EDITORIAL NOTE: This is part the final segment of a multi-part series by author Neal Solomon. If you have missed previous installments please see part 1: The Myth of Patent Quality; part 2: Patent Quality Relies on a Fictitious Narrative; part 3: The Problem of Reducing Patentability to Novelty; part 4: The Problem of Obviousness; part 5: The Problem of Inter Partes Review (IPR);and part 6: Solutions for Inter Partes Review. In this installment Solomon discussed the free-rider problem and high asymmetric cost for innovators to re-prove their patent validity in IPR, which impacts patent value.
The anti-patent narrative views patent quality as the major nexus that distinguishes bad patents from good patents. This article has argued that notions of patent quality are fictitious since they rely on patent validity, which has been politicized. Whether because of overcoming the subjective challenge of inventiveness, the overly broad interpretation of obviousness or the deprivation of due process in IPRs, the arena of patent quality has been politically charged, with anti-patent ideologues constructing biased policies to attack the democratization of patents, increase patent examination and review costs and increase patent enforcement costs, while enabling free riding and efficient infringement by big tech incumbents.
In many cases, the challenge of patent quality is reduced to questions of patent validity. However, in other cases, the quality of a patent depends on economic valuation, which is a market phenomenon. After all, if a patent lacks any value in market, why would infringers care about it at all? Only valuable patents that have market impact are directly attacked by incumbents. This observation leads to the revelation that all patent disputes are based, not on patent quality, but on patent valuation. In the main, most patents of high value are considered high quality inventions, with low quality inventions not having value in the market.
While the originality of a patented invention is related to the past, the valuation of a patented invention is related to the potential future of a technology. A future unknown market will determine the value based on market demand and supply dynamics. The key insight of the founding fathers in establishing the intellectual property clause was to embed a private right into a patent as a critical component to induce microeconomic competition. Only if a patented invention was valuable would the market respond by embedding a high value based on a high market demand. This value is inherently unknowable in advance. By limiting the patent term, the monopoly inherent in a patent was constrained, while the patent holder required a long period to wait for a market to develop, particularly if the patented invention was truly novel, since market infrastructure and network effects require a critical threshold of market development. For example, it is not unusual to wait a decade from invention to market development. Competition and economic dynamism is enabled by multiple companies introducing competing patented products that satisfy customer demand.
When patents are attacked for invalidity in the patent office or the courts, only large patent portfolios – that generally cost eight- or nine-digits for R&D and patent prosecution and defense – are valuable. By attacking patents in IPRs, the value of patents is diminished because the risks of patent validity reviews substantially increase transaction costs. This increase in costs tends to have a higher burden for market entrants. Thus, challenging patent quality adversely influences the question of the value of patented technologies and diminishes incumbent patent input prices.
Since patents are the disclosure of original inventions, anyone can use the invention after the patent has been published. In order to protect the ex-ante costs for the inventor, the patent right is critical to enable a return on capital.
Though there is no objective way to determine value of a patented invention, since patent valuation is largely art and science, patent value is determined by market size and growth factors. A high demand invention will be compelling in the market and enjoy a high valuation. Analyses of market size, market growth and market share components are critical to determination of patent valuation. The market value and utility of inventions depend, then, on market evolution, which is typically out of the control of one or more competitors.
In fact, most markets are structured as oligopolies, with only a few competitors with significant market share. As one company originates a market with a pioneer invention, other companies join the original competitor in the emerging market.
Market incumbents have a strong self-interest in attacking patents since it enables them to maximize profits and obtain low patent input prices. In effect, the incumbents are applying game theory in which they designed the rules based on a false narrative largely depending on a fictitious argument about patent quality that enables them to relatively cheaply attack others’ patents while they can efficiently infringe patents in which R&D others have invested heavily. The relentless attack on patents, sometimes benefiting from collusion of multiple infringers attacking the validity of the same patent, enables a free ride by market incumbents. The new rules are clearly aimed to drive up patent costs for innovators and reduce patent costs for incumbents and efficient infringers. These market distortions have the adverse effect of destabilizing the patent system and the economy. The very existence of costly IPRs represents a high asymmetric cost for innovators to re-prove their patent validity, while infringer free-riding is optimized. These facts of dramatically increased transaction costs alter valuation models for patented inventions with a bias towards infringers and away from innovators.
In the short-run anti-patent strategies promote free riding by reducing input prices. However, in the long-run, big tech incumbents are forced to pay much higher for substantial portfolios of re-proved gold-plated patents.
Clearly, then, if patents are easily challenged in the PTO with low standards for patent validity, the consequences of errors in implementation of patent validity standards are to substantially increase inventor transaction costs (thereby turning patents from assets to liabilities), to inhibit investment into technology R&D from risk-averse investors and to fundamentally constrain productivity growth, which both is driven by business investment and depends on technology investment incentives. While the winners of the disintegration of the U.S. patent system are technology multinational corporations and their Chinese manufacturers, that are enabled to infringe with impunity, the losers are capital constrained market entrants and innovative companies.
Ultimately, therefore, the myth of patent quality is a proxy for attacking start-ups and market entrants. The democratization of the American patent system has been marginalized by the introduction of high transaction costs for IPRs and patent enforcement in face of free riding efficient infringers. The politicization of patents is based on the false narrative of big tech incumbents or anti-patent ideologues that have wrongly argued for a wholesale shift of the American patent system.
There was a time not long ago when the patent system was neutral, enabling anyone to participate and providing a level playing field for competition. Those days are gone. Now, big tech corporations attack all patents, claiming that all patents other than their own are invalid and bad quality. The key issue is one of responsibility. The problem for the patent system is that increasingly big tech incumbents prefer dramatically increasing transaction costs for market entrants to bias the playing field rather than to maintain responsibility and fairness. These big tech incumbents blatantly flaunt the law by abusing their economic power because they have manipulated the courts to weaken both patent law and antitrust law. Thus, the weak patent system was engineered by the big tech cartel to ultimately destroy incentives to invent by instituting high transaction costs on market entrants. The anti-patent rhetoric belittles the extreme difficulty of doing the heavy lifting of original research, erodes incentives to invent and burdens those that need patents the most. Big tech incumbents would rather burn down the patent system than be held responsible for infringement.
Congress and the courts need to stop listening to the false narrative of big tech anti-patent critics. Patent quality is simply a code term applied by patent critics to destabilize the patent system. So far, the history of the patent system has revealed the shifting and artificial criteria for patent validity, a proxy for patent quality. The shifting goalposts of changing law on patent standards have enabled the anti-patent critics to undermine a stable patent system. The main objective of the destabilization of patents has been the devaluation of patents of market entrants.
The modern patent system originated in Venice. At first, it worked well. But eventually, a cartel of market incumbents exercised their market power, took over the system by modifying its rules and diminished the effectiveness of the patent system for their self-interest. The effects of these changes were disastrous as technological progress slowed and the economy floundered.
We are seeing a repeat of this market phenomenon in the U.S., with the big tech cartel suggesting falsely that diminished patent quality justifies wholesale changes to the patent system. In fact, the problem clearly lies with the cartel itself, not with the issue of patent quality. In reality, the problem is one of competition, not the patent system.
To download the entire article in one PDF —-> The Myth of Patent Quality (PDF)