Dissertation- Sample 3

U N I V E R S I T Y O F K E N T A T C A N T E R B U R Y

KENT LAW SCHOOL

INTELLECTUAL PROPERTY LAW

(LW 556)

DISSERTATION

“Innovation and the patent system. Can the current, overly

stringent patent system still be an incentive for innovation?”

Word Count: 5000 Words

Student Name: Antonios Pantazis (02040726)

Seminar Leader/Supervisor: Mr. Alan Story

Seminar Group: #4

March 2006

Antonios Pantazis Intellectual Property Law Dissertation

Abstract

Innovations benefit consumers through the development of new and improved

goods, processes and services. If one observes all the technological breakthroughs around

us, will understand better, the importance of innovation in the life we lead. Undoubtedly,

Intellectual Property Rights and more specifically, the Patent System, foster innovation

even further. However the fact that patents actually amount to temporary monopolies on

very useful inventions, requires careful handling. The number of patent applications filed

in the world’s three leading Patent Offices, the Patents and Trademarks Office of the

United States, the Japanese and the European Patent Offices, has increased by more than

40% between 1992 and 2002. Therefore, the main question that this dissertation will try

to address will be, whether this abundance of patents rather than lubricating the gears of

innovation, is instead clogging them. New fashions suggest that patents are more

frequently used for huge economic profits. This arrives as a shock to the traditional

thinking that the major justification for patents, lies in the fact that they provide an

incentive for innovation. Whether innovation is being liquidated for bigger more

profitable markets, we will attempt to clarify through this dissertation. Moreover, the

potential deficiencies of the monopolistic behaviour that the patent system suggests will

be examined. Furthermore, an analysis of the alternatives to the patent system will

conclude this dissertation.

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C O N T E N T S

1. Abstract……………………………………………………...page 2.

2. Contents……………………………………………………..page 3.

3. Introduction………………………………………………….page 4.

4. The case for patents………………………………………….page 7.

5. Patents’ use today; a stimulus for innovation or not...……….page 9.

6. Innovation without a patent system?..…………….………….page 18.

7. Conclusion...………………………………………………….page 20.

8. Bibliography………………………………………………….page 23.

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1 Introduction.

The patent system has experienced a remarkable increase in the past decade. As

statistics suggest, more than 850,000 patent applications were filed in USA, Japan and

Europe in 2002, compared to only 600,000 in 19921. These figures independently of the

motives that the patent system is said to promote, clearly suggest that nowadays patents

have a constantly growing importance to global economy. Since patents even in their

simplest sense are a temporary monopoly to the use of an invention, both the private and

the public sector are frequently using patents to protect their inventions. This is

traditionally based on the view that patents in their turn will foster investment in the

innovation area and help in the dissemination of knowledge. The first English patent for a

new invention is thought to be Aconicio’s Patent for a grinding machine granted in 1565

by the Crown2. Throughout history many arguments have been hired to support the

existence of the patent system. Without patent rights competitors would immediately

copy inventions and the undertaker with the lowest costs would claim the financial

reward, and that by its turn would diminish any incentives to invent3.

However after many controversies, three broad justifications used for the

development of the patent system have survived as the ones being closest to the truth.

The first is more of a moral (being about natural justice) rather than an economic

justification and thus, not of primary concern to this dissertation. It argues about the

patent system offering justice to the inventor. According to this theory, patents reward

their inventors based on the principle that every person must have a right to the product

of her brain, and, therefore, others should be prevented from ‘free riding’ on her

invention. However even supporters of the patent system admit that these arguments are

too minor to make the case, since justice would probably require all the inventors that

came up with the same invention to be rewarded for their labour and not the first one to

file his invention with the UK Patent Office, contrary, perhaps surprisingly, to the USA

1 Patents and Innovation: “Trends and Policy Challenges”, Organisation for Economic Co-operation and Development (OECD), 2004 Report, page 7.2 Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford University Press, New York, 2005, page 25.3 http://www.eco.utexas.edu/Homepages/Faculty/Norman/long/DII.html , accessed on 28 February 2006.

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where the patent protection goes to the first to invent4. That is to say that these arguments

collapse in these case of ‘simultaneous inventions’ which happen more or less at the same

time, but from independent inventors5. In these instances, the fact of who will get the

patent is clearly an issue of luck, preparation, and a matter of who is better connected

with the Patent Office. There are also further arguments saying that if the sole purpose of

the patent system was to reward inventors then potentially the protection period would be

even longer, like it is the case with copyrights6 (life of the author plus 70 years).

Nonetheless, as it has already been mentioned these arguments are not of great

interest to this dissertation, as one could say that patents are not granted for a social

purpose anymore. In the past not necessarily all inventions were patented but only those

capable of benefiting the society as evidenced in the British Patent Law of 16247:

declaring patents that ’were mischievious to the State, by raising prices commodities at

home, or hurt of trade, or generally inconvenient’, as invalid. However, closer to what we

are examining here can be the second and third justifications that are clearly of economic

nature. These suggest that a strong and efficient patent system can encourage innovation,

and that also, pursuant to s14(3)8, which requires the specification of a patent application

to disclose the invention in a clear and complete manner for a person skilled in the art,

there are hopes that through patents, knowledge will be wider disseminated and grasped

from others, who will invent further or compete. This latter case is said to be the

exchange of the inventor to the monopoly he is being given9. Judging also from the

insistence of the Courts, as shown in the case of “Asahi”10, that all (valid) patent

applications should contain an ‘enabling disclosure’11 that will assist the reader of the

4 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 130.5 Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford University Press, New York, 2005, page 25.6 Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26.7 Statute of Monopolies 1624, 21 Jac. 1, c.3, s.6, “Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69 Can. Bar Rev 98., page C 117.8 Patents Act 1977, section 14(3), Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “, 7th edition, Oxford University Press, New York, 2004, page 431.9 Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26.10 Asahi Kasei Kogyo’s Application. [1991] R.P.C 485.11 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 151.

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application to reproduce the invention, one could potentially say that this is by far the

most convincing argument in supporting the patent system.

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2 The case for patents.

However the third argument of whether patents are promoting innovation, which

is the primary aim of this dissertation, has been hotly debated and the results are still not

pointing at a clear direction. This principle evolved as early as 1793 by Jeremy Bentham,

the father of utilitarianism, who was a strong supporter and articulator of the incentive

thesis of intellectual property. This rationale though heavily challenged, remains the most

powerful argument in favour of the patent system, even today. Bentham wrote in 1793

that “Without the assistance of the laws, the inventor would almost always be driven out

of the market by his rival who, finding himself, without any expense, in possession of a

discovery... would be able to deprive him of all his deserved advantages, by selling at a

lower price…”12. This is more or less taken to mean that even if the inventor comes up

with a marketable innovation, he will need a monetary incentive (a patent) in order to

carry on with the marketing of his idea. This is needed as even after the conception of the

innovation a sizeable capital investment will be needed to develop, manufacture, market

and sell the end product of the invention13. Today, it is beyond doubt that patents are used

increasingly day by day, effecting but also sustaining (in their nature) many changes.

Even the patent system itself is constantly being modified so to be capable of

accommodating this increasing need for new patents. Patents on genetic material,

business methods and software, are now granted on many Patent Offices around the

world, being potentially enough to say that they are already recognised in the US Patents

and Trademarks Office14 (the biggest one currently in the world). These patents are now

granted on grounds that were not recognisable by older patent regimes (some still not

recognised in the UK)15. This has subsequently led to an enhanced ability of the patent

holders to enforce their rights even more strictly that they used to. Since the Federal

Circuit Court of Appeals (USA)16 declared in 1998 that technology-based business

12 http://aoi.cordis.lu/article.cfm?article=1503, accessed on February 28, 200613 http://www.patenthawk.com/blog/archives/2005/04/patent_economic_2.html, accessed on 28 February 2006.14 Patents and Innovation: “Trends and Policy Challenges”, Organisation for Economic Co-operation and Development (OECD), 2004 Report, page 8.15 Patents Act 1977, section 1(2), Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “ , 7th edition, Oxford University Press, New York, 2004, page 426.16 Business methods still not recognisable in the UK, section1(2)(c) Patents Act 1977.

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methods, previously considered too abstract to be patentable, are in fact eligible to be

patented, thousands of e-commerce companies have submitted their patent applications. It

is worth mentioning, that patents in this field are being awarded on almost everything;

from data processing systems to methods of creating custom CDs online17. Undoubtedly

this has not happened without a reason, and many people suggest that it is only because

of these policy changes, that the patent system was able to cope with changes in the

innovation system, as well to attract bigger private sector capitals in the Research and

Development area. Despite all these however, many commentators suggest that today’s

rights are too strict and make even the sharing of knowledge very expensive18

17 http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes, 20 January 2006.18 “The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 23.

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3 Patents’ use today, a stimulus for innovation or not?

However and clearly at odds with the past, nowadays, almost every new gadget

can be patented. Today the Patent Office will apparently patent anything regardless of its

respective novelty and usefulness in its industry. Examples of non-novel ideas that were

recently patented can be a patent on swinging on a swing; the peanut butter and jelly

sandwich, and a method of transmitting energy by poking a hole in another dimension19!

Therefore, the question we need to ask at this point is; do all these really happen because

the invention is a real invention and the inventor was pushed further in his job with the

patent system being his incentive, or these things happen because of other reasons,

simpler and clearly financial ones. Many argue that this tension of ‘over-patenting’ is

primarily noticed because of the ingenuity of the patent attorney in drafting the Patent

Application and not because of the inventive step that the inventor took in coming up

with the idea20This has subsequently led to having many invalid patents. In addition, the

paradox in these cases is that there is no litigation being brought against these (invalid)

patents. This can be understood by the fact that the challenge costs and the uncertainties

involved in these kinds of actions are rather high. So by not challenging this phenomenon

we end up with an increase in the licensing of these invalid patents since the licence

royalty per unit costs can be much lower that the aforementioned litigation costs!21 This

seems logical though, since the litigation costs in these cases pose as a serious business

decision and have little to do with legal doctrines. Licensing of invalid patents is also

encouraged by the recent phenomenon of threatening22 the initiation of costly

infringement actions by the patent holder. Such a threat will either enforce the other party

to pay the patent holder royalty fees, as the alleged infringer would most certainly want to

avoid the very expensive and time consuming litigation, or will succeed in getting the

patent holder a Court injunction that will subsequently stop the improper use of the

patent. Such an example could be that of Jeff Bezos suing Barnesandnoble.com for

19 Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 6.20 “Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69 Can. Bar Rev 98., page C 120.21 “Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69 Can. Bar Rev 98., page C 121.22 Though there is a provision providing remedies for threats, section 70, 1977 Patents Act, it only covers groundless threats, and not threats that are based on legally granted but otherwise invalid patents.

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infringing on ‘Amazon's 1-Click’ ordering system patent23. Amazon's patent, titled

"Method for System for Placing a Purchase Order Via a Communications Network," is so

broad, that it is feared that if the courts continue to support it, the giant ‘e-tailer’

(Amazon) could make a mint in licensing fees from other undertakers, also keen on

getting their own customers quickly in and out the door. Therefore many believe that

Bezos, by securing an injunction against B&N's use of its own one-click ordering system,

Amazon climbed yet another rung on the e-commerce ladder, and Bezos himself made his

most brilliant competitive move to date24. At this point it is important to understand that

even if someone wanted to challenge an invalid patent and even if we suppose that he

were successful; in the aftermath he would not be the only one able to make the product,

but instead everyone, including its competitors, would be able to do this. However, the

challenger would have been the only one that borne the litigation costs25. This poses as

another strong disincentive against challenging an invalid patent as well as being another

form of ‘free riding’. This is a quite straightforward example that patents are not always

there to foster innovation, but instead can be used even at the detriment of innovation

(licensing of invalid patents) so to confer huge financial benefits to their holders.

It is also believed that patents with the security and the monopoly they offer to

their holder, lower in a sense the psychological barriers to innovation, thus making it

easier for people to innovate. People do not have to worry any more if all their time and

money spent on Research and Development will pay off or whether the risks taken will

result in a profitable product, as Kenneth Arrow rightly observed in the 1960s26.

However, if one examines closer the practical operation of the patent system, will notice

that much of this positive impact is diminished27. This is because, much of the protection

that a patent offers to its holder greatly depends on the language used by the patent

attorney in couching the claims of the invention in the specification of the patent

application. This renders crucial for all competitors to examine this part for any potential

weaknesses. However, recently, it is being noticed that even this process is effectively

23 http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes, 20 January 2006.24 Ibid.25 “Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69 Can. Bar Rev 98, page C121.26 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 3.27 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 134.

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ruined by new drafting methods, which achieve patent claims to disclose as little useful

information as possible28. Even if an intelligent member of the public reads the

specification, she will most probably not comprehend it as the language is addressed only

to the relevant industry that the patent refers to. This is also further sustained by the fact

that here is no such requirement that the patent specification should be comprehended by

everyone (only to the person skilled in the art. This poses a serious attack to the earlier

mentioned argument (in favour of the patent system) that patents are there to function as

virtual pools of publicly available knowledge.

If however, any deficiencies are indeed located, then the competitor could spend a

great deal of time and money to ‘invent around’29 the earlier specification, therefore, find

another way of doing the exact same thing, which the draftsman of the first specification

simply did not anticipate and thus did not cover in his specification. Though this strategy

is known as an irrational way to allocate scarce resources such as money and time for

research, it must not be overlooked, as it is frequently dictated by the market and

competition needs. I believe that this is another way of acquiring a perfectly valid patent

on a similar or even the same invention already patented, with the sole incentive being

the big money returns, as in these cases clearly no inventive step was taken by the

inventor. The only thing that was procured was not innovation but rather, an expensive

‘patent race’30 to the Patent Office, in the view of big financial returns. Even from a

different point of view, if the language used in a patent is vague and general so to cover

all contingencies, this could subsequently lead to real patents being refused patent

protection as lacking inventiveness. This makes the distinction between making an

invention and succeeding in innovation crucial31. This is understood by the fact that many

inventions that are not in fact real ones, thus offering no further innovation in their

respective field, may be granted patent protection, whereas real inventions which are

really innovative in their field, may be refused reward and subsequent protection, not

because the earlier invention is novel, but because the draftsman of the earlier patent

28Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69 Can. Bar Rev 98., page C 123.29 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 134.30 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 13.31 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 133.

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application is ingenious. This means that a real invention will never reach the public,

therefore, will never succeed in innovation in its respective field. This demonstrates the

huge role of patents in procuring big returns for their holders, rather than fostering

innovation. This should not surprise us as almost three-quarters of the value of the

publicly traded companies in USA comes from intangible assets, which are thought as the

raw materials of intellectual property32. As a confirmation, Alan Greenspan, the chairman

of the America’s Federal Reserve admits that “The economic product of the United

States, has become predominately conceptual”33.

However, unfortunately even if an invention is a real innovative breakthrough

and, therefore, was rightly granted patent protection, this fact under the current market

tendencies, will not necessarily mean that further innovation in the field will be procured.

This means that we must not omit the fact that many recent significant inventions were

only put to circulation, long after they had been discovered34. This could be based on the

ill reasoned motives of greater profits, as the patent holder may wish to wait (by

upholding supplies) until market prices grow to a point where the price that the patent

holder will charge, will cover all the estimated demand and guarantee the biggest possible

returns to him. This is better understood by the fact that in all patent instances the

inventor is the sole supplier of the new good, service, or process35, thus having a

temporary monopoly. In a sense, everybody loves to be a monopolist, and as quite

resoundingly Michele Boldrin and David K. Levine have argued, patents serve only to

reinforce monopoly control and not procure innovation36. But, even if there are genuine

reasons for delaying production, like unpredictable time to arrive to a viable product, or

high costs in persuading distributors to participate, or in setting up new plants; only

because of the fact that the invention is patented, innovation in the field is nevertheless

hindered. Patents may be said that they discourage in this way even the slightest form of

innovation which is ‘follow on’ innovation37. Furthermore, patents may not even be used

32 “The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 3.33 Ibid.34 i.e. long lasting razor blades, Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 133.35 Rent Seeking and Innovation (2003) Michele Boldrin; David K Levine, page 2.36 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 2.37 “The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 23.

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in the field of innovation, but rather be hired by big firms in the course of creating a

‘wall’ of patents around anything that even slightly resembles their product (of course

already patented), so to prevent others from entering the same field of their product. This

tactic is known as ‘defensive patenting’38. I think that it is needless to mention that these

efforts, not only they do not procure innovation, but instead they stifle it, especially the

innovation coming from small or even middle-sized companies. Many also suggest that

the role of the patent system in procuring innovation is constantly changing39. Many do

not see any more patents as a tool enabling the transfer of knowledge and fostering

innovation. This is taken to mean, that patents are changing in order to create a market of

their own, providing, thus liquidity for innovation and not fostering innovation40. These

theories have already started being confirmed by voracious ventures like the company of

Mr. Nathan Myhrvold, called ‘Intellectual Ventures’41. The business purpose of this

corporation is totally different to what we are familiar with. Its purpose is to finance

inventors so to keep them inventing and subsequently acquire patents upon these

inventions, with the ultimate scope being of course to licence those innovations to the

world or alternatively pursue their infringers. As Myhrvold himself says, this venture is

for the time being an “experiment” being itself a cross “between a venture capital fund, a

law firm and a Research and Development laboratory…”42

Even if however, a patent is perfectly valid and represents indeed an innovative

and novel step in its field, I do not think that this on its own is sufficient to render the

whole patent system as one that is protecting the inventors, and stands as an incentive for

them (the inventors) to innovate even further. If we add to this that nowadays we do not

have only one general category of inventors, we get an indication that the inventors of a

patent might not necessarily be the ones reaping off the royalty fees of their patented

inventions43. Let us first consider the fact that in an estimated 90% of granted patents the

38 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 13.39 The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 23.40 The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 23.41 The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 12.42 Ibid.43 So if they are not benefited from the patent (how could it potentially stimulate them) why should they pursue it.

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inventor is employed44. That subsequently means that the inventor has been employed to

make the invention, but the resulting patent will belong to his employer. So, on the one

hand we have the employed inventor who will invent because he is required to do so, and

on the other hand we have an independent inventor (a self-employed inventor) who more

often will invent in order to solve a problem of his own rather than to get a patent on his

invention45. Though at first, in both cases we see that the patent system is not playing

such a great role in procuring those two kinds of inventors to innovate, let us consider

these two cases separately.

I think that in the case of employed inventors what is of vital importance to

consider is the British Legislation itself. In strict terms, the 1977 Patents Act can be seen

as a scheme, which recognises that the patent system per se has none or little incentive

upon the actual inventor (employed at least) himself46. It is more or less a project that

among other things it attempts to give greater financial compensation to employed

inventors. This is an implied recognition that the patent system itself has failed to do so,

and it, therefore, needs to be supplemented by statute law. If this is taken to be true, it

constitutes also a serious strike to the argument in favour of the patent system, that

patents are also needed in promoting greater dissemination of knowledge47. This is so, as

a potential patent monopoly would be the excellent incentive for the employer of the

inventor to innovate or disclose information but surely not for the inventor himself. The

employed inventor by being a hired entity will in any case be paid. Even if someone

wanted to show good faith and believe that the patent system is still procuring innovation,

then, why would the 1977 Patent Statute try to provide further incentives to innovate to

the employed inventors under sections 39 to 43?48 The fact that these articles try to

promote the position of the employed inventor in the patent field, demonstrates a

weakness of the current patent system to promote innovation, rather than a British

breakthrough in the area, which attempts to increase the protection of the employed

inventors. This is because these principles were already implemented by the Swedish and

44 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-A.45 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-B.46 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-C.47 Ibid.48 The Patents Act 1977, sections 39 – 43, Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “ , 7th edition, Oxford University Press, New York, 2004, page 439.

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West German legal systems many years ago49. As a matter of fact these principles in

terms of the notions they represent are easily comprehensible and very welcome.

However, through the way they were incorporated into statute they became rather

complex and lost much of their incentive power50. For instance, in order for an employed

inventor to succeed in a compensation action against his employer under section 40(1) of

the PA 197751, he must be in a position to prove that his employer received or is expected

to receive an ‘outstanding benefit’, through the patent on the inventor’s invention. This

poses as a practically impossible burden to establish, as there is no clear definition of

what is meant by the term ‘outstanding benefit’. It certainly does not mean substantive or

just some kind of benefit, it has to be great, outstanding, something that on its own makes

the whole process very difficult. In addition we must also think of the difficulty that an

inventor will face if he tries to gain access to the financial books of the company, as these

are not publicized. And even in the rare instance where a company publicizes its financial

records, it does not do so in an analytical manner for the inventor to find out the exact

benefit accrued solely by his invention52. Something that also needs special attention in

this area is the fact that even if compensation is decided to be granted to the inventor, the

specific amount of the compensation will depend on non-commercial criteria53 such as

the difficulty of coming up with such an invention, or the peculiarities of it or even

whether the inventor received any outside help in carrying out is job54. But, even the

actual statute clause determining the exact amount of the compensation given to the

inventor, is itself vague, requiring only that a ‘fair share’ should be given to him, without

at the same time defining what a ‘fair share’ should be55. Nevertheless, the requirement of

section 40(1) of the ‘outstanding benefit’, constitutes an almost impossible burden to

shoulder as it is also evidenced by the case law and the cases of GEC Avionics Ltd’s

49 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-C.50 Ibid.51 Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “ , 7th edition, Oxford University Press, New York, 2004, page 439.52 In order to calculate whether it is ‘outstanding’ or not.53 Patents Act 1977, section 41(4)(b).54 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-C.55 section 41(1) Patents Act 1977, Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “, page 439.

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Patent56; British Steel plc’s Patent57 and Memco-Med Lts’s Patent58. Therefore, it is sadly

observed that the current patent system also supplemented by the Patents Act 1977 still

have very little incentive impact upon employed inventors. This is further supported by

the respective statistical evidence in the area, which shows that eight years after the

implementation of the Patents Act, in 1986, only five claims were lodged with the

Comptroller out of which none was successful59. Even more recently now, in 1998, the

employed inventors seem to have understood the futility of these provisions as absolutely

no claim was lodged this year with the Comptroller60. So, sadly, it is observed that the

Patents Act 1977 and the patent system as a whole seem not to procure innovation in the

area of employed inventors.

The fact that, as seen above, the patent system is potentially diminishing the

incentives for employed inventors should not necessarily be taken to mean that it fosters

self-employed inventors to innovate. Despite the fact that in these cases we do not

observe an employer exploiting the rights of the inventor, or receiving the returns of the

patent, in due course other difficulties evolve. We must not omit at this point one very

important practical disadvantage of the patent system; it is very expensive and

specialised. The costs of obtaining a patent are very high. Additionally, all expertise

agents helping in the drafting of the Patent Application and in the subsequent grant of the

patent itself, would want to get paid independently of whether the application is

successful or not. The use of such agents, like a patent attorney, or the Patent Office, or

any commercial and industrial advisers, or even the makers of the prototype, is

unavoidable and regrettably very expensive61. Furthermore, even if the patent application

itself is successful (and the patent is granted), all the aforementioned agents will have to

get paid, well before the inventor gets the first monetary returns from his invention. This

could well be a connotation that a patent by itself is not necessarily profitably exploitable,

at least for the near future62. This probably shows that also in the case of the self-

employed inventors, the grant of a patent itself is not the crucial element in procuring

56 GEC Avionics Ltd’s Patent[1992] RPC 107.57 British Steel plc’s Patent [1992] RPC 117.58 Memco-Med Ltd’s Patent [1992] RPC 403.59 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-C.60 Ibid.61 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-A.62 Ibid.

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innovation. As mentioned above, many people together with some psychologist scholars

believe that when people innovate, in most cases they do so in order to solve a problem of

theirs63. This means that even if an average person is sufficiently educated and acquainted

up to a certain extent with the ‘prior art’64 in a technological field, any potential unsolved

problems in this area will be the ones that will lead him to innovate and not the patent

system per se65. This notion is also more closely related to the public image of an inventor

which is believed to be eccentric and not motivated by financial factors66. So finally all

these in conjunction with the fact that nowadays the greatest proportion of inventors is

employed67, make us see that perhaps the patent system on itself does not stand as

sufficient incentive for the inventor to innovate. This is further supplemented by

historical records showing that small scale organisations and independent inventors, both

being of outstanding quality, produce a gravely disproportionate number of useful

inventions when compared to their corporate size and their capital value68. That is to say,

that though they are small in financial terms, as they are not the ones granted the majority

of the patents, they nonetheless keep innovating. This is one more example, which

separates the patent system from the corresponding fostering of innovation. It is not

anymore considered as a given that the patent system will necessarily produce the

“optimal degree of investment in research and development and innovation”.69

4 Innovation without a patent system?

63 The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’, page C85-B.64 Part of the requirement of novelty of a patent section 2, 1977 Patents Act.65 Ibid.66 Ibid.67 Mentioned above, on page 14. (90% of inventors being employed).68 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 132.69 Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003, page 132.

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I think that progressively we come to realise that the principle noticed and

challenged by Boldrin, stating that innovation will not happen unless innovators receive

monopoly rights, is beginning to have many flaws70. In their book “Perfectly Competitive

Innovation”, Boldrin and Levine, argue that the patent system is totally unnecessary and

unrelated with the fostering of innovation71, and as none of them is an empiricist they try

to bring the relevant evidence so to make their point. They more or less argue about a

flourishing innovation system under the auspices of healthy competition, where the

monopoly rights of the patent system play no role. However, one must not think of the

patent role as totally obsolete in procuring innovation, as there are many suggestions that

both competition and patents, when both are kept on a proper balance can foster

innovation72. But even if indeed the patent system is actually somewhere needed in the

whole process of innovation, we cannot help noticing that historically people have been

inventing and innovating without any patent protection73. Many of the most important and

major inventions, like penicillin by Alexander Fleming or the vaccine against Polio by

Dr. Jonas Salk in 1954, were brought around without a patent system The fashion world

at this point should stand as a more contemporary example of a financial sector

innovating without the use of the patent system74. It is an area that is highly competitive

and staggeringly innovating, with its designs being largely unprotected by the patent

system, but only through the commercial use of Trade Marks. Even the software industry,

though it has always attracted some patent protection in many countries like for instance

the USA, it has traditionally had a very weak patent protection and sustained major

imitation of their products, but it nevertheless remained an industry, which was

consecutively innovating. It is worth mentioning at this point that after some major US

Court decisions in the 1980s which strengthened patent protection for software, the

respective innovation in the field fell sharply75. On the other hand, the fact that

pharmaceutical companies make huge profits from the patents they obtain and they

subsequently invest huge amounts of money in research, may be misleading and not

70 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 7.71 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 6.72 To Promote Innovation: “The Proper Balance of Competition and Patent Law and Policy”, a Report by the Federal Trade Commission, FEDERAL TRADE COMMISSION, October 2003, page 4.73 Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 5.74 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 6.75 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 7.

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necessarily a positive sign that patents foster innovation. We must not omit the fact that a

big proportion of the capitals that are used in pharmaceutical research (like the ones used

for the anti AIDS drug, ‘AZT’) are coming from public funds. If this is taken into account

it could potentially show a waste of money coming from patent fees, rather than using

this money in fostering innovation. But, even if the situation is not like this and indeed all

the money deriving from the use of patents is invested in innovation, this can hardly be

the sole incentive for such expensive and speculative projects, as almost all companies

know that only rare and exceptional inventions like the anti-impotence drug Viagra will

fully pay off76. Additionally, even under these circumstances there are theories arguing

that if only the invention was the first to enter the market, the returns would, nonetheless,

still be the same as if they had come under a patent77.

5 Conclusion.

Boldrin and Levine have also successfully argued that the financial securities

industry is also a prime example of a sector making millions, by developing and selling

76 Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford University Press, New York, 2005, page 26.77 Ibid.

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complex securities and options, staying at the same time outside the ambit of the patent

system. However, recently, this has begun to change, since patents have expanded to

include ‘business practices’ together with the financial securities. In their book,

“Perfectly Competitive Innovation”, they resent this expansion to a great extent, since

they believe that this policy change was totally contrary to overwhelming evidence by

Tofuno in 1989, demonstrating that the financial industry was positively and enormously

innovating under a competitive environment78. What they further argue and can be of

vital importance to this dissertation is that, though ideas in a pure sense can be shared

freely and be non-rivalrous in consumption, the economic application of these ideas is

totally different and inherently rivalrous79. As an example they say that Calculus is

economically valuable as long as the engineers and the economists comprehend it and

know how to apply it80. As they suggest, if an economic idea is put into a competitive

environment then it can subsequently decrease the huge costs of replication of the

original product (under a patent system) and mitigate, therefore, the difference between

development and replication. In general lines it remains nevertheless very difficult to

assess and measure the effects of a particular patent system, since inventions are not

made and subsequently introduced always at an optimal rate81. Therefore, they accept that

the development of the initial prototype is always far more costly than the production of

all subsequent copies82. However, what they suggest is that competition through

imitation, though it will not generate totally free goods, it will nevertheless lower the

prices considerably (with the prototype always remaining more valuable than all the

others83. I believe that what these two scholars mean and is also central to this

dissertation, is that giving an inventor monopoly rights under a patent system, is not

necessarily the sole way of promoting innovation. The two scholars suggest that through

competition even the inventor can make his fortune, despite the fact that no patent is

involved. This could simply be done, by selling the first copies of his innovation at

78 Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine, page 6.79 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 8.80 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 8.81 The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005, “A Market for Ideas”, issue, October 22nd – 28th 2005, page 4.82 Ibid.83 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 9.

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Antonios Pantazis Intellectual Property Law Dissertation

substantially higher prices84. In due course competition and free copying of the product

will lower these prices and bring a balance, making at the same time the products much

more affordable for the consumers. Even Romer, a critic of Boldrin and Levine, and a

Professor in the University of Rochester85, admits that the current property rights for

intellectual goods86are potentially too strong. He says that even music file sharing though

hurting the music industry and being at odds with the intellectual property regime, can

nevertheless increase social welfare87. However, he also brings into light potential

deficiencies of this competitive innovation, as since everyone who buys the product will

subsequently be able to copy it, why would people keep buying it at such high prices.

This will deprive the product of being sold at very high prices even in the beginning of its

circulation88. This can be effected if the time between the making of the invention and the

beginning of copying the invention is not as big as Boldrin suggests, but is rather small, a

remark put forward by Solow89. Romer further supports that though what Boldrin and

Levine suggest can be correct in mathematical terms, it is not practicable however,

especially in the pharmaceutical industry90. Finally about the argument of Boldrin and

Levine stating that downstream use should be allowed, Romer responds that even if

something like that is not restricted under a patent or copyright regime, it can still be

excluded, thus restricted, under a contract between the seller and the buyer in a

competitive environment. As a final point, we should bear in mind that though Boldrin

and Levine’s competitive innovation system has many critics and potentially many flaws,

none of them (the critics) has contested their theory, which is believed to be correct. The

only concerns are about the applicability of such a model for innovation, as Lucas of the

University of Chicago91 suggests. It is not a theory that is always applicable. In

concluding, I think that we have come to realise that the patent system is not fostering

innovation so smoothly anymore. Even if a competition model is not necessarily the right

one in procuring innovation, we must realise that as long as one wants to remedy the

84 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15.85 Where he was a former teacher of Boldrin.86 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 14.87 Ibid.88 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15.89 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 16.90 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 15.91 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 16.

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deficiencies of the patent system in the sector of innovation alternatives always exist.

These can be very simple things like the government promoting the technology

education92, to more demanding ventures like prizes. We have to mention here that some

years ago the World Health Organisation together with the World Bank, used monetary

prizes, in order to strengthen the innovation of vaccines that otherwise would not have

been developed or distributed widely enough93. Developments like these undoubtedly

foster the economic interest in the use of prizes as incentives for innovation. Prizes are

pre-set amounts of moneys, posing as a reward for a specific task. Whoever accomplishes

this task first, thus coming up with the invention asked, wins this money. We must not

overlook the fact that historically the prizes that have to do with Research and

Development, “R&D grant prizes”, have led to many well known inventions like the

prize offered in 1714 by the British Government, for the design of an accurate method of

measuring longitude, with the top prize going to John Harrison for his chronometer94.

I hope that the last parts of this dissertation have helped us understand some

weaknesses of the patent system in procuring innovation, and at the same time have

shown us that workable alternatives do exist, raising hope for the remedying of the

aforementioned deficiencies and the strengthening of the innovation sector.

B I B L I O G R A P H Y

92 Creation Myths: Does innovation require intellectual property rights? (2003) Douglas Clement, page 14.93 http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf, accesed on 28 February 2006.94 Ibid.

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Antonios Pantazis Intellectual Property Law Dissertation

Articles:

Creation Myths: Does innovation require intellectual property rights? (2003) Douglas

Clement.

Factor Saving Innovation (2001) Michele Boldrin; David K Levine.

Factor Saving Innovation 105 J. Economic Theory 18-41 (2002) Michele Boldrin; David K Levine.

“How effective are Prizes as incentives to Innovation? Evidence from three 20th Century

contests”, Davis, L., Department of Industrial Economics and Strategy, Copenhagen

Business School, 7 May, 2004.

- Also on: http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf,

accessed on 28 February 2006.

Patents and Innovation: “Trends and Policy Challenges”, Organisation for Economic Co-

operation and Development (OECD), 2004 Report.

Perfectly Competitive Innovation, (2003) Michele Boldrin; David K Levine.

“Promoting innovation through patents”, Green Paper on the Community patent and the

patent system in Europe (presented by the Commission).

Rent Seeking and Innovation (2003) Michele Boldrin; David K Levine.

The Case Against Intellectual Property, The Theory of Innovation without Intellectual

Monopoly The Case Against Intellectual Monopoly, Chapter 2 (2003) Michele Boldrin; David K Levine.

“The Economist Magazine”, A survey for Patents and Technology, October 22nd, 2005,

“A Market for Ideas”, issue, October 22nd – 28th 2005.

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Antonios Pantazis Intellectual Property Law Dissertation

“The Guardian Newspaper”, an article by Brown A., “Owning ideas. The boom in the

intellectual property market will not reap rewards for all of us”, Saturday, 19th November

2005, http://www.guardian.co.uk/comment/story/0,3604,1646125,00.html.

The Value of Innovation: The Interaction of Competition, Research & Development and

Intellectual Property OIPRC (2004) Christine Greenhalgh; Mark Rogers.

To Promote Innovation: “The Proper Balance of Competition and Patent Law and

Policy”, a Report by the Federal Trade Commission, FEDERAL TRADE

COMMISSION, October 2003.

Books:

Christie A. and Gare S., “ Blackstone’s Statutes on Intellectual Property “ , 7th edition,

Oxford University Press, New York, 2004.

Cornish W. and Llewelyn, D., “Intellectual Property: Patents, Copyright, Trademarks

and Allied Rights”, Fifth edition, Sweet and Maxwell, London, 2003.

Davis J., “Intellectual Property Law ” , Core Text Series, Second edition, Oxford

University Press, New York, 2005.

Plant A. “Selected economic essays and addresses”, second edition (first published in

1934), Routledge & Keagan Paul, for the Institute of Economic Affairs, London, 1974.

Story A., “Cases and Materials Pack”, edited by Alan Story, Volume 2:

- “Intellectual Property Today: Of Myths and Paradoxes”, Vaver, D. (1990)69

Can. Bar Rev 98. (pages C116-C126)

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Antonios Pantazis Intellectual Property Law Dissertation

- The patent and legal policy”, Chapter 9 ‘The patent as an incentive to invent’.

(pages C85A-C85F)

Website:

http://webbusiness.cio.com/archive/021400_patent_content.html?printversion=yes,

January 20, 2006.

http://www.druid.dk/conferences/summer2004/papers/ds2004-114.pdf, February 28 2006

http://www.eco.utexas.edu/Homepages/Faculty/Norman/long/DII.html ,February 28 2006

http://www.timesonline.co.uk/article/0,,923-2056103,00.html, February 28, 2006

http://aoi.cordis.lu/article.cfm?article=1503, February 28, 2006

http://www.patenthawk.com/blog/archives/2005/04/patent_economic_2.html,February

28, 2006.

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