Patents trigger rent-seeking behavior --- stifles small innovators

What lead the US Patent Office to interpret, essentially, the words “not obvious” as meaning “obvious”? The Patent Office is constantly under pressure from applicants and their lawyers to be more generous in issuing patents—that is, to adopt lower standards of obviousness and steeper standards for what is considered “prior art.” The following statement by David Kappos (2010), director of the US Patent Office concerning the allowance rate—what fraction of patents are accepted—is revealing: “Overall in FY 2010, the allowance rate increased to 45.6%, compared to an allowance rate of 41.3% in FY 2009 . . . So, while we still have a lot of work to do, I think we are on the right path.” Apparently, accepting a higher fraction of patents applications is defined as “the right path.” Talk about “regulatory capture”!

Patent lawyers play a large role in the political economy of patents. According to Quinn (2011), who is a patent attorney, legal fees for filing a patent run upwards of $7,000 and roughly half are rejected. In 2010, according to the US Patent Office, 244,341 patents were issued, which would imply roughly $3 billion in legal fees per year. Obviously, patent attorneys as a group have a tremendous incentive to see that more patents are issued. This insight helps us understand better the role of the courts and their relatively recent reform. In 1982—lobbied by patent lawyers— Congress passed the Federal Courts Improvement Act, which moved federal patent appeals out of the regular court system to a special court system for dealing with patents. Naturally, many of the judges for this new court were chosen from the ranks of patent attorneys. For example, when a court voted, in a 1994 decision, to expand the scope of patents to software (In re Kuriappan P. Alappat, Edward E. Averill and James G. Larsen 33 F.3d 1526 [ July 29, 1994]), of the six judges who voted in favor, half had previously been patent attorneys, while of the two that voted against, neither had been. The referee of the patent game is biased both materially and ideologically. As Landes and Posner (2004, p. 26) write in their discussion of the political economy of patents: “That has been the experience with the Federal Circuit; it has defined its mission as promoting technological progress by enlarging patent rights.”

Notice, too, that many patent lawsuits have a public goods aspect. Consider a case in which the plaintiff is asserting that its patent has been infringed. If the plaintiff wins the lawsuit, by confirming its monopoly position it appropriates all the benefits of winning the lawsuit. A victory by the defendant, by contrast, benefits partly itself, but also other firms that might be sued by the plaintiff for patent infringement as well as consumers who would have a more competitive market. Thus, the defendant receives only a slice of the overall benefits from winning the lawsuit, and will be willing to spend less on such lawsuits than it would if it were to receive all the benefits. This dynamic is nothing but the patent court version of the (already noted) fundamental asymmetry in the distribution of economic incentives that defines the foundations of the political economy of patent law.

Finally, political economy can be influenced by how standard terminology frames a problem. Landes and Posner (2004) point out that there is an “ideological” argument in support of stronger patent rights: supporters of free markets tend to favor institutions of private property, and patents and copyright are intellectual “property.” Hence, strengthening them is ideologically and politically consistent with the general principle that “private property is good for growth.” But as we (Boldrin and Levine 2008b) and many others elsewhere have argued, patents are just a monopoly, not property.

Given this set of players and their incentives, the patent game moves naturally towards its equilibrium, as we have observed over time. Two centuries or so ago, patents were restricted in their areas of applicability and limited in both depth and duration over time; they were somewhat “reasonable,” to the extent social gains and costs seemed balanced. But we have witnessed a steady process of enlargement and strengthening of patent laws. At each stage, the main driving force was the rent-seeking efforts of large, cash-rich companies unable to keep up with new and creative competitors. Patent lawyers, patent officials, and wannabe patent trolls usually acted as foot soldiers. While this political economy process is pretty straightforward in broad terms, we are still missing an empirical, quantitative analysis of the stakes involved and of the gains and losses accruing to both the active players and to the rest of society, from the general public to the innovators that never emerged due to preexisting patent barriers.

Perhaps surprisingly, despite the key importance of political economy in understanding why we have the patent system we have, economists have had relatively little to say on the subject. The few prominent papers that we know of on this subject typically build from analyses very similar to what we have presented here—but then shy away from drawing the logical conclusions.

For example, Landes and Posner (2004) recognize that patent laws are mostly designed by interest groups keen to increase their monopoly rents, not aggregate welfare, and that this drove the enormous growth in patent legislation and judiciary activity during the last 30 years. The more elaborate writing by Scherer (2009) on “The Political Economy of Patent Policy Reform in the United States” follows a similar approach. It focuses on the fact that “government emphasis on patent systems increased” while academic research was starting to become more and more aware that patents are playing a minor positive role, if any at all, in creating incentives for high R&D and in fostering productivity growth. After providing a concise and very well-informed historical survey of all major changes in US patent policies over the last century or so, Scherer (p. 195) wonders why the political system would increase patent protection so much in light of the fact “that the record of debates on the enabling bill contains no solid evidence that the change would in fact stimulate R&D, and that there is no evidence of an acceleration in company-financed R&D between the 27 years before the bill was enacted and the 18 years thereafter.” He then extends the same argument to the international arena, paying particular attention to the case of pharmaceutical patents. While Scherer’s language and arguments are strongly critical of current trends in patents, he does not seek to explain why an institution, such as the patent system, that was supposed to be theoretically sound would degenerate into something so socially damaging over same 30-year period that academic researchers were realizing the institution’s limitations and potential dangerousness.

In our view, even insightful writers such as Landes and Posner (2004) and Scherer (2009) seem unable to shake themselves free of the belief that patents are essential in fostering innovation and that any problems can be fixed with some tweaks to the patent system; they fail to seriously consider the possibility of intrinsic problems with the design of the institution itself. This belief in patents flies in the face of the structural realities: Marginal extensions of patents result in substantially higher per capita rents for the few holders of the right while marginally reducing the individual welfare of the much larger number of nonpatent holders. The rent of the monopolist is a lot higher than an individual consumer’s deadweight loss, so the monopolist has an incentive to perpetuate the system while the individual consumer has no incentive to fight it. Those who possess a patent do not hold a “property right” in the conventional sense of that term, but they do hold a socially granted “monopoly” right, and will tend to leverage whatever initial rents their monopoly provides in order to increase their monopoly power until all potential rents are extracted (and, in all likelihood, also largely dissipated by the associated lobbying and transaction costs). This scenario helps explain how patents interact with the industry lifecycle — why patents are either ignored or scarcely used in new and competitive industries, while being highly valued and overused in mature and highly concentrated ones.