[Patents] Bessen & Maskin reply on software patent paper

[Jim Bessen jbessen@researchoninnovation.org]

----- Original Message ----- 
From: Jim Bessen 
To: Gregory Aharonian 
Cc: Eric Maskin 
Sent: Saturday, February 03, 2001 7:28 AM
Subject: reply on software patent paper


Greg,

Thanks for your comments on our Working Paper, "Sequential Innovation, 
Patents and Imitation." (We are currently revising the January 2000 draft.) 
However, our intent appears to have been miscommunicated, so below are some 
brief clarifying comments we hope you will publish:

1. Simplistic Models

We could not agree with you more that patent policy should not be based on 
overly simple economic models. But please don't blame us for this unfortunate 
development.

Fact is, for nearly 20 years U.S. patent policy has been guided by an overly 
simple model that Todd Dickinson and most patent attorneys recite with little 
provocation. It goes like this: "Without patents, competition from imitators 
deprives innovators of profits on their innovations. Therefore, they will not 
invest sufficient R&D. Patents provide innovators with monopoly rents 
(licensing fees and extra profits from monopoly prices). These rents 
encourage R&D. Stronger patents mean more R&D which means more innovation. 
Stronger patents are always better." This simple argument appears to be 
behind the subject matter extension of patents and the lowering of the 
non-obviousness standards. It has also been used to argue for the extension 
of the patent term.
 
This common argument is what we call the "static model." We show that with 
just a few slightly more realistic assumptions (sequential innovation, 
alternative technologies), the conclusions of the model are turned upside 
down. In a more dynamic world, stronger patents may actually reduce 
innovation. Our point is not that patents are necessarily and always bad, but 
that policy should be careful and balanced.

Indeed, prior to the 1980s, both economic theory and legal theory took a 
balanced view, recognizing both benefits and costs to patents and calling for 
limits on patent protection. Our paper argues for a return to this 
perspective.

2. Empirical evidence on software

We do NOT argue that the explosion in software patents has stifled innovation 
in software generally. We would hardly argue that the software industry as a 
whole has become less innovative.

Instead, our review of empirical evidence has a much more limited aim: to 
determine whether or not those companies that have gotten large numbers of 
software patents have been induced to invest more in R&D, as the simple model 
implies they should.

Economists understand very well the costs of monopoly rights. Patent 
monopolies mean consumers pay higher prices either to a monopolist or in the 
form of licensing fees that are passed on. (Also, consumer choice may be 
limited.) These costs can be thought of as a social subsidy to patentholders. 
As your data make clear, a small number of large companies (mainly hardware 
companies) have been spending millions of dollars to build large portfolios 
of software patents. They hope to cash in on these government-sponsored 
subsidies that are potentially worth many many billions over the next 20 
years.

Prudent policy makers should examine whether society receives commensurate 
benefit for these large subsidies. The static model provides the main 
justification for them: they supposedly encourage higher R&D spending. But we 
looked at the actual R&D spending (relative to sales) of those companies 
building large software patent portfolios. These companies did not increase 
their R&D to sales ratios.

This suggests that: a.) the simple static model does not accurately describe 
the effect of patents and b.) society may be getting a raw deal. Indeed, in a 
slightly more complex world than the static model, companies might obtain 
patents mainly to extract royalties from other firms (shocking, but true!).

3. Europe

Although some Europeans are opposed to software patents of any kind, much of 
what we hear is really a much more balanced view. Many people suggest that 
software should have patent protection in Europe, but perhaps with some 
limitations, e.g. a term shorter than 20 years, or limits on the prohibition 
against private use of patented ideas (like "fair use" in copyright). These 
suggestions provide a refreshing and balanced alternative to the "stronger is 
better" reflex one encounters in the U.S.

Most refreshing is that Europe is having a public discussion of this 
important policy issue at all, even if it does mean that some incorrect views 
get expressed. It is easy for us to forget that the current U.S. arrangement 
was largely the result of court decisions that were handed down with little 
discussion and no public review.

It is hard to predict the impact of the large number of software patents 
issued. Perhaps in the future, software startups will have to pay an "IBM 
tax" and a "Hitachi tax" and a "Xerox tax" etc. to avoid litigation. Perhaps 
also contingency-fee lawyers will become more active in this field, raising 
the level of uncertainty. These could be significant liabilities to the U.S. 
software industry. Many Europeans recognize that they may gain some 
competitive advantage with a more balanced policy.

Jim Bessen and Eric Maskin

 

----- Original Message -----

From: Jim Bessen

To: Gregory Aharonian

Cc: Eric Maskin

Sent: Saturday, February 03, 2001 7:28 AM

Subject: reply on software patent paper

Greg,

 

Thanks for your comments on our Working Paper, "Sequential Innovation, Patents and Imitation." (We are currently revising the January 2000 draft.) However, our intent appears to have been miscommunicated, so below are some brief clarifying comments we hope you will publish:

 

1. Simplistic Models

 

We could not agree with you more that patent policy should not be based on overly simple economic models. But please don't blame us for this unfortunate development.

 

Fact is, for nearly 20 years U.S. patent policy has been guided by an overly simple model that Todd Dickinson and most patent attorneys recite with little provocation. It goes like this: "Without patents, competition from imitators deprives innovators of profits on their innovations. Therefore, they will not invest sufficient R&D. Patents provide innovators with monopoly rents (licensing fees and extra profits from monopoly prices). These rents encourage R&D. Stronger patents mean more R&D which means more innovation. Stronger patents are always better." This simple argument appears to be behind the subject matter extension of patents and the lowering of the non-obviousness standards. It has also been used to argue for the extension of the patent term.

 

This common argument is what we call the "static model." We show that with just a few slightly more realistic assumptions (sequential innovation, alternative technologies), the conclusions of the model are turned upside down. In a more dynamic world, stronger patents may actually reduce innovation. Our point is not that patents are necessarily and always bad, but that policy should be careful and balanced.

 

Indeed, prior to the 1980s, both economic theory and legal theory took a balanced view, recognizing both benefits and costs to patents and calling for limits on patent protection. Our paper argues for a return to this perspective.

 

2. Empirical evidence on software

 

We do NOT argue that the explosion in software patents has stifled innovation in software generally. We would hardly argue that the software industry as a whole has become less innovative.

 

Instead, our review of empirical evidence has a much more limited aim: to determine whether or not those companies that have gotten large numbers of software patents have been induced to invest more in R&D, as the simple model implies they should.

 

Economists understand very well the costs of monopoly rights. Patent monopolies mean consumers pay higher prices either to a monopolist or in the form of licensing fees that are passed on. (Also, consumer choice may be limited.) These costs can be thought of as a social subsidy to patentholders. As your data make clear, a small number of large companies (mainly hardware companies) have been spending millions of dollars to build large portfolios of software patents. They hope to cash in on these government-sponsored subsidies that are potentially worth many many billions over the next 20 years.

 

Prudent policy makers should examine whether society receives commensurate benefit for these large subsidies. The static model provides the main justification for them: they supposedly encourage higher R&D spending. But we looked at the actual R&D spending (relative to sales) of those companies building large software patent portfolios. These companies did not increase their R&D to sales ratios.

 

This suggests that: a.) the simple static model does not accurately describe the effect of patents and b.) society may be getting a raw deal. Indeed, in a slightly more complex world than the static model, companies might obtain patents mainly to extract royalties from other firms (shocking, but true!).

 

3. Europe

 

Although some Europeans are opposed to software patents of any kind, much of what we hear is really a much more balanced view. Many people suggest that software should have patent protection in Europe, but perhaps with some limitations, e.g. a term shorter than 20 years, or limits on the prohibition against private use of patented ideas (like "fair use" in copyright). These suggestions provide a refreshing and balanced alternative to the "stronger is better" reflex one encounters in the U.S.

 

Most refreshing is that Europe is having a public discussion of this important policy issue at all, even if it does mean that some incorrect views get expressed. It is easy for us to forget that the current U.S. arrangement was largely the result of court decisions that were handed down with little discussion and no public review.

 

It is hard to predict the impact of the large number of software patents issued. Perhaps in the future, software startups will have to pay an "IBM tax" and a "Hitachi tax" and a "Xerox tax" etc. to avoid litigation. Perhaps also contingency-fee lawyers will become more active in this field, raising the level of uncertainty. These could be significant liabilities to the U.S. software industry. Many Europeans recognize that they may gain some competitive advantage with a more balanced policy.

 

Jim Bessen and Eric Maskin