Patents cause high prices, deadweight loss, rent seeking, and preclude follow on innovation.

II. Patents in the Context of AI Systems and Pharmaceutical Innovation

A. A Brief Primer on Patent Law

A patent grant entitles inventors to a right to exclude others from making, using, offering for sale, or selling their inventions (or in cases of patented processes, any resulting products) throughout the United States, as well as importing these inventions into the United States, during the term of the related patent.95 The basic principle behind patent law is that patent holders are granted a limited period of exclusion, during which they can restrain competition from using the patented invention.96

According to the Supreme Court, this right of exclusion is compensation for inventors’ “labor, toil, and expense in making the inventions, and reducing the same to practice for the public benefit.”97 The right to exclude is a quid pro quo for the benefit the public derives from the disclosure and availability of inventions.98 Courts have further ruled that the ultimate goal of the patent system is the public use and disclosure of inventions.99

Patent law is a “one-size-fits-all system,” which does not distinguish inventions and associated rights based on technology.100 Patent law also does not address the problem of balancing incentivization against the need for equitable access. In providing incentives for innovation, the existing system does not differentiate between luxury goods and life-saving drugs, effectively prioritizing private over public interest.

B. Evaluating the Costs and Benefits of the Patent System

The most widely cited justification for patent law is that it provides a method for inventors to reap the benefits of their inventions and recoup R&D investments, which in turn encourages innovation and progress.101 The pharmaceutical industry often claims patents are essential for innovation, as they provide a method for compensating costly R&D associated with drug development. 102 However, evidence on how the patent system actually affects innovation is inconclusive.103

Economically, patents offer a bargain between the inventor and the general public.104 The right of exclusion granted to patent holders is aimed at encouraging innovation by preventing imitation by third parties during the patent term.105 In return, patent holders are required to disclose their inventions to the public.106 This is the “classic patent trade-off,”107 a quid pro quo for the benefit the public derives from the disclosure and availability of inventions.108

Patent law aims to advance social welfare by mandating disclosure of inventions to the public, enabling third parties to access the know-how necessary to make and use the inventions.109 Public disclosure of inventions also aims to reduce duplicative R&D efforts and serves as guidance for competitors on deciding where to target their R&D investments.110

Whether these benefits of the patent system justify its social and economic costs has been an issue of much debate.111 One significant cost associated with the patent system is that patents can lead to higher prices.112 The right to exclude competitors from introducing alternative products to the market allows patent holders to charge exorbitant prices.113 In the case of pharmaceuticals, prices mostly exceed what is necessary to recoup R&D investments.114

For instance, a 2019 study of ninety-nine cancer drugs approved by the Food and Drug Administration (FDA) showed that high prices allowed pharmaceutical companies to recoup “maximum possible risk-adjusted cost[s]” of R&D within an average of five years, and that these drugs continued to generate significant revenue thereafter, even following expiration of any exclusivity terms.115 Exorbitant prices restrict access for some potential customers, leading to a misallocation of social resources, or a so-called “deadweight loss.”116 Deadweight loss is particularly concerning in the case of pharmaceuticals, as lack of access poses health risks.117

Another significant cost of the patent system is that it indirectly encourages innovation in larger markets, leading to a misallocation of R&D efforts.118 The current system encourages patent holders to maximize the revenue generated from their patents and does not duly incentivize innovation in areas where there is less market demand.119 In the pharmaceutical industry, this results in redirection of R&D funds away from products that may better serve the needs of society.120

Wasteful rent-seeking is another important cost of the patent system.121 Innovating companies compete with each other, invest heavily, and sometimes waste resources in a “patent race” to become the first to file a patent.122 Rent-seeking within the patent system may result from a race to obtain patents, both during patenting and preceding R&D processes, which may cause competing parties to over-invest.123 In the case of pharmaceuticals, excessive investments arising from patent races translate to higher costs for consumers.124

Lastly, patents limit access to knowledge and inventions.125 The patent system hinders subsequent innovation by restricting access to knowledge, data, materials, and processes necessary for research.126 As the number of patents innovators need to take into account increases, probability of follow-up innovation decreases, indicating that the system set up to incentivize innovation discourages it by imposing additional costs and hurdles to R&D.127