Patents, Tort And Antitrust- A Deal? by Reuven Brenner

Jay Walker, the CEO of Priceline.com, profiled during the Internet boom as "An Edison for a New Age?," admitted that the bulb which lit up the drive to start his company was this. He just read about three mathematicians who won a patent based upon their algorithm in cryptography, and set up a company. Walker Digital registered then 12 patents on business methods, including 2 that underlie Priceline.com, and also had 240 other patents pending. However, Jeff Bezzos, Amazon founder, suggested that the length of patents on the Net should be shortened from 17 to 5 years.

When Prime Minister Tony Blair and then-President Clinton came out with the view of imposing restrictions on just what exactly can companies patent in the field of genetics to start with, bio-tech went through a predictable mini-crash. The impact of their statement would not have been so significant if patents had shorter lives than the 17 years life that the law gave to patents from the moment of their approval. The law now allows 20 years - from the time of application, having assumed that, historically, roughly 3 years elapsed between application and approval.

Let's go back to fundamentals: Where is the number 17 coming from? Why not 5? Why not 10? If found that the numbers are arbitrary, and since such drastic decrease in the life of patents would diminish share prices - of pharmaceuticals in particular - it is time to make a deal and diminish the life of patents together with a drastic change in tort and anti-trust laws, and regulations. The goal would be to move tort law and regulations - the effects of which are either significant price increases, or making products and services disappear - away from the present trend of "absolute standard" toward "personal responsibility." The latter is, in fact, a feature of Western European tort law: that's why the French, who still smoke like chimneys, can't contemplate suing cigarette companies. As to anti-trust: the goal would be to eliminate treble damages - a non-existent feature in European law - and allow parties to be compensated for the legal costs of frivolous suits (again, the case of Western Europe's legal tradition).

So where is the 17-year patent life coming from?

The earliest recorded English patent was granted in 1331 to John Kemp the Fleming so that he would be encouraged to import his weaver's mystery. By the 17th century, however, the English Crown granted such monopolies not only for attracting qualified immigrants - draining the Continent from brains - to establish trade or industry, but, eventually, also to protect guilds against competition, to reward for royal favor and fill the Crown's coffers. The latter abuses led to the English Parliament to enact the Statute of Monopolies in 1623 by which all form of monopolies, with an important exception, were abolished. This exception related to patents granted for bringing 'new manufacture within this realm,' and its main object being craftsmen from Amsterdam, the city that was becoming the miracle of the 17th century world. The monopolies were to last for a term of 14 years - to reward the entrepreneur until he trains two generations of apprentices on English soil. In fact, the English textile industry at the time was one of those developed with the assistance of "qualified immigrants," and helped England catch up with - and eventually leapfrog - the Dutch Republic.

In the US, the first patent act of 1790 adopted the 14 years term, drawing on the 7-year trade apprenticeship number, and with no option of extension. The 1836 patent act added a seven-year renewal term, extending the life of the patent to 21 years. The present 17-year term is a compromise dating back to 1861, when the House wanted to retain the 14+7 option, and the Senate that wanted to go back to the 14-year limit. We lived with the political 50-50-and-rounded compromise until 1999, when the extension to 20 years was standardized around the world.

What would happen if the life of patents was shortened?

Since prices of many patented goods would decline, there would be less piracy around the world. If the change was done in isolation, it would lead to a drastic decrease in share prices of pharmaceuticals, though raising share prices and rapidly expanding employment in the generic part of the industry. However, if the change was done together with significant revisions in tort law and regulations, both of which had the effect of significantly increasing the average costs of bringing new drugs to the market and their prices, the effect would be a win-win-win for consumers, producers and investors.

And it may not be true that diminishing the life of patents combined with the legal and regulatory changes would have the effect of diminishing the rate of innovation over the longer haul be it in the US or elsewhere. During the 19th century, Belgium attracted investments by operating the laxest company law of all developed countries in Europe: among others, they did not enforce patent laws. Switzerland did not have a patent law until 1887 - and was the reason that German chemical and aluminum companies opened plants there. The 1887 Swiss Law still covered only inventions that could be represented by a model, leaving other processes unprotected. Recall too that Phillips' initial success first in Holland and then all over Western Europe, were due to copying Edison's lamp's, without paying royalties to Edison interests. Briefly: Belgium, the Netherlands and Switzerland attracted capital and investment and developed fast - though they had no patent laws to speak off.

Though there is no doubt that Edison and his family might have lost money, there is no proof that allowing patents to last 17 years, rather than 5 or 10 does not simply give too much monopoly power and have undesirable consequences. It well may be that tort laws and regulations - and the legal profession - would not be expanding, if society did not perceive that companies' deep pockets were due to having too much monopoly power, derived from patents' (or copyrights, for that matter) arbitrary, overly long lives. Lawyers, politicians and regulators perceived the monopoly rents - and ventured into the resulting "redistributing the rents" business, with, by now, disastrous effects. The law of unintended consequences at work, and the pendulum swinging too much.

The historical debate on patents between Thomas Jefferson and Benjamin Franklin, on one side, and James Madison and Alexander Hamilton, is illuminating, indicating an even more far-reaching solution than the political compromise of simultaneously diminishing the life of patents and changing tort laws and regulations.

Thomas Jefferson and Benjamin Franklin were generally opposed to awarding limited monopolies to inventors. James Madison and Alexander Hamilton were in favor, though Madison wanted to give inventors monetary prizes, or other rewards rather than monetarily open-ended monopoly power. The 1787 promise from Congress to James Rumsey of 30,000 acres of land in Ohio if he could demonstrate a steamboat that traveled up the Ohio River reflects the latter idea. (In fact, another person too, John Fitch, got the same reward for the same invention at the time). However, when debating their solutions, all four were, in fact, interested in the Federal government's promotion of scientific endeavors. The significant debates were over details of implementation and the providing direct Federal support for science - but without violating the spirit of the constitution. The result with which the US has - roughly - lived ever since, as far as patents are concerned, has been a compromise, combining elements of Hamilton's and Jefferson's bills.

Since, for better and for worse, the Federal support to the sciences is today a well-established idea, and entirely separated from the subject of patents, it's about time to re-evaluate the latter. And once a deal is worked out and the life of patents is lowered, the next step could be to follow up on Jefferson and Franklin, privatize the "market of ideas," and let innovators float their "idea-prospectus" to investors in well-organized auction markets.

Of course, not auction markets of the arbitrage-creating, ill-thought-California-electricity-regulatory variety.

Reuven Brenner lectures at McGill. His last book is Force of Finance (Texere, 2002). Professor Brenner can be reached via e-mail at: reuven.brenner@mcgill.ca

Editor's Note: The Wall St. Journal featured an article based on this commentary, from Reuven Brenner, on November 19, Tuesday, 2002

Reuven Brenner

Wednesday, November 27, 2002