Is Intellectual Property Rights necessary for innovation?

The leaders of Big Pharma have been quick to express their opposition to the developing countries' proposal at the World Trade Organisation (WTO) to temporarily waive its Trade-Related Aspects of Intellectual Property Rights (TRIPS) rules. They  warned, it "would undermine innovation and raise the risk of unsafe viruses." 

Thomas Cueni, director-general of the International Federation of Pharmaceutical Manufacturers and Associations claimed, "the system that built a coronavirus vaccine in record time relies on robust intellectual property rights protections".

This is in marked contrast to reality. Sixty-five years ago, Jonas Salk insisted that the polio vaccine he had developed remain patent free. Asked who owned the patent, he replied, "The people I would say. There is no patent. You might as well ask, could you patent the sun?" 

Patents and innovation – the claim

Currently patents grant 'inventors' or companies monopoly rights for at least 20 years. It is argued that the revenues generated from commercially successful patent-protected technologies make it possible to finance further technological research and development (R&D), thereby improving the chances of even better technology becoming available in the future.

It is further argued that patent rights can promote innovation by creating markets for ideas and innovation, thus facilitating transactions such as the licensing or sale of an innovation and enabling the efficient allocation of ideas and technology. While creative firms focus on the development of technologies, other firms with comparatively better production, distribution or marketing capabilities undertake commercialisation. 

Patent rights can also promote innovation by facilitating knowledge diffusion because, as a condition of receiving a patent, inventors are required to describe the technology in sufficient detail so that someone skilled in the art can reproduce it. This requirement is long-standing since the first US patent act, passed by Congress in 1790, stipulated that a patent should "enable a workman or other person skilled in the art…to make, construct or use the same". 

False claim

The claim that patent protection is necessary for innovation is false. Research has revealed that an industry can be exceptionally innovative without patents. For example, during the first three decades of the 20th century, there was an avalanche of innovations in American agriculture, with many advances in hybrid corn, new types of fertilizers and new ways to fight pests, even though the law did not allow inventors to patent most agricultural innovations. If patents are the only way of incentivising innovation, there would not have been so many innovations in that period.

The 1851 world's fair in London included a significant share of scientific instruments from Switzerland and Denmark, which did not have patent protection. On the other hand, some countries which issued long-term patents had a lower number of entries at the same fair. Interestingly, sometimes people can apply for lots of patents without actually being super innovative.

Securing a patent is not easy or cheap, and does not necessarily result in profits. For example, since the mid-1960s only half of applicants have had their patents granted by the US Patent and Trademark Office (PTO), and in 2015 of the total 326,033 patents granted by PTO, only an estimated 3%-5% was profitable, since a hypothetical monopoly on a market that does not exist is not worth anything, but generated around US$300 million in fees.

Misleading claim

The claim that patent protection promotes innovation through creating markets for licensing and knowledge sharing is misleading. 

Firms and their patent lawyers often obfuscate the workings of a technology in the patent's description, and patent examiners rarely effectively enforce the full disclosure requirement. Furthermore, the evidence of searching the prior art in a given technological field often risks wilful infringement of court rulings and associated larger damages.

When the patent landscape is too complex and too many negotiations have to be undertaken, the impact on innovation could be negative. In a recent report, the Australian Productivity Commission concluded, when IP laws are too strong, they restrict innovation and access to knowledge. 

The issue becomes more contentious at the boundary between invention and discovery; between invention and abstract thoughts. Thus, broad foundational patents in new areas of technology could block off whole areas of research and development (R&D), deterring innovation. For instance, breast cancer gene patents have delayed additional research on these genes. 

Patent 'trolling'

Patents are now not an asset to innovation and industry so much as they have become an industry in themselves. They have created a bonanza for lawyers and hedge fund managers.

This is because of what is known as "patent trolling" (hold-up). Most patents cover a wide-range of related features of commercially viable innovations. They are not obtained by genuine inventors to protect their innovations from competitors; but acquired by unscrupulous organisations or individuals to threaten litigations, hoping to make money mostly through out of court settlements. Large corporations obtain such broad patents for defensive purposes, to prevent others from suing them over patent violations, instead of commercialising their inventions. Such patent trolling strangles innovation, instead of promoting it.

By buying and bundling together a patent portfolio and arming oneself with lawyers threatening to sue for patent infringements, such a portfolio becomes a formidable tool. There are companies, such as Intellectual Ventures and Acacia Research, that accumulate patents, build large portfolios, and then wait and seek out those they can accuse of infringing "their" patents. Thus, David Koepsell asked "Who wins? Who profits? Not innovation". 

Patent trolling involving predators hedge funds is a relatively new phenomenon. Hedge funds take short positions on the stock of pharmaceutical companies, then challenge the patents on the drugs, just to obtain a rapid fall of the stocks and buy shares back at a rock-bottom price. These billionaire-led hedge funds obviously have no intention of making medicines; they challenge a patent only to make more money.

There were six times as many patent lawsuits in the US in 2013 than in the 1980s. The number of firms sued by patent trolls grew nine-fold during 2003-2013, and a majority of patent lawsuits are filed by trolls. Studies revealed that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in the aggregate, patent litigation destroys firm wealth of more than $60 billion each year. 

The economic burden of patent lawsuits is historically unprecedented. These costs fall disproportionately on innovative firms: the more R&D a firm performs, the more likely it is to be sued for patent infringement, all else equal. Thus, patent rights can stifle, instead of promoting, innovation. Sustainable green technologies are not immune to patent trolls strangling.

Patent trolling in the fields of biotechnology and genetics involves a more fundamental question. That is, whether naturally occurring DNA is a "product of nature," and applied techniques or methods to amplify and sequence this DNA can be regarded as an innovation to be granted monopoly rights. In a land-mark case the judges at a New York District Court unanimously ruled in 2013 that any "naturally occurring" DNA sequences—"lie beyond the domain of patent protection" as products of nature and not of human engineering.

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.