Business

Replace Patents With Prizes To Spur Innovation, Create Savings: R Street

Patents serve a valuable purpose in protecting the rights of inventors. Intellectual property like a patent offers innovators who come up with useful new ideas a “limited monopoly” (that can be exploited for financial gain) as a reward for their valuable contribution to society as a whole.

The patent system has been in place for decades, and has worked relatively well, at least until the last couple of decades. Patents, however, are not fair in a very real sense, and they clearly limit competition.

As R Street’s Derek Kanna points out in a recent policy study: “Even when they work properly, patents limit competition by granting a 20-year legal monopoly.7 De jure legal monopolies are able to use the power of the law to extract excess rents from consumers and other firms. In practice, it is not unusual that multiple teams work simultaneously on similar concepts and make similar or iterative discoveries, but only the team that receives the patent enjoys the windfall. The others typically will be barred from bringing their independent invention to market, rendering the research and development invested in such projects sunk costs.”

Offering inventors prizes, percentages instead of patents

Replace Patents With Prizes To Spur Innovation

The R Street report suggests that to enable research and development that produces real taxpayer savings, the federal government should implement an “innovation savings program” to serve as an alternative to the traditional patent system. The program is designed to reward teams or individuals who make discoveries or develop new technologies that result in federal budget savings. The plan would be funded by earmarking a percentage of the savings for the innovators. However, to join the program and receive the rewards, the researchers and inventors would not receive patents and the innovations could be publicly exploited.

Kanna argues that this “perpetual, self-funded federal prize system” would be modeled on the current False Claims Act and Medicare Recovery Audit programs. All payouts to inventors will be administered by an independent agency (ideally verified by the Government Accountability Office and overseen by Congress).

Most importantly, new technologies developed through this process would be available immediately for commercialization, free of royalty fees. This offers the important benefit of encouraging innovation in areas where patents and traditional research spending have fallen behind, and at the same time bringing innovations to market more efficiently.

Of note, prize systems of this kind have been known for more than 150 years, in the form of the False Claims Act, and actually predate patents as prizes were offered as part of “qui tam” actions as early as the 13th century.

The problem with patents (or Current patent system is inefficient and needs reform)

As Kanna notes, if we assume businesses are rational economic actors, they will maximize their opportunities to file for and obtain patents. This inevitably leads to patents of dubious quality being granted, and over time this distortion of the system becomes greater and more harmful to the overall social goal of innovation.

As he points out: “Maximizing patents can mean investing in lawyers, rather than engineers, and filing applications for inventions and processes which the firm has no intent ever to bring to market. In such cases, innovation and competition suffer, for no discernible benefit.”

Also keep in mind that although the stated purpose of patents is to allow inventors to make up large R&D costs, there are essentially no provisions in the Patent Act to calibrate patents’ “monopoly rents” to match the level of upfront expenditure. As a matter of practice, patents are granted for inventions large and small, regardless of the cost to develop. This, of course, means some inventors with low “sunk costs” get to reap huge profits, while those with high “sunk costs” make much less (or nothing).

See full study below.