Patent Reform

About

Patent reform has recently emerged as an important issue in the small business space.The current patent system in the United States is facing a fair amount criticism on multiple fronts. Skeptics have argued that the current system is broken as it allows the presence of entities called 'patent trolls'. Trolls manipulate small businesses and extort money through patent litigation. Metrics regarding the prevalence of patent trolls are unclear. Several important pieces of legislation have been proposed to combat these reported patent trolls, as well as a "Prize System for Invention", which rewards innovative companies with monetary prizes instead of patents.

Problems with Current Patent System

• Many patents are approved because United States Patent and Trademark Office examiners don’t have time or resources to search all the relevant references
  • The current patent backlog, as of January 2016, is 561,585. (USPTO)
  • Total Pendency, time between patent filing and patent action, is 26.1 months, as of January 2016. (USPTO)
    • Total Pendency goal time is 20 months by FY2019. (USPTO)
• “The past three decades of wanton patent-granting have created a disastrous environment for innovation. Today it’s practically impossible to build anything without violating a patent of some kind—and risking a multimillion-dollar lawsuit for your troubles.” (Wired)
• Technology industry has too many overly broad patents, leading to incredibly silly patent litigation cases
  • Amazon “owns” the process that allows people to buy things with a single click.
  • Apple now claims the exclusive right to sell rounded-edged, rectangular-shaped communication devices on which icons are arranged in a grid with a row of persistent icons at the bottom
  • A small company in Tyler, Texas, once demanded more than $600 million from Google because of the design of the borders around its display ads.
• ‘’’Patent Trolls’’’ are nonpracticing entities that don’t make products but exist solely on the revenue of its patents
  • Costs a few thousand dollars to secure a patent, which can bring in millions through litigation
  • It is usually more expensive to win a case against a troll than to just settle
• Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings. (NYT-PW)
• Me-too drugs: a drug that is approved after a pioneering drug and is the 'same'; it is not clinically superior to the original drug (WHO)

Current Reform

Legislation

• Innovation Act
• PATENT Act
• TROL Act
• STRONG Patents Act
• Demand Letter Transparency Act
• Innovation Protection Act

Legislation Considered in Previous Congressional Sessions

• Leahy Smith America Invents Act
• Prize Fund for HIV/AIDS Act
• Medical Innovation Prize Fund Act
• The Shield Act
• Patent Fee Integrity Act

Drafts of Future Legislation

• Innovation Promotion Act

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 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) Patent pools are useful when new products are based on multiple existing patents or on one invention with patents on many of its components. (GIPC)

Benefits

Ideally, companies are able to reduce costs during product development by using patent pools to share intellectual property assets. Patent pools would be able to increase efficiency and positively affect competition and innovation. (WIPO) In a situation in which two companies own different IP assets that are not enough to create specific products, these companies would be blocking each other's patents and preventing the introduction of an innovative product or service to the market. Patent pools deals with these inefficiencies by organizing complementary IP assets under one contract. (WIPO)

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)

Risks

Patent pools have many flaws, which may explain why they have been used so infrequently. (GIPC)

Elimination of Competition Opponents criticize patent pools for the potential of anti-competitive behavior and collusion. According to the World Intellectual Property Organization, "a patent pool may be regarded as a cartel." (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)

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)