Patents as Currency in the Intellectual Property Marketplace

I like Wikipedia’s definition of intellectual property (IP) as being the product of the mind or the intellect that has commercial value and may be legally protected in the same way as other forms of property.  Former Federal Reserve Chairman Alan Greenspan observed in a speech last year that: “In recent decades […] the fraction of the total output of our economy that is essentially conceptual rather than physical has been rising. This trend has, of necessity, shifted the emphasis in asset valuation from physical property to intellectual property and to the legal rights inherent in intellectual property.”  And a recent article in Business Week pointed out that: “Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation.”  It should thus not come as a surprise that IP in general and patents in particular are playing such a prominent role in our increasingly knowledge-based economy as more and more of the innovations driving the economy are products of the human mind, which are then described or disclosed in a patent application.  Patents, consequently, are in a very real sense becoming one of the key currencies of the 21st century intellectual property marketplace.

What should be the key characteristics of a properly functioning IP marketplace?  That’s a subject that is very important to the future of innovation, and the focus of a new podcast series from IBM.  Let me offer some perspectives on the challenges we face. 

Over the last 25 years the volume of patent applications has significantly increased around the world and whole new classes of patents have sprung up reflecting innovations in areas like software and biotechnology.  These changes have overwhelmed our existing patent systems, and sparked calls for patent reform from just about every major panel that has addressed the subject of energizing innovation and competitiveness in society.  In the US, such recommendations linking patent reform with innovation are part of the White House's "American Competitive Initiative", the National Academies "Rising Above the Gathering Storm" and the National Innovation Initiative from the Council on Competitiveness.  Similar recommendations are heard around the world. 

Overburdened patent systems have given rise to uncertainties. In the aforementioned speech, Alan Greenspan remarked: “Only in recent decades, as the economic product of the United States has become so predominantly conceptual, have issues related to the protection of intellectual property rights come to be seen as significant sources of legal and business uncertainty.” This increased uncertainty is seriously eroding the public trust in the patent system, with the proliferation of patents that many regard as low in quality, too broad and vague, or based on ideas that are neither significant nor new.  The rising uncertainty and eroding trust in the patent system are very serious, not just for patents but for the very innovations that the system is designed to promote.  Uncertainty brings with it a rise in speculative behavior and litigation that further undermines the public's faith in the patent system and the common good that system was designed to protect.   

History has shown that you cannot create a fluid marketplace in society for the orderly exchange of goods, be they physical or financial in nature, unless the system is based on certainty and trust.  For example, if I buy a house from you, it is very important that everyone be very clear as to precisely what it is I am buying.  If property records indicate that the house you sold me was actually owned by someone else - we have a problem.  If I decide that the land I now own should encompass part of my neighbor's property so I can build a pool - we have a problem.  If I feel that I should charge a toll for cars wanting to use the town's road that runs in front of my house or airplanes flying above it to help me raise money - we have a problem.  All those problems can be ultimately settled in the courts, but, if sufficiently widespread, the end result would be detrimental to society. 

Similarly, our financial systems are highly dependent on certainty and trust for their smooth operation, as we have been reminded recently with the accounting scandals of the last few years.  If officials of public companies felt free to say whatever they chose in order to make the stock in their companies rise for their own benefit at the expense of investors, it would not be long before the stock markets would stop working altogether.  If speculators artificially manipulated the prices of stocks and commodities to make a killing at the expense of the ordinary investor, those investors will keep their savings under their mattresses instead of putting them to work to help build new businesses and create new jobs as is the purpose of financial markets. 

What lessons can we learn from markets in physical and financial goods that can guide us as we try to establish orderly markets for intellectual property?  I think that three ingredients are paramount: transparency, integrity and fair prices.

Transparency is a very simple concept:  all relevant information should be available to everyone.  It is a key requirement for fair and efficient free markets.  Individuals and small businesses should have access to the same market information available to large financial firms and big companies.  With respect to patents, this means specifically that the community should assist in the evaluation of patent applications by providing as much information as possible to patent examiners on prior art that might support or invalidate an application, as well as feedback on the quality and merit of the application in question, as is the case with the Community Patent Initiative.  The public should also have access to all pertinent information about the inventors and those actually applying for and holding the patent, whether it is the inventors themselves, a corporation, or an IP-only business that exists solely for the purpose of buying and licensing patents to the exclusion of actual production of any kind.  A major step toward increased transparency was taken with the announcements we made earlier this year with the US Patent Office (USPTO), the Open Source Development Lab (OSDL) and others aimed at involving open communities and the public in general to help increase patent quality.

Integrity begets trust and is thus crucial to a properly functioning market.  Wild fluctuations in prices caused by manipulative behavior to artificially drive up the prices for the enrichment of the few will totally undermine the public’s trust in markets.  With patents there is an increasing fear that the emergence of IP-only companies with the sole purpose of trafficking in patents could create an asymmetric situation that would de-stabilize the system.  Generally, all kinds of checks and balances cause businesses to behave reasonably in the IP marketplace, such as the potential damage to their brand and reputation for integrity which could result in the loss of customers for their products and services as well as difficulty in establishing business relationships.  But since IP-only companies produce no products, perform no services, and have no customers of their own, they have no such checks and balances.  They therefore might feel free to try to extract unreasonable fees from businesses engaged in production under the threat of injunctions and other litigation, with potentially negative consequences to innovation as a whole.

Finally, a hallmark of a properly functioning market is that there is a clear way to determine the fair price of the assets being sold and bought.  Most will agree, I believe that such pricing should be established based on the dynamics of an open market.  While it would be nice if I could ask for and get whatever price I want for my house, it is ultimately up to potential buyers to decide whether I am asking a fair price given all the other houses on the market.  Similarly, establishing fair prices for stocks, bonds, currencies, commodities and so on is a prime objective of financial markets.  Artificially driving up prices, whether by collusion among sellers or hoarding goods to try to extract higher prices, is discouraged -- often through criminal penalties.  In the same way that the quality of a bond, from AAA to junk, is a key factor in helping to determine its fair price, we need a clear way to determine the quality or merits of a patent, including factors such as the risk that the patent will be found invalid or unenforceable, in order to reduce speculation around its proper valuation.  The Patent Quality Index initiative which is part of our previously referenced efforts to improve patent quality working with the USPTO, academics, open communities and others aims to develop such a unified numeric index representing the quality of patents and patent applications.  When all is said and done, the reason inventors are granted exclusive rights to benefit from their ideas for a limited period is to encourage the disclosure of inventions and thus promote innovation, as others find benefits beyond those originally imagined by the inventor.  An artificially high price for a low quality patent as a result of its being vague, overly broad, or without merit will only enrich the patent owner while severely limiting the potential applications and benefits to society.

The reason we all need to help restore trust in the patent system and help establish an IP marketplace based on transparency, integrity and fair prices, is not for the sake of the patent system itself.  In the end, the patent system is a means to an end.  The knowledge in our knowledge-based economy comes from the minds of humans, and it is that human capital that we want our patent system to help us put into circulation, just as we have established other systems in society to help us better circulate physical and financial goods.  Our overriding objective is for patents to help us, rather than hinder the establishment of an orderly IP marketplace.    

Comments

[Steve Flinn]

Irving,
Having just discovered your blogs, I really appreciate having access to your thoughtful perspectives.

With regard to promoting a more effective IP environment, it seems to me what is often lost in the ongoing IP debates is that the fundamental objective (which your re-emphasize in your blog) in encouraging invention disclosure within patents is that it is meant to educate the public and advance innovation (in exchange for the 20 years of exclusive property rights).

There seems to be two inter-related issues regarding the ongoing patent debates: the first issue is finding the optimal overall balance between the benefits of disclosure in exchange for inventor property rights, and the second issue is effectively promoting maximum learning from, and application of, patent applications and issued patents.

The first issue is basically a policy issue, and the key policy variable is the scope of what can be patented. In the USA that scope continues to increase (e.g., Lundgren). It can be debated whether that is positive or negative, but the “right” answer depends significantly on the second issue related to the ability to effectively learn from the disclosures of patents . . .

The second issue is a technical and process-related issue – it is fundamentally about applying technologies and processes to promote effective learning in the face of increased complexity (greater scope of patentability, greater volumes of patents, greater volumes of prior art, etc.). Although determining the right balance in patentability scope on an absolute basis is a thorny problem, on a relative basis it is certainly the case that the better the ability to assimilate patent knowledge and learn from it, the happier we should be about broadening patentability scope.

And here it seems to me that we need to think about effective learning both within the patent authorities (e.g., USPTO) to promote the highest quality patents, and for the public as whole. For example, the patent quality index approach sounds like a good step forward in that it can promote a simple metric that can gauge patent quality. This can be useful for the public as a whole, and also for patent authority examiners.

However, in the face of massive complexity and steep learning curves, it seems to me that we need to think about some additional methods of promoting effective learning in the face of increasing complexity, both within the patent authorities and for the public as a whole.

Specifically, a whole host of technical solutions for managing large volumes of complex information of varying quality has evolved over the past few years that increasingly leverage social-based information (leveraging the “Wisdom of the Crowd”). An example is Wikis technology, as applied in Wikipedia – a wonderful community resource that we all cite in our on-line writings. Certainly contemporary search engines also come to mind as instruments to manage increasing information volumes and complexity.

Extending beyond these specific technologies, it seems to me that organizing patents as a socially adaptive knowledge network with some of the following features could promote effective learning both within patent authorities (promoting higher quality issued patents) and for the public in general:

 Patents more formally represented as “objects”, with the patent objects tightly bound with meta-information, history etc.

 Socially-driven (explicit or inferred) interconnections between patents objects (“knowledge network”)

 Ability to create private, but optionally sharable, knowledge networks of patent objects with personal interconnections among the objects

 Ability to easily integrate other information (prior art, lab notes, etc.) into a patent object knowledge network for personal or shared use

 Ability for individuals or sub-communities (e.g., experts) to apply ratings, provide feedback, etc., to patent objects that can be used by others

 In addition to search capabilities, automatically generate personalized recommendations based on personal and social use patterns (and such a recommendations function could incorporate a patent quality index in its algorithm).

Such a system is feasible to implement right now. At the risk of a commercial plug, the best working example I know of is our business thought leadership site (www.manyworlds.com), which is an adaptive learning system for a complex knowledge base spanning a number of inter-related business-related domains. As an aside, reflecting your culture of learning, I must mention that at last count, IBM has more executives subscribing to wwww.manyworlds.com than any other company in the world!

[Marc Ehrlich]

Hi Steve -

You make some very compelling suggestions in your reply.

I agree it is vital to enhance the usability of the patent record to promote the intended public teaching both within the office (better exam) and in the public at large.

As you may well know, some aspects of the knowledge network you call for do already exist. There are a wealth of commercial tools and scholarly articles that cover networks of patents linked by the patent citations within the patent documents. This so-called patent citation analysis field is explored in depth in the book entitled Patents, Citations and Innovations: A Window on the Knowledge Economy, by Adam Jaffe.

Of course these citation-based patent networks are of limited utility as a learning mechanism since they are created by applicants and examiners in their necessarily limited recitation of relevant prior art during patent exam. The limitations in this process are well known as they omit (for example)citations to art seen as redundant from a patentability perspective, but potentially valuable from a learning perspective.

The only issue I would seek to clarify is your initial discussion about patentable subject matter.

I read your posting to say that we may be more comfortable with an expansion in patentable subject matter if patents were better at teaching the public. While I do agree that this ability to learn from patents bears on the utility of the patent system, I would point out that the harms of expanding patentable subject matter beyond their constitutional mandate (the 'useful arts') presents potential harms that cannot be remedied even by the most well crafted and fully knowledge enhanced patent documents.

[Steve Flinn]

Hi Marc,

Thanks for your reply and suggestions. Yes – agree the current citation management approaches contain the kernel of some of the capabilities needed for effective patent and relevant prior art – but I think we both agree there is much more that could and should be done to get to the next level of truly useful learning systems that can serve a variety of learning needs.

On the question of patentable subject matter – no, I’m not arguing for expanding patentable subject matter beyond the constitutional mandate. But, as we both know, even within the confines of that mandate, the interpretations of what is patentable subject matter has certainly expanded in the past couple of decades. And whether that is good or bad is clearly contentious. I personally believe it is a good thing, but if and only if patent examinations are of high quality and obviousness criteria are applied appropriately.

But although I believe this broader interpretation of patentable subject matter is a good thing, I can’t prove it a priori, and I have seen no fact-based analysis that can prove or disprove this hypothesis (if someone has I would be interested in taking a look at it).

As a recovering economist, the debate on the appropriate scope of patentability reminds me a bit of the debate in this country regarding socialism versus capitalism – until very recently, some the brightest minds in this country thought a predominantly socialistic economy would be more effective in the long run than a predominantly capitalistic economy. And frankly there was no theoretical a priori argument that was convincing one way or the other – the convincing came by looking at real-world performance over a number of decades. I think the same will be true of patent scope – we’ll have to evaluate the real-world consequences over a significant period of time to settle the debate.

One can visualize a value curve that stretches along a horizontal axis that measures the patentability scope chosen by a society. At one extreme is a policy of no patents and/or enforcement in any domain – there are many in the world that argue that that is the point at which the value curve is at its peak. At the other extreme is the broadest possible interpretation of patentable subject matter within the confines of the constitutional mandate. I believe the value curve peaks closer to this point – given the caveats about patent quality. Others will believe the value peak is somewhere in between.

But again – all the advocates of the different shapes of this value curve can do at this point is to generate plausibility arguments. On the other hand, what we all can agree on, is that higher patent quality and patent-based learning systems will serve to shift up our theoretical curve regardless of its actual shape.

[Jonas Maebe]

I do not agree that patent quality is somehow able to magically solve all problems faced by the patent system due to expanding subject matter. However, supposing it did, wouldn't the proper course of action be to first solve the quality problems and only then expand subject matter, instead of the other way round?

After all, the patent quality problems indeed aren't confined to fields like software and business methods, see e.g. this speech by David Martin from M-Cam: http://wiki.ffii.org/Martin041109En

His story (real world data!) about how low quality patents are hurting US companies operating in China and the amusing anecdote about the 683 patents that are currently in force covering the ethernet plug are quite interesting.

[shrikant sharma]

dr irving sir ihave gone thru yr nice expertise on patents. usa in perticuler and mankind ingeneral have been benifitted with the invention of the wordPATENT and the economics of patents are becoming complex more and more with the advancement of time.for aresearcher like me who has developeda new energy tapping system non fuel and sustainableSO MUCH THAT THATOIL DEPENDENCY OF ANY COUNTRY LIKE USA WILL BECOME ZERO IN THREE YEARS. how to proceed has become a problem. if i would have born in the era of Edison or so iwould have got the patents and not only usa but me also would have been benefitted. pl let me know what to be done maintaining the secrecy andpossibility of thefts minimum.

[philippines property]

If you talking about intellectual property (IP) Wikipedia’s right definition being the product of the mind or the intellect that has commercial value and may be legally protected in the same way as other forms of property.You have a very informative blog thank;s for sharing.

by:stephen