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Thursday, 29 May 2008

"Strategies to Improve Patenting and Enforcement"

The IPKat thanks Nick Cunningham (Wragge) for sending him this report on the recent AIPPI UK talk, "Strategies to Improve Patenting and Enforcement", which was prepared by Shauna Garvey (Bristows).

Right: strategies, once the province of the military, are now a matter of immediate concern for the IP community

Nick writes:

"At an AIPPI UK talk hosted by Bristows, Mark Schankerman, Professor of Economics at the London School of Economics, spoke to a capacity audience on “Strategies to Improve Patenting and Enforcement: the impact of patent thickets, renewal fees and litigation insurance”. Professor Schankerman, a noted and long-standing commentator on the economics of patents, is a Research Director of the Programme on Productivity, Innovation and Intellectual Property Rights at the LSE Centre for Economic Performance, a Research Fellow at CEPR, and a Director at LECG.

The seminar began with an analysis of the rapid increase in the number of patent applications over the past few decades. While this trend might reflect growth in innovation, Professor Schankerman noted concerns that increased patenting could impede rather than incentivise innovative activity. Reasons advanced for this included the creation of patent thickets (where fragmented intellectual property rights require the securing of licence agreements from many patentees, inflating the costs of innovation), a corresponding increase in the cost of enforcing patents, and the problems caused by patent trolls.

Professor Schankerman discussed potential strategies to address these issues, motivated by the basic objectives of maintaining innovation incentives, preserving effective competition among innovators, and using market-based solutions.

Patent screening processes could be divided into two categories: ex ante screening (undertaken by the patent office examiner) and ex post screening. The talk focused on the latter, and in particular on two particular forms of ex post screening, the first being litigation by private parties, and the second, somewhat surprisingly, being the level of renewal fees. Recent econometric research demonstrated that the decision to renew a patent is sensitive to economic considerations, including renewal fees, the size of the market, and the threat of litigation. Professor Schankerman postulated that governments could use renewal fees as an active instrument of patent policy to increase the effectiveness of ex post screening. Raising renewal fees could, for instance help to dramatically reduce the number of patents ascribed a low value by their proprietors, and act to deter patent trolls.

He also reported research that demonstrates patent renewal fees can be used to improve the innovation incentives generated by patent rights. Professor Schankerman set out an analysis of renewal fees as a tax on the property right conferred by a patent, and proposed that the effective tax rate be adjusted to provide socially optimal incentives. His analysis suggests that existing renewal fees impose a highly regressive tax on patents, and suggested that renewal fees should be very substantially increased, especially in later years, to make the effective taxation rate progressive.

The heterogeneity of patent litigation was next discussed. Research suggests that litigation is not randomly distributed across technology areas, and that the fraction of patents litigated across the lifetime of the patent varies in accordance with the characteristics of the patent holder. Individuals and small firm patentees were found to have much higher average litigation rates than both US domestic stock-exchange listed firms and foreign firms patenting in the US. By comparison, post-suit settlement rates were shown to be almost identical for all types of patent-holders.

Reasons behind these trends were suggested, but the take-home message was that these differences in litigation exposure for different types of patentees underscore the importance of developing ways to create a more level playing field for patent litigation, in particular through the use of market-based patent litigation insurance. Currently, the take-up rate of such insurance is low, particularly among smaller businesses, and presumably due to the cost of it. Professor Schankerman suggested that the adoption of a rationalised risk model by insurance companies, incorporating his empirical findings about the factors that influence litigation risk, would significantly reduce the cost of such insurance for smaller firms, ultimately providing them with increased bargaining power in the settlement of disputes. The seminar ended with a lively and thought provoking question and answer session.

Wrapping up the session and offering a vote of thanks to the speaker, AIPPI UK President Trevor Cook noted that intellectual property lawyers have not been used to analysing the IP system in economic terms, but that increasingly an economic analysis of the system is likely to become an important part of the IP lawyer’s toolkit.

The full text of Professor Schankerman’s talk, and a report on AIPPI UK’s other seminar this month (“Community Designs - a Silver Bullet or a Rubber Dagger?” Henry Carr QC and Dr Henning Hartwig, 7 May at Linklaters) are available on the AIPPI UK website".

The IPKat notes all of this with interest. It seems to him that, to date, insurance -- in the form in which it has been commercially available to small and medium sized enterprises -- has been peculiarly ill-equipped to do the job it is supposed to do best: there must be plenty of scope for innovation in IP insurance, and also in terms of mutual insurance, that can make policies more attractive and affordable to those who might be expected to benefit from them. Merpel adds, as for patent renewal fees, their adjustment will presumably affect the behaviour of the small fry far more than that of the big battalions -- but it's not the tiddlers that create the thickets and do the trolling, is it?


Anonymous said...

Just a couple of disparate points:

1)As regards patent thickets 'inflating the costs of innovation', how strong is the evidence relating to this?

For example, in computer hardware there are vast numbers of patents out there, and yet every year far better computers are on the market at cheaper prices than the less-good computers were a year before. So innovation is increasing rapidly and retail price is falling rapidly. The same holds true for areas such as telecoms. Think of the original mobile phones and how little they could do and how expensive the tarifs were.

2) As regards renewal fees, I have long thought that the level of the fees should increase substantially over the 20 year term. Patentees should be incentivised, if not making money out of an invention, to let it fall back into the public domain.

In Germany, the level of renewal fees increases much more greatly over the patent life than in many other countries (such as uk).

3) I note from para 6 that the studies appear US based. Interesting, but would it not be better for Europeans to be studying European patents?

In this regard, renewal fees in the US are low and are only paid at (if memory serves) 3 1/2, 7 1/2 and 11 1/2 yrs.

4) In response to Merpel's comment at the end: All large companies I have ever dealt with have a mechanism in place to re-evaluate their patents at 1, 2 or at most, 3 yr intervals. They do not blindly pay renewal fees.

Imagine you have 1000 patents in each of UK, DE, FR, IT, NL. You don't pay 500-2000 euro for each in each country every year unless you think there is value. This links back to the increased renewal fees. The higher the fees, the better the perceived return has to be to make it worthwhile to pay the fees.

As for, 'its not the tiddlers that do the trolling'. Quite often it is, isn't it? Would you call Aerotel a troll? What about a big telecoms player such as BT or Vodafone? Small guy suing a big company in the US (for patents or anything else) is common. Could you give examples of large tech companies engaging in 'trolling'?

Lastly, I hate the term 'troll', but I won't go into that now..


Michael said...

Thanks for providing this summary, IPKat!

Cheaper patent litigation insurance would certainly be an improvement from the point of view of levelling the playing field for smaller companies. And getting more patent lawyers to talk with the actuaries pricing risk would help to price more accurately.

Nicola said...

In my interactions with patent lawyers, I have often asked what role economists play in their business. The answer is often either a very limited role or no role at all. One of the pillars of IP systems is the economic concept of encouraging innovation. Economics pervades all levels of IP and I would like to see economics taking on a larger role in the legal practice of IP.

Of course, as a postgraduate in Economics, I have an incentive to think this way!

In response to Marvin's comment regarding patent thickets inflating the cost of innovation:

The typical argument is that patent thickets cause innovators to devote time and resources to inventing around existing patents and/or negotiating multiple licensing agreements. These increased innovation costs impede innovation.

Cell phones and computers may demonstrate high innovation rates but this may occur at higher innovation costs than without patent thickets. The innovation rate might be higher if these costs were lowered. The retail price of these goods is not a reliable indicator of the innovation costs as it may reflect increases in demand (among other things.)

Anonymous said...

Attention IPKat, have a look at the item just posted on the IPEG blog, about the OLG in Duesseldorf (district court on appeal - infringement jurisdiction, not validity) enjoining an infringer of a patent already found invalid by the German Federal Patents Court. Weird, no?

Anonymous said...

And at the same time we have the EPO purporting to use an economic analysis to justify an intention to raise procedural fees to reduce reliance on renewal fees on granted patents - little joined up thinking is happening.

Of course politically economics is embarrassing - how much would you pay for protection in Germany in comparison with Monaco?

So while some talk the need for an economic analysis most shy away from the consequences and nearly all ignore the fact that if you have 2 economists in a room you tend to have at least three opinions.

Riemannzeta said...

So while some talk the need for an economic analysis most shy away from the consequences and nearly all ignore the fact that if you have 2 economists in a room you tend to have at least three opinions.

That's because almost no economists have the theoretical tools needed to understand dynamics. Everything taught in school is based on static models of supply and demand. True enough, some economists are good at being able to visualize how elasticity and magnitude will change in time. But to reach consensus, some new mental models for market dynamics are going to be necessary. It's just more obvious in the IP and Antitrust areas of law because these are the ones in which short-term and long-term trends diverge so dramtically.

Gerontius said...

Actually, that the EPO raised procedural fees to reduce their reliance on renewal fees is perhaps a sign that they are keeping their ears to the ground.

I don't know if anything came of it, but I was intrigued by this 2003 report when I first saw it a couple of years back:

It's a study on litigation insurance which concludes that, for an insurance scheme to work, it would have to be compulsory (see page 54 or 49 depending on how you count)

15.2.2 Without a compulsory scheme the premiums would be high, the take-up low and most tellingly, insurers would not wish to be involved. Without a compulsory element any scheme would be likely to fail.

It may be possible that a propotion of all renewal fees could get sidelined into a compulsory insurance scheme, leaving less for the EPO.

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