I like Wikipedia’s definition of intellectual property (IP) as being the product of the mind or the intellect that has commercial value and may be legally protected in the same way as other forms of property. Former Federal Reserve Chairman Alan Greenspan observed in a speech last year that: “In recent decades […] the fraction of the total output of our economy that is essentially conceptual rather than physical has been rising. This trend has, of necessity, shifted the emphasis in asset valuation from physical property to intellectual property and to the legal rights inherent in intellectual property.” And a recent article in Business Week pointed out that: “Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation.” It should thus not come as a surprise that IP in general and patents in particular are playing such a prominent role in our increasingly knowledge-based economy as more and more of the innovations driving the economy are products of the human mind, which are then described or disclosed in a patent application. Patents, consequently, are in a very real sense becoming one of the key currencies of the 21st century intellectual property marketplace.
What should be the key characteristics of a properly functioning IP marketplace? That’s a subject that is very important to the future of innovation, and the focus of a new podcast series from IBM. Let me offer some perspectives on the challenges we face.
Over the last 25 years the volume of patent applications has significantly increased around the world and whole new classes of patents have sprung up reflecting innovations in areas like software and biotechnology. These changes have overwhelmed our existing patent systems, and sparked calls for patent reform from just about every major panel that has addressed the subject of energizing innovation and competitiveness in society. In the US, such recommendations linking patent reform with innovation are part of the White House’s "American Competitive Initiative", the National Academies "Rising Above the Gathering Storm" and the National Innovation Initiative from the Council on Competitiveness. Similar recommendations are heard around the world.
Overburdened patent systems have given rise to uncertainties. In the aforementioned speech, Alan Greenspan remarked: “Only in recent decades, as the economic product of the United States has become so predominantly conceptual, have issues related to the protection of intellectual property rights come to be seen as significant sources of legal and business uncertainty.” This increased uncertainty is seriously eroding the public trust in the patent system, with the proliferation of patents that many regard as low in quality, too broad and vague, or based on ideas that are neither significant nor new. The rising uncertainty and eroding trust in the patent system are very serious, not just for patents but for the very innovations that the system is designed to promote. Uncertainty brings with it a rise in speculative behavior and litigation that further undermines the public’s faith in the patent system and the common good that system was designed to protect.
History has shown that you cannot create a fluid marketplace in society for the orderly exchange of goods, be they physical or financial in nature, unless the system is based on certainty and trust. For example, if I buy a house from you, it is very important that everyone be very clear as to precisely what it is I am buying. If property records indicate that the house you sold me was actually owned by someone else – we have a problem. If I decide that the land I now own should encompass part of my neighbor’s property so I can build a pool – we have a problem. If I feel that I should charge a toll for cars wanting to use the town’s road that runs in front of my house or airplanes flying above it to help me raise money – we have a problem. All those problems can be ultimately settled in the courts, but, if sufficiently widespread, the end result would be detrimental to society.
Similarly, our financial systems are highly dependent on certainty and trust for their smooth operation, as we have been reminded recently with the accounting scandals of the last few years. If officials of public companies felt free to say whatever they chose in order to make the stock in their companies rise for their own benefit at the expense of investors, it would not be long before the stock markets would stop working altogether. If speculators artificially manipulated the prices of stocks and commodities to make a killing at the expense of the ordinary investor, those investors will keep their savings under their mattresses instead of putting them to work to help build new businesses and create new jobs as is the purpose of financial markets.
What lessons can we learn from markets in physical and financial goods that can guide us as we try to establish orderly markets for intellectual property? I think that three ingredients are paramount: transparency, integrity and fair prices.
Transparency is a very simple concept: all relevant information should be available to everyone. It is a key requirement for fair and efficient free markets. Individuals and small businesses should have access to the same market information available to large financial firms and big companies. With respect to patents, this means specifically that the community should assist in the evaluation of patent applications by providing as much information as possible to patent examiners on prior art that might support or invalidate an application, as well as feedback on the quality and merit of the application in question, as is the case with the Community Patent Initiative. The public should also have access to all pertinent information about the inventors and those actually applying for and holding the patent, whether it is the inventors themselves, a corporation, or an IP-only business that exists solely for the purpose of buying and licensing patents to the exclusion of actual production of any kind. A major step toward increased transparency was taken with the announcements we made earlier this year with the US Patent Office (USPTO), the Open Source Development Lab (OSDL) and others aimed at involving open communities and the public in general to help increase patent quality.
Integrity begets trust and is thus crucial to a properly functioning market. Wild fluctuations in prices caused by manipulative behavior to artificially drive up the prices for the enrichment of the few will totally undermine the public’s trust in markets. With patents there is an increasing fear that the emergence of IP-only companies with the sole purpose of trafficking in patents could create an asymmetric situation that would de-stabilize the system. Generally, all kinds of checks and balances cause businesses to behave reasonably in the IP marketplace, such as the potential damage to their brand and reputation for integrity which could result in the loss of customers for their products and services as well as difficulty in establishing business relationships. But since IP-only companies produce no products, perform no services, and have no customers of their own, they have no such checks and balances. They therefore might feel free to try to extract unreasonable fees from businesses engaged in production under the threat of injunctions and other litigation, with potentially negative consequences to innovation as a whole.
Finally, a hallmark of a properly functioning market is that there is a clear way to determine the fair price of the assets being sold and bought. Most will agree, I believe that such pricing should be established based on the dynamics of an open market. While it would be nice if I could ask for and get whatever price I want for my house, it is ultimately up to potential buyers to decide whether I am asking a fair price given all the other houses on the market. Similarly, establishing fair prices for stocks, bonds, currencies, commodities and so on is a prime objective of financial markets. Artificially driving up prices, whether by collusion among sellers or hoarding goods to try to extract higher prices, is discouraged — often through criminal penalties. In the same way that the quality of a bond, from AAA to junk, is a key factor in helping to determine its fair price, we need a clear way to determine the quality or merits of a patent, including factors such as the risk that the patent will be found invalid or unenforceable, in order to reduce speculation around its proper valuation. The Patent Quality Index initiative which is part of our previously referenced efforts to improve patent quality working with the USPTO, academics, open communities and others aims to develop such a unified numeric index representing the quality of patents and patent applications. When all is said and done, the reason inventors are granted exclusive rights to benefit from their ideas for a limited period is to encourage the disclosure of inventions and thus promote innovation, as others find benefits beyond those originally imagined by the inventor. An artificially high price for a low quality patent as a result of its being vague, overly broad, or without merit will only enrich the patent owner while severely limiting the potential applications and benefits to society.
The reason we all need to help restore trust in the patent system and help establish an IP marketplace based on transparency, integrity and fair prices, is not for the sake of the patent system itself. In the end, the patent system is a means to an end. The knowledge in our knowledge-based economy comes from the minds of humans, and it is that human capital that we want our patent system to help us put into circulation, just as we have established other systems in society to help us better circulate physical and financial goods. Our overriding objective is for patents to help us, rather than hinder the establishment of an orderly IP marketplace.
