele, Journal of Law & Economics, vol. XLIV (October 2001), p. 525. [Update: see also: Re: Patents and Utilitarian Thinking Redux: Stiglitz on using Prizes to Stimulate Innovation, Mises Blog (Dec. 28, 2006) and Patents and Utilitarian Thinking Redux: Stiglitz on using Prizes to Stimulate Innovation (Sept. 19, 2006); Stallman: An Internet-Connectivity Tax to Compensate Artists and Authors; $30 Billion Taxfunded Innovation Contracts: The ‘Progressive-Libertarian’ Solution; Tabarrok’s Launching the Innovation Renaissance: Statism, not renaissance; The Economist: Copyright Is An Antiquated Relic That Has No Place In The Digital Ages.]  [↩]
2. See especially the section “Costs of the Patent System” in Julio H. Cole, Patents and Copyrights: Do the Benefits Exceed the Costs?, Journal of Libertarian Studies, v. 15, no. 4 (Fall 2001), pp. 79–105 for further examples. [↩]
3. See on this Arnold Plant, “The Economic Theory Concerning Patents for Inventions,” in Selected Economic Essays and Addresses (London: Routledge & Kegan Paul, 1974), p. 43 (originally published in Economica, New Series, vol. 1, no. 1, Feb., 1934, 30-51) . See also Murray N. Rothbard, Man, Economy, and State, scholar’s ed’n (Auburn: Mises Institute, 2004) , ch. 10, sec. 7: “It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. . . . Research expenditures are therefore overstimulated in the early stages before anyone has a patent, and they are unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system then has the further effect of artificially stimulating research expenditures in the patentable areas, while artificially restricting research in the nonpatentable areas.” [↩]
4. See, e.g., Petra Moser, “How Do Patent Laws Influence Innovation? Evidence from Nineteenth Century World Fairs,” NBER Working Paper 9099 (August 2003) (examines innovations exhibited at World’s Fairs during the 19th century and concludes that countries with patent systems do not have a higher rate of innovation per capita, but that patents affect the industries in which different countries make their innovations); Cole, Patents and Copyrights: Do the Benefits Exceed the Costs?; Lawrence Lessig, The Future of Ideas (2001); The Economics of Intellectual Property: A Review to Identify Themes for Future Research, Padraig Dixon and Christine Greenhalgh (November 2002); Fritz Machlup, U.S. Senate Subcommittee On Patents, Trademarks & Copyrights, An Economic Review of the Patent System, 85th Cong., 2nd Session, 1958, Study No. 15; Fritz Machlup and Edith Penrose, “The Patent Controversy in the Nineteenth Century,” Journal of Economic History 10 (1950), p. 1; Roderick T. Long, “The Libertarian Case Against Intellectual Property Rights,” Formulations 3, no. 1 (Autumn 1995); Stephen Breyer, “The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs,” Harvard Law Review 84 (1970), p. 281; Wendy J. Gordon, “An Inquiry into the Merits of Copyright: The Challenges of Consistency, Consent, and Encouragement Theory,” Stanford Law Review 41 (1989), p. 1343; and Jesse Walker, “Copy Catfight: How Intellectual Property Laws Stifle Popular Culture,” Reason (March 2000). [↩]