Patent Policy in the Knowledge-Based Economy: Trends and Issues in OECD Countries

Date November 24, 2005
Speaker Dominique GUELLEC(Chief Economist, European Patent Office (EPO))
Moderator MOTOHASHI Kazuyuki(Faculty Fellow, RIETI / Associate Professor, Research Center for Advanced Science and Technology, The University of Tokyo)


In most countries, the number of patent application and patent grants has essentially doubled over the past 10 years, and even tripled in some countries. In the European Patent Office (EPO), we have now nearly 200,000 applications per year, whereas in the early 1990s it was 75,000. Is this dramatic increase in patent applications going to continue as our forecasts suggest? Applicants say that their intention is to continue filing ever more applications. This is an exceptional situation historically, and one must go back to the 1870s, the time of the so-called second Industrial Revolution, to find a similar increase in patent applications. In fact, we are now in the middle of a technological revolution, and this is the first reason behind this explosion in the number of patents.

Business R&D expenditure among OECD countries grew about 50% between the early 1990s and early 2000s, while at the same time GDP increased by about 20-25%. In many cases this is not noticed because total R&D has not increased that much in the OECD, but business R&D has increased very rapidly, while government R&D in that period has shrunk. The surge in business R&D corresponds also to an increase in particular areas. Half of the increase in patents in this period comes from the ICT and biotechnology industries. However, new technologies and the surge in R&D would not completely explain the increase in patent numbers. We had an increase in business R&D of 50% in 10 years, but a 100% increase in patent numbers.

In many countries important sectors of the economy have been deregulated, resulting more intense competition. Also, due to globalization, as markets are opening they are getting more competitive due to foreign entrants. National monopolies did not need patents whereas companies exposed to competition do need patent protection. There are also changes in the way innovation is organized. The dominant model used to be that companies would innovate in-house. Companies are increasingly specialized, so they must rely on other companies' competencies. With the diversification of technologies and so on, Sony for instance will need technologies coming from competitors or from producers of complementary goods like Ericsson. So they need to make alliances with all these companies to purchase their technology, and also to do research with them. When you enter into such contractual relationships, you have to protect your intellectual property to delineate clearly what you put in the common basket and what you do not. Who owns the results of research must be clearly defined, which was not necessary when you were doing everything yourself. It is not the case anymore that only big established companies are making new technologies. You have all these startups which might become very big at some point, but they start from nothing. They do not have control of distribution channels, they do not have brand names, they do not have big manufacturing facilities and so on. They have one thing, their technology, and they have no other way of protecting this technology than by filing patents.

With the expansion of markets for technology, even large companies will find opportunities to buy technology from others and sell technology to others. Without an active market in technologies, technologies that are not useful to the inventor are put in a drawer and forgotten about, but if there is an active market it might benefit other companies and society. However, a recent survey cosponsored by the EPO shows that the share of patents licensed by small European companies who make their living from these markets for technology is 3-4 times as high as the share of patents that big companies license. Big companies license out more or less 3% of their patent portfolio, whereas it is around 10% for small companies.

Statistics on licensing are always fragile, but all sources point in the same direction, a sharp increase in royalties, licensing in, and licensing out. Patents are also increasingly used for other purposes than just protecting a monopoly on a market. Raising capital for small companies via venture capitalists, financial markets or banks requires patents, as is clearly the case for startups. Most venture capitalists will not invest if there is no patent protecting the invention. Also there is the securitization of patents, which is still small but could get more important in the years to come, wherein a bundle of patents is floated on the financial markets with a view to raise capital.

A further factor causing a surge in patent numbers, which might be the most interesting, is the role of policy. There have been big changes in patent policies over the last 20-25 years or so, depending on the country. This started in the U.S. in the early 1980s when the U.S. was frightened with the progress made by Japanese companies, and frightened that Japanese technology might overtake U.S. technology. Many types of measures were taken by the end of the Carter administration, and were expanded when the Reagan administration took control. One of this set of measures was to strengthen patent regimes in the U.S. As the U.S. apparently had much success in strengthening its technological position and recovering its dominance between the early 1980s and the mid-1990s, other countries observing that tried to follow suit. What is the responsibility of patent policy in that success? What is clear is that patent policy was part of a bigger package which was really successful. Other countries followed suit, and at a worldwide level there was pressure, initiated by the U.S. and supported by other developed countries, for having stronger patent regimes in all countries. This resulted in the TRIPS agreement signed at the WTO in 1994, the trade-related intellectual property rights agreement, which includes a set of minimal standards that all countries signatory to the agreement should set in place.

The first kind of measure that was taken in the U.S. and followed by other countries was strengthening the institutional regime governing the patent system. A central court was installed by the U.S. in 1982, and Japan set up a central IP court this year to unify the treatment of patents and litigation. In Europe, there is the European framework, with the European Patent Office, and a few European Commission regulations, but the rest is national. There has however been a trend for strengthening the European bodies over the years.

Enforcement has been strengthened with increased damages. There are statistics on that for the U.S., with many cases going beyond a couple of hundred million dollars in damages. Nobody would have imagined a few years ago that a patent could be so valuable, but courts are recognizing that value now, which of course gives strong incentives for companies to file more patents if there is value there.

The patent subject matter has also been expanded. There was a series of court decisions in the U.S., Europe and Japan, that progressively expanded the field to genetic material. Genes would not have been patentable 25 years ago; they would have been considered as scientific discoveries. Now genes are patented under certain conditions. Software is patentable without limits in the U.S., but with limits in Europe. Finally, business methods are patentable in the U.S., though not in Europe, but this is still an expansion of the field.

Other aspects of the strengthening of patent law are the research exemptions that essentially benefit universities, which allow them to use patented research for free, or without a license. This exemption has been essentially dropped in the U.S. by a court case nearly two years ago, and universities now are faced with more difficulties than before for using so-called research tools that come either from private companies, or from other universities. A related measure for strengthening the patent regime is Bayh-Dole Act type policies. Bayh-Dole is an act passed in the U.S. in 1980 that allowed and even encouraged universities and publicly funded laboratories to take patents on their inventions that had been funded by the government, as an incentive to universities to elaborate more on their basic inventions, and for industry to use more of these inventions knowing that they could have an right of exploiting these inventions for some time. While it is not 100% clear what the effects of these policies are, in view of the expansion of biotechnology in this period in the U.S. and in other countries, and the central role that universities and university spin-offs played in that expansion, it seems the policies did play a positive role. Other OECD countries have taken similar measures over the past 10 years or so, in certain cases making it compulsory that patents will be taken by the universities and not by the professors. When government funding of universities was put under pressure, governments found it a good way to say to universities, "We do not have any more money, but now you have the right to make money from patents, so please find your own complementary funding from that." However, universities cannot in all cases make much money from their patents. There are a few blockbusters, but the rest of the patents are not valued that much, and it takes some energy and investment from universities to manage their patent portfolio. A good team of good lawyers needs to be hired, and for universities and less significant players in a market, this is not necessarily the most valuable investment they can make.

The mission of the patent system is to encourage innovation and to not impede as little as possible or even encourage in certain cases, diffusion of technology. Patents give a monopoly position for a limited period of time, an exclusive right for the holder, so the holder could charge a higher price than the competitive price for his invention, and that will make supplementary money that will feed into research, which will at least incentivize research in the first place. Also, patents include a disclosure clause, making knowledge available to others in society, and that is a good thing, as others can use this knowledge to improve on it, to feed into further inventions. But patents have their drawbacks. The first drawback is a deadweight loss, as when you charge a higher price to customers you will exclude certain customers who would be ready to pay the marginal cost for your invention, but they are not ready to pay the markup. Then you exclude customers that would benefit even yourself, as they would help you fund part of your research. The second drawback is that patents make inventions public, but if you want to use these publicized inventions then you have to pay a license fee to the inventor, and depending on how the markets for technology work and so on, the fee could be high, and could in certain cases even deter the use of this knowledge.

A good patent system is one which maximizes the positive side and minimizes the negative side, which means that it should give a strong incentive to invention, minimize the deadweight loss, minimize barriers to accessing knowledge, and finally it should facilitate the working of markets for technology, thereby helping technology to circulate from inventors to companies which are able to somehow implement it. In view of these criteria, the current challenges to the patent system include the articulation between patents and university research -- Bayh-Dole Act types of policies and their connection with the research exemption, meaning that if you allow universities to make money with patents why would you exempt universities from paying fees to other patents owners? When you start entering or pushing universities into a business logic, there are positive sides but there are also negative sides that you have to carefully balance, and it is a topic that is currently discussed not only in the U.S. but also in Japan and Europe. Another challenge that is increasingly prominent is the differences across industries. A good patent regime for certain industries might be bad for others, and the other way round. The question is, is it better to have a patent system which is the average of all industries' needs as is the case now, or would it be better to have a differentiated patent system that would accommodate the specific needs of different industries? There are pros and cons for each of these approaches.

One more immediate challenge is the quality of patents, in which there are three dimensions: selectivity, delay and voluminosity. Selectivity means that inventions which are not really new should not be allowed to patent, and patents which are granted should not be overly broad. This is not a new challenge, but it is probably more difficult to address now that there are all these new technical fields. It is a big challenge for companies and markets, but it is a big challenge also for patent officers and for courts. The standards should be adapted, competencies should be accumulated in patent offices, and all the prior art that allows examiners to screen out bad applications should also be accumulated. There have been discussions, which are not over yet, of whether the current proliferation of patents is a good thing or not. Should patent offices be more selective or not? Should they refuse more applications and keep patents for the real breakthroughs? Or should patent offices be more generous and provide patents for inventions which are new, but which are not necessarily breakthroughs?

Another related issue is that the explosion in applications means there is a backlog which is accumulating, involving a continual increase unexamined applications. The number is more than 600,000 applications waiting to be examined in each of the Japan Patent Office (JPO), the United States Patent and Trademark Office (USPTO) and the EPO. That is not only a big challenge for patent offices, but it is also worrying for society, as when you have an application in waiting, you do not have yet a real title and you are not sure that you will get one. If you have a new invention your competitors will see that you have this application, and they do not know whether it will be granted or not. They might be ready to invest in a similar technology, but if your patent is granted, they will be deemed as infringing your patent, and their investment would be lost. So this backlog creates uncertainty in the economy, and uncertainty is bad for investment. Another consequence of the backlog is that the time required for the granting of patents is increasing.

Not only are there more applications, but these applications are ever bigger. The number of claims per patent application has increased by about 50% at EPO of the past 10 years, from 14 in the mid-1990s, to 21 in 2004, and the growth still continues. This growth in claims is mainly in emerging technology areas where the number of applications is also increasing more. When you have an application with hundreds of claims and hundreds of pages, the real invention is hidden somewhere in the application. So voluminosity is a problem for the quality of the system and for the ability of the patent system to fulfill its function of disclosing inventions. In addition to that it is a challenge for patent offices with continually increasing workloads, and something needs to done. Solutions are there but they need to be elaborated, discussed and implemented. As economists we would rely on the price mechanism, in this case advocating for putting higher fees on claims. The USPTO did last year. It set a more expensive marginal claim fee, and apparently it works. Another solution is rigorous implementation of statutory requirements such as clarity and unicity of invention.

The second challenge is developing technology markets to allow a better allocation of resources. The question is should governments do anything in that regard. Is it not the case that these markets are expanding by themselves, and that any interference by government would be more detrimental than positive? Certainly any measure taken by government in relation to these markets should be extremely carefully designed and implemented. There is a presumption, based on business surveys and case studies, that these markets are extremely complex ones. There is also a presumption that there are failures on these markets; transaction costs are high; notably, licensing contracts are very complex, very difficult to design. One needs many lawyers to prepare such contracts. Big companies can afford to do it, and might even reuse similar contracts from one operation to the next, but small companies might not have the necessary resources.

Inadequate government legislation could be seen as a government failure, but failures could also take place on the tax side, the accounting rule side, and so on. So at least a policy evaluation should be set up. There is work currently at OECD in which METI is involved, which has a much broader spectrum as it covers all intellectual assets. A conference was organized in June 2005 in Berlin by the OECD with the EPO and the German Ministry of the Economy (BMWA) that looked carefully at utilization and exploitation of patents, and valuation which is closely related. All the conclusions from this conference can be found on the OECD and EPO websites. Granting high quality patents is even more important in the context of markets for technology because proliferation of bad patents could hamper the development of such markets; the diffusion of information, regarding the availability of patents to licensing and their quality, can be fostered by patent offices. A branch of JPO, the NCIPI, is tasked with fostering information on patents available for licensing and the needs of companies in terms of licensing. A final area for further investigation is the design of templates for licensing contracts.


Q: The U.S. seems to be finally moving toward a first file system. There has been talk that the EU is going to strengthen the grace period system in return for the U.S. adoption of first file system. I am wondering if you have any comments on this. The second question is, some people who are influential in the Japanese patent system claim that Japanese precious technology leaks to developing countries through the digital patent database. Do you have similar concerns in Europe?

A: For some time Europe has made it clear that it would accept a grace period if the U.S. was moving to a first-to-file system, as having a grace period with a first-to-invent system is a source of legal uncertainty. The industry is not that favorable to the grace period. First-to-file is a very simple system. You go to the patent office, you have priority, then it is yours. When you have a grace period, somebody could come and say, "Well, I have not filed a patent yet, but I am doing it now, and I published the invention before you." The answer is that Europe would be ready to move, with a preferred period of 6 months; while the U.S. prefers one year. But one year, although not preferred, would be acceptable to European industry. So the answer is yes.

Regarding leakage of information through patent databases. My first answer would be I hope it happens. It is part of our mission to make this information available to everybody, and if nobody was using it that would be wasted money.

Q: But what if the technology leaks to the country where the IP protection is inadequate? That is a concern.

A: That is a legitimate concern. But in that case what needs to be done is not to restrict the diffusion of information, but to strengthen the patent system in these countries. The weakest part, and the most difficult one for developing countries, is enforcement. Patent law is not very costly to set up, but enforcement is costly.

Q: In the U.S., many big companies prefer the collaboration among patent holders through open licensing and so on, but this is difficult for me to imagine. If you have some observations concerning this collaboration or cooperation it would be very helpful. Secondly, the JPO is suffering from a very serious backlog, so it has asserted since about 2000 that a mutual recognition or world patent system would be introduced as soon as possible. Do you have some comment on this yourself or for EPO?

A: There is evidence in upstream cooperation in R&D that increasingly companies are investing in joint ventures and joint research projects. We are seeing increasing numbers of patents having several distinct owners. IP managers tell that the more they open their technology to other partners the more they want to put labels on it, so that people will not take it and use it for their own purposes.

A second area for cooperation is on standards. Standards could involve hundreds of different companies that have each invented part of the technology which is necessary for the entire system to work. One way of doing things, which might be socially optimal and might work in certain fields depending on the market conditions, is each partner giving his invention for free to the others. But in a market economy most parties which contribute to a standard will want a reward. The most direct way to be rewarded is to create a patent pool, where partners assess all their patent rights collectively, select the ones which are really key to the technology, and set up rules for the patent pool to work. We know that patent pools are better than wild competition, and result in a lower price for the technology, and a key for sharing the rewards which is in a way clearer than with pure competition. Although patent pools also raise questions for competition policy and not all of them are accepted by competition authorities, who could have good reasons for refusing them, still a patent pool or any other way of pooling rights to a given technology might be a better approach than having a competition of standards, or for each technology user to have to deal separately with the owners of 100 different pieces of the technology that need to work together. Pooling reduces transaction costs, which reduces the overall cost of the technology.

Regarding the second question, it would possibly be best for the world to have a single patent that would reduce costs, but then you have to solve a series of difficult problems, such as harmonization of law. If you want to get all the benefits you need a single court system, because courts set the standards. That is not a simple matter from a political point of view. A second problem would be quality standards. How to ensure that titles delivered by different patent offices that would be part of this system would be the same, how to avoid patentees identifying places where it is easier to get a patent and so on. These are the most serious objections for such a system to be put in place. In Europe a significant share of the cost of extending patents to different countries is not the procedural cost, but the translation cost. Worldwide titles would need to be translated into many languages unless countries are willing to validate patents in languages other than their own.

Lastly, as economists we also have to think of the correspondence between patent systems and national innovation systems. It is not clear that a worldwide patent system would be optimal for everybody, but I do not have a definitive answer on that and it is certainly something that should be investigated in view of broader conditions in innovation systems.

Q: Some Japanese companies are now discussing IP accounting to maximize the corporate value for shareholders. As an economist how do you project and comment on the possibilities and the limits of IP valuation?

A: It is desirable that IP be valued and capitalized in the accounts of companies, and this is even more important for startups that do not have much else to show to investors. While it should be done, it is extremely difficult, because the value of technology in the early stages is very difficult to assess, whether it is patented or not. Evaluation of the market or of your market share in 5 or 10 years time is far from easy to do. Also, the value of a patent or technological asset has a lot to do with the quality of the people that manage it. When venture capitalists want to value a patent they will value first the company itself, and the value of the patent will be a sub-product of that. So the same patent could be valued at a very different level from one company to the next. The value of a patent may change a lot over time as the market changes and so on. Standard techniques should certainly be used, otherwise there is no transparency, but valuations should remain very cautious, especially if you want to convince investors you have to have credible figures. So valuation should be done, but certainly it should be done carefully.

Q: There is no doubt about market imperfection in the technology market, but I suppose activating these markets leads to increasing social welfare. Certainly the government can do something, but what kind of policies are actually discussed in Europe?

A: My feeling is that at the moment the discussion in Europe is not as concrete as asking precisely what kind of policies we should follow. The European Commission is investigating the problem now, but it is not yet at the stage of formulating precise policies.

Patent offices should do their work well. They should issue only good patents, which have no dubious value; they should disseminate licensing information on both the demand side and the supply side; and they should advise applicants. We need also to identify undue interference of certain government policies with the markets. Certain countries have lower taxation for income from licensing than from other income. These kinds of policies should be evaluated.

*This summary was compiled by RIETI Editorial staff.