Patent Basics

Patents: Property or Monopoly?

Patents are often described either as property or a monopoly.  Both are only partially correct and both are potentially misleading.  Patents are defined by federal statute (and, as of the Oil States Supreme Court decision in 2017, by the Supreme Court) as a 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 potential ability 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 these superficial similarities, patents do not behave like real property.  Identification of real property is visible and intuitive — lots abut and do not overlap.  If property boundary conflicts arise, they can be dealt with predictably by looking at deeds and hiring surveyors if needed.

But the boundaries of a patent can be very difficult and costly to determine.  Each patent is defined by its claims, which may be written in a way that is ambiguous—sometimes intentionally.     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. Ultimately, obtaining a definitive answer to what a patent covers requires expensive and time-consuming litigation.

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.  And courts often contradict one another—in one case, seven different district courts construed the same patent and no two courts came up with the same answer.  So, unlike a deed to land, it is often unclear what any given patent actually covers. Appraisals are costly and indeterminate, and the insurance market is virtually nonexistent.  Validity opinions retail for a median price of $15,000.  It’s relatively easy to know if you’ve built something on someone else’s land—the same is not true for patents.

And unlike land, ideas are not a naturally limited resource.  There’s only one 1600 Pennsylvania Ave NW, Washington DC. There are a potentially infinite number of patents on various aspects of a cell phone.  And the one-sided process for granting patents (only the applicant interacts with the examiner) means that there is no immediate constraint on issuing patents.  Overpatenting usually only becomes apparent years after an invention is first made. This overpatenting can result in a single product potentially being covered by more than 250,000 overlapping patents.  When that many patents are involved, it becomes impossible to accurately evaluate what patents are valid and infringed by a product, resulting in a situation where a manufacturer must either license patents they likely don’t infringe or risk litigation.

Even within the realm of “intellectual property”, the various flavors of IP have significant differences.  While patents, copyrights, trademarks, and trade secrets are often referred to as a group with the term “intellectual property,” this is misleading.  There are critical differences. Unlike copyrights, patents do not allow for independent creation or fair use.  Unlike trade secrets, the knowledge of a patent is publicly available to anyone.  Unlike trademarks, there’s no requirement that a patent owner actually use their patent to be able to enforce it.  And the transaction costs, including legal overhead, in all aspects of a patent are relatively high in comparison—something which is especially problematic for small companies.

But, while a patent isn’t property like land, a patent is also not necessarily a monopoly.   Most patents are worthless. Other patents are narrow enough that, if known, they can easily be designed around.  But there’s great variation from industry to industry. A drug that is the only known treatment for a particular disease is in effect a monopoly.  A patent on an abstract idea likewise is effectively a monopoly over a basic aspect of technology. And a patent on a technology that’s been made part of a standard like Wi-Fi or LTE is effectively a monopoly, because you can’t make a Wi-Fi chip without infringing it.  But a patent on a particular way of solving a particular problem may not provide monopoly power—someone else could design around it.

In the end, patents aren’t property, and they aren’t always a monopoly.  What they are is a government regulation of the kind of conduct inventors and manufacturers can engage in.  They’re industrial policy—and if patent policy hinders innovation and manufacturing, then it should be changed.

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