19 August 2014


'Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century' [PDF] by B. Zorina Khan argues that
The most significant changes to the patent and innovation system in the past two centuries have been, or are in the process of being, implemented in the United States today. Critics of patent grants and intellectual property institutions propose alternatives such as unprecedented constraints on the rights of patent owners, and many advocate the award of technological prizes as superior alternatives. Such proposals are motivated by claims that the patent system is in crisis, with new developments that require departures from traditional approaches to property rights and technology policy. The historical record sheds light on the nature and validity of these controversies. In particular, data on patents granted, litigation rates over the past two centuries, and the role of non-practicing entities, indicate that these features of the current market in intellectual property are hardly anomalous. Indeed, they have been inherently associated with disruptive technologies that transformed the United States into the world leader in industrial and economic growth. By contrast, extensive empirical analyses of prize systems in Europe and the United States explain why early enthusiasm about such administered nonmarket-oriented awards had waned by the end of the nineteenth century. 
Khan's NBER paper states that
The patent system is the source of widespread dissatisfaction, many scholars and observers call for multifaceted reforms in its rules and standards, and some even propose the abolition of state-mandated grants of intellectual property. Patents are vilified as unnecessary monopolies that serve to enrich a few corporations and their robber baron executives while harming their competitors and the general public. The popular press is filled with ubiquitous headlines about negative-sum “patent wars” that are waged in boardrooms and courtrooms across the world, culminating in huge litigation and enforcement costs, where the only winners are the lawyers on both sides of the dispute who garner lavish fees regardless of the outcomes. Pervasive copyright piracy of music and other cultural goods leads many to fear the demise of domestic creativity and output. In response to the urging of paid lobbyists, Congress engages in lengthy debates and considers abundant proposals for reforming the patent and copyright system. Prizes and other alternatives to patents are gaining greater favour among the opponents of the existing intellectual property system. In general, these debates and policy proposals are primarily based on rhetoric and self-interest rather than on objective assessments of empirical evidence.
The previous paragraph refers to discussions and debates that were rife in the nineteenth century about patent and copyright systems. Similar claims and counterclaims were prevalent when the British Statute of Monopolies authorized the world’s first statutory patent institution in 1624, and have persisted through the centuries with periodic upsurges that replicate the same questions and concerns. In 1950, another period when Congress was paying closer attention to calls for reform, Fritz Machlup and Edith Penrose published an article on “the patent controversy in the nineteenth century,” in order to prove that “despite all the changes in the economic scene, our thinking on the subject has hardly changed over the century.” They described the historical evolution of the patent system and its tendency to generate discontent and debates, culminating in a call to abolish patents in the second half of the nineteenth century. Their report effectively demonstrated how the same issues and positions were still being rehashed a hundred years later, as if nothing had been learned from history. However, although the authors’ stated objective was to provide a more systematic approach to the subject, their article was largely descriptive and not based on empirical evidence.
Facile rejoinders to historical accounts tend to dismiss such experiences as irrelevant to the twenty-first century and the Brave New World of smartphones, silicon chips and one-click patents. Both the new anti-patent abolitionists and their opponents often recycle inaccurate and misinformed historical anecdotes when it serves their purpose, without much regard for the validity of these claims. According to a noted jurist, “a page of history is worth a volume of logic.” A systematic historical perspective is necessary to filter out the signal from the noise of the plethora of contradictory claims that are currently prevalent. For, although the technologies are obviously different, much of the underlying economic and legal fundamentals remain unchanged. Legal rules and social reforms may be necessary to fit radical new circumstances, but many of the concerns of today are hardly radical or new, and some have even proved to productive feature of markets in invention since their inception. And, in a social system based on norms and precedent, “if a thing has been practiced for two hundred years by common consent, it will need a strong case … to affect it.”
Who are the new patent dissidents of the twenty-first century? As one might expect, the primary core of the movement consists of lobbies in industry who would benefit from royalty-free usage of patented ideas, but disinterested analysts and academic observers also highlight a range of concerns.
Many criticize specific aspects of the administration or consequences of patent rules and standards. Some wish to increase access to essential medicines, and others argue that patents do not function effectively in particular contexts such as gene therapies and software. It is interesting to note that the most radical critics consist of a number of eminent theoretical economists with little specialized expertise in intellectual property. They highlight the sort of analysis that is standard in principles of economics classes: patents comprise monopolies which drive up prices above marginal cost, produce “contrived scarcity,” and lead to a social deadweight loss. Gary Becker concludes that it would be advisable to “maintain the patent system on drugs and a few other products that are expensive to innovate and cheap to copy, and eliminate patents on everything else.” Joseph Stiglitz, noted for landmark contributions to mathematical theories of asymmetrical information, now advocates prize systems as superior alternatives to patents, “an idea whose time has come.” Michele Boldrin and David K. Levine, general equilibrium theorists, are less temperate; they refer to the “evils” of the patent system, and lobby for its complete abolition.
This paper addresses several specific debates about innovation and institutions. The intention is not to provide a comprehensive survey of the literature, but rather to present research findings that may shed light on a number of these issues. The empirical evidence is based on the analysis of large original panel data sets that were compiled from patent records, biographical information about inventors, assignment transfers, lawsuits and legal treatises, and over 20,000 observations of technological prizes that were granted in Britain, France and the United States. The first section of the paper considers the general argument that patents function as inefficient monopolies. The second section highlights the role of “non-practicing entities” in early markets for invention. “Trolls” are often associated with excessive enforcement of patent rights through litigation, so the third section assesses patterns of litigation over major innovations, involving patent-related disputes and disputes in general that were reported in state and federal courts. The next section analyzes prize systems, which are being advocated as superior alternatives to patent institutions, and examines the identity of prize-winners, as well as the social consequences in the form of technological spillovers. The final section offers a brief summary conclusion.