Innovation Policy

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United States Patent and Trademark Office

The United States Patent and Trademark Office (USPTO) is the organization within the United States government that reviews and grants patents and trademarks. Established under the Department of Commerce on July 19, 1952[1] by 35 U.S.C. §1[2], the USPTO is intended to fulfill the mandate in Article I, Section 8, Clause 8 of the United States Constitution "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."[3]. Since 1790, the USPTO has issued more than 6.5 million patents[4]. The agency's main offices reside in Alexandria, Virginia, with several satellite offices around the country.

Federal Trade Commission

Current Issues Facing the Patent System

Summary

The number of patent applications sent to the USPTO has continued to increase over the years. Although innovation has not slowed, critics of the patent system point to numerous flaws in the patent system and demand stricter reform. Generalized criticisms include patents slowing down or even preventing the government from enacting necessary policy reform and the creation of impractical or pointless patents which result in expensive litigation [5]. More specifically, The USPTO continues to grant patents without the necessary time or resources to search all relevant references. As of January 2016, the current patent backlog is 561,585 (USPTO), leading to more cases being referred to lower, random courts. These courts increase the cost of processing a patent application and rely on juries without technical or procedural expertise to decide whether high level technology or processes satisfy the requirements for protection [6]. Additionally, critics believe that the amount of patent litigation and patent infringement claimed has created a "disastrous environment for innovation." (Wired) Litigation and lawsuits result in a significant decrease in product development as proven in 2015 as Google and Apple invested more in supporting patent purchases and litigation than in R&D.(NYT-PW) The biotechnology industry as a whole provides new ethical challenges to the patent system and introduces new competitive threats such as me-too drugs. Me-too drugs are approved after a pioneering drug and function as substitutes (WHO).

The primary complaints on the patent system are about patent pools and patent trolls. The Prize System has been suggested as a viable solution, though it carries its own set of risks.

Patent Pools

Patent pools are agreements between "two or more patent owners to license one or more of their patents to one another or to third parties." (WIPO) Generally, patent pools cover mature and complex technologies that require complementary patents to develop compatible products and services. (WIPO). More recently, the Department of Justice (DOJ) has taken steps to standardize patent pools in order to prevent violations of antitrust laws. The DOJ finds patent pools with the following characteristics permissible:

  1. Essential patents included only.
  2. Complementary patents included only.
  3. Sensitive information may not be shared amongst parties.
  4. Substitute products may still be developed by parties included in the licensing agreement.
  5. Patent pool has an established expiration date.
  6. Pricing in downstream production cannot be affected by or discussed by members of the patent pool. [7].

Benefits

Efficiency: The creation of patent pools mainly benefits the owners of complementary or essential patents. Complementary patents cover multiple technologies protected by separate patents required for the development of a specific new product, and therefore, necessitate shared licensing (WIPO). Cross-licensing between companies in a patent pool facilitates building upon previous technologies and increases the efficiency of innovation by organizing complementary intellectual property assets under one contract (WIPO). Mutually blocking patents often slow technological developments as neither party can make use of its technology without infringing on the other party's patent. By forming a patent pool, both parties can develop substitute technologies.

Cost Reduction: Companies can also reduce the amount spent on litigation by settling disputes with the creation of patent pools. This would benefit small- and medium-sized businesses that usually cannot afford the costs of expensive litigation. (WIPO) Transaction costs as well as royalties can also be lowered in a patent pool.

Risks

Elimination of Competition: Opponents criticize patent pools for the potential of anti-competitive behavior and collusion, primarily with regards to substitute patents. Substitute patents cover competing technologies that can be developed in parallel without risk of infringement [8]. Patent pools formed between entities holding substitute patents eliminate competition in that particular technological sector, reinforcing the parallels drawn between patent pools and cartels (WIPO). Patent pools potentially create a way for companies to share competitively sensitive information, such as pricing, marketing strategies, or R&D information among its members." (WIPO) For example, R&D information and developments could be shared in grant-back provisions, a requirement that companies share new or downstream technologies and innovations with members of the pool without additional fees.

Licensing Practices: If a patent pool restricts its members from licensing its patents independently, it lowers the incentive to produce alternatives and inflates the costs of goods or technology for consumers. The Department of Justice and Federal Trade Commission state that restrictions on licensing may create "a barrier to entry if existing relationships make it harder for 'new firms to come in and overcome the patent thicket'." (DOJ)

Pricing: Given agreements between patent holders to reduce royalties, there may be collusion to fix higher prices for consumers. Technology may become inaccessible to a large number of consumers, hurting the overall public good.

Patent Trolls

Patent Trolls are an innovation bogeymen, with numerous research articles and legislation addressing ways to curb troll activity. Patent Trolls, also known as Patent Assertion Entities (PAEs), generate revenue through suing or threatening to sue businesses that infringe on patents. Experts dispute terms for such corporations, labeling them as either Patent Assertion Entities (PAEs) or Non-Practicing Entities (NPEs). There is no widely agreed upon definition of 'Patent Troll', because it is often used interchangeably with the terms Patent Assertion Entities and Non-Practicing Entities, whereas we make a distinction between these three terms. For our study, we define Patent Trolls as a 'person or entity that attempts to enforce patent rights against supposed infringement far beyond the patent's actual value'[9]. Their asked damages are far beyond the market value of the patent. This is a tactic used to scare small businesses in the initial demand letter, when pressing them to pay the fee to license the patent.

Prize System for Inventions

The current patent system allows companies to file for the right to exclude if they have a novel, non-obvious invention. The right to exclude creates a temporary monopoly for a certain product, which leads to higher product costs for the consumer. One example of a patent leading to exorbitantly high prices would be Daraprim, a drug produced by Turing Pharmaceuticals. Martin Shkreli, the CEO of Turing Pharmaceuticals, led the charge to increase the price of Daraprim from $13.50 to $750 per pill. (BBC)

Critics of the current patent system also believe it does not incentivize enough research and development for drugs that benefit society as a whole. (Economic Times)

Because of such abuses of patent protections, economists and legislators have advocated for a prize system (see Medical Innovation Prize Fund Act) instead of a patent system for pharmaceutical drugs. (Washington Post) Under this system, companies that invent a new drug will receive a lump sum prize. The rights to the drug will then be placed in the public domain, creating generic drugs. The biggest benefit of a prize system is the ability to target research towards a specific problem. With prize money as the incentive, research companies are more likely to devote time and resources towards the identified issue. In addition, the prize system lowers barriers to entry; nontraditional parties are encouraged to participate.

Although the prize system idea sounds promising for individuals requiring medication without high reservation price, the issue of sustained government funding for such endeavors hurts this proposal. Private investors, such as the Bill and Melinda Gates Foundation, offer similar prize systems for pharmaceuticals discoveries. However, if private investment has proven to be effective, why does the government need to intervene?

Legislators have proposed bills that provide for prize systems for a small class of drugs (see Prize Fund for HIV/AIDS Act).

Prize systems could take many different forms:

  1. Opt-in systems where the government pays at least the monopoly profits that the patent holder would expect to receive
  2. System where patents are exchanged for compensation through an auction
  3. Offer cash subsidy to consumers who value the patented product more than the marginal cost but cannot afford the patented product at a monopoly price

Problems & Considerations Surrounding the Prize System

No one knows the economic effects of prize systems; there is lack of empirical evidence supporting the benefits of a prize system over a patent system. There are several factors that need to be considered in creating a prize system (BU):

Valuation Problems What is the criteria for awarding a prize and how much prize money is each innovative drug worth? This is one of the biggest problems in establishing a prize system. Prize payments that are too low won’t provide enough incentive, while payments that are too high may incur resource duplication costs. The prize payment amount also has to be individually tailored to the benefit of the drug. People suggest the value of the payment be dependent on the ‘social value’ of a drug, but how is that social value determined? Will a distinction be made between medically necessary drug inventions and lifestyle improvement drugs (e.g. acne medication)?

Timing of Prize Payments The timing of the prize payment has to be timed well; if awarded too early other companies may not be incentivized to produce a drug that would’ve been higher quality than the drug that won the prize. After the prize is awarded, incentive to commercialize the drug is reduced since there is no patent system. One potential solution is to defer prize payment until there has been a certain degree of commercialization.

Administrative Problems The MIPF creates a board of trustees that has the responsibility of awarding prize payments. Though the board of 13 members is designed to be unbiased, it is unlikely that they will not be subject to political and external pressures, leading to a distorted allocation of resources.

A negative aspect of the patent system is the controversy and dispute that follows patent distribution of benefits. We can expect that there will also be challengers regarding the recipient of prize payments, thus the prize system has to specify how to resolve disputes, and also develop a thorough screening mechanism to confirm the reported benefits of the invented drug.

Patent Reform

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