Patents: Property or Monopoly?

Patents are often described either as property or a monopoly — both are only partially correct and potentially misleading.  Patents are defined by federal statute as a private regulatory right.  A patent looks like property because it can be bought and sold, its perimeter is defined by its claims (like the boundaries in a deed for land) and the patent owner has the power to exclude others from manufacturing, distributing, selling or merely using an invention.  Because patents can be bought and sold — and used as collateral or monetized — they also can be viewed as financial instruments, i.e., as options to litigate.

Despite superficial similarities, patents do not behave like real property.  They can be licensed over and over to different parties, and the boundaries can be very difficult and costly to determine.  Patents often overlap; each patent is defined by its terms, and ambiguous words must be turned into fences.  Identification of real property is visible and intuitive — lots abut and do not overlap.

Ordinary people understand houses and the value of living in one.  If property boundary conflicts arise, they can be dealt with predictably by looking at deeds and hiring surveyors if needed.  Understanding a patent requires both technical and legal expertise — and deep knowledge of the field, including the extent of prior art.  And even with expertise, the boundaries are not clear.  In principle, going to court should be an effective, albeit expensive, way of gaining clarity.  Yet when judges construe claims, they are reversed 40% of the time by the appellate court.  As one former USPTO examiner recently noted, “if you give the same application to 10 different examiners, you’ll get 10 different results.”

Unlike a deed for property, a patent is only a right to exclude; it does not grant the owner a right to exploit the technology — or even to use it.  Using it may be against the law, or the technology may be controlled by an underlying or overlapping patent that belongs to someone else.

But a patent is not necessarily a monopoly.   Most patents are worthless, and other patents are narrow enough that, if known, they can easily be designed around.

Once again, there is great variation from industry to industry.  A molecule can be managed as property much more readily than an abstract idea.  A drug that is the only known treatment for a particular disease is in effect a monopoly.

While patents are often referred to as “intellectual property” along with copyright, trademarks and trade secrets, this is misleading.  There are critical differences.  Unlike copyrights, patents do not allow for independent creation or fair use.  The transaction costs, including legal overhead, in all aspects of the patent are exceptionally high, which is especially problematic for small companies.

Unlike conventional forms of property, the scope and meaning of each patent is objectively unique.  Appraisals are costly and indeterminate, and the insurance market is virtually nonexistent.  Validity opinions retail for $10,000-20,000.

Unlike land, ideas are not a naturally limited resource.  The one-sided process for granting patents (only the applicant can interact with the examiner) means that there is no immediate constraint on issuing patents, and overpatenting only becomes apparent years later.  Like the mortgage brokers who promoted subprime lending, patent intermediaries and agents benefit greatly from growing the volume of patenting and the long-term postponement of adverse consequences.