Sunday, September 30, 2007

Why Patent Demand?

I have spent my entire legal career working within the patent system. My first experience as a patent litigator taught me the incredible power that a single patent can impose on the market, and the huge expense of patent litigation. Now, as in-house IP counsel at a large software company, I see the enormous risk that all companies face from patent litigation just by being in business. Large corporations are filing huge numbers of patent applications so that, if they are sued by a competitor (or another company that actually makes a product), they will likely have a patent within their portfolio to file their own lawsuit (sort of like mutually assured destruction).

Because patent infringement lawsuits cost so much to defend ($4 million), just the filing or threat of filing a lawsuit is a very powerful weapon. I have heard IBM patent professionals publicly declare that the size and scope of IBM’s patent portfolio allows them to enter any business it chooses without fear of patent infringement suits. So, when IBM decides that it would like to enter a market, the player who created the market in the first place can’t use its patent portfolio against IBM without fear of a retaliatory strike from IBM in an area that may be completely unrelated to the technology that created the market. Thus, a real inventor’s market advantage from its patent portfolio is limited by the huge patent portfolios developed by huge companies.

IBM files more than ten patent applications each and every day of the year…..

Supply and Demand Reviewed

I like to examine markets using economic principles. In a market for commodities, the Law of Demand generally states that if all other things are equal, the price of a good has an inverse relationship with the quantity of the goods demanded. In other words, the higher the price, the lower the quantity of the goods demanded. This relationship is depicted graphically by a Demand Curve, with price on the y-axis and the quantity demanded on the x-axis as follows:

Of course, there is an equally powerful Law of Supply in most markets, which reflects that the supply of a good is directly related to its price graphically reflected in a Supply Curve. The interaction between the Demand Curve and the Supply Curve in a perfectly competitive market yields a price and quantity demanded that will efficiently allocate resources.

The Patent Application Market

What does this have to do with the patent system? Well, consider that a patent application is a “good” within its market system. The Law of Demand would require that as the price of a patent application increases, the number of patent applications demanded by the market would decrease. The Law of Supply would predict that as the price of a patent application rises, so does the quantity supplied. However, in the market for patent applications, the US Government is, in effect, a monopolist that controls both the price of patent applications and the quantity of patent applications supplied.

In a normal market controlled by a monopolist, economic theory would predict that the monopolist would set a price and supply goods that would maximize its profit. In the market for patent applications, the US Government follows a policy that the price of a patent application should not keep an inventor from accessing the patent system. Large corporations have determined that it is in their interest to file as many patent applications as possible because of the potential value of a single patent application. The interaction of the government policy and the corporate determination have lead to the 400,000+ annual patent applications and the chaos created within the USPTO simply trying to deal with the incredible volume of applications – to say nothing of providing a quality examination process.


Tim Wilson said...
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Breanna said...

Well said.