In his post Shaun Larcom explains the findings of Gaetan de Rassenfosse and Bruno van Pottelsberghe. Their research shows that great variation exists between territories as to patent fees, but that variation does not appear to cause a commensurate impact on patenting activities as between territories. This reveals that demand for patent applications and patent renewals is inelastic (i.e. unresponsive to price change) and the authors observe that this did not mean that patent fees were an ineffective policy tool, but that ‘a change in fees must be sufficiently large to have observable effects’. The question is put by Larcom: what is a socially optimal fee structure? Larcom argues that patent fees could have a taxation role, targeted at ‘the monopoly rents that accrue to patent holders’. For the reasons stated here it is argued that this should only be done if a conscious policy decision has been made to reduce the incentive effects of the patent system.
Deciding whether to have a property system of patents for inventions entails social choices.
The primary social choice is whether or not to institute patent property. Over time it has been largely accepted that temporally limited property rights for inventions confers net social benefit by providing measured incentives to accelerate the rate of technological progress, and to provide those incentives in such a way that they are conditional on full disclosure. The rationale is economic. The promise of being able to appropriate value from market demand for the patented technology per se is intended to have stimulating effects upon conduct likely to yield more technological progress – such as investment in R & D. After the patent term expires, the disclosed technology is absent any property rights.
Another social choice is how to conduct a merit assessment of that which is patentable. It has been long agreed that patents for existing or obvious technology is unjustifiable. Such grants do not stimulate worthwhile progress and restrain existing trade. It is largely accepted that best practice involves assessing the merit of inventions the subject of a patent application, and the written application itself, prior to grant. Such assessments are complex. The exercise involves integrating technologies that are at the edge of human understanding with a body of difficult law. Employing sufficient quality human capital to administer a patent system is expensive. How is a nation’s patent office to be properly funded?
The current IP Australia fee structure to acceptance for a standard patent is between about $1000 and $2000 depending upon the circumstances of the particular application. (For example the acceptance fee of a patent application with more than 20 claims entails $100 for each claim in excess of 20.) The current IP Australia fee scale for standard patent renewal is
5th anniversary $250
6th anniversary $250
7th anniversary $250
8th anniversary $250
9th anniversary $250
10th anniversary $450
11th anniversary $450
12th anniversary $450
13th anniversary $450
14th anniversary $450
15th anniversary $1,020
16th anniversary $1,020
17th anniversary $1,020
18th anniversary $1,020
19th anniversary $1,020
If term extended, $2000 for each anniversary during the period of extension
What should underpin the setting of such fees? In my view it should simply be to fund the patent system by a user-pays principle.
Because a patent office is expensive, it needs to be funded. While inventors can use the patent system, they do not need to. For example sheer secrecy and/or merely first-to-market advantage provide alternative means to confer comparative advantage upon inventors. If an entity relies on patent incentives and avails itself of the patent system, it is apt that the entity pays for the system. Patentees derive a clear private benefit from the system. But the total fee take should not be more than that required to properly fund the patent office.
What is the extent of such use in any given case? Given that the direct users of the patent system are mostly patentees, the extent of any use must be measured by degree of reliance on the patent system. The logic underpinning the current fee structure reflects this thinking. Most obviously, the more patents applied for and renewed, the greater will be the fees payable by a user. But extent of use can be differentiated, and usage pricing accordingly discriminated as between individual usages. For example X and Y might each apply for and be granted a respective patent. X has invented an improved device for which there is no market demand; X might maintain the patent for short time and then surrender it. Y has invented an improved pharmaceutical which is heavily demanded; Y might obtain a term extension of the patent. X and Y are each required to pay quite different total fees to IP Australia in relation to their patents. This is because while each has used the patent system in relation to their respective patents, the extent of patent system use of X and Y is very different. On user-pays principles, Y should make a bigger contribution to the running of the patent office because the extent of its reliance on the system is higher than X.
There may be very good arguments for revising overall fee levels to ensure that a country’s patent office is properly resourced and employing sufficient numbers of talented people. However it seems that the basic features of total fees being no more than that amount necessary to fund such a system, and fee pricing set on the basis of a user-pay principles, are sound. In contrast Larcom’s idea is that patent fees should also be a tool to tax (so-called) ‘monopoly rents’ accruing to patentees. This seems less desirable unless an informed policy decision has been made to reduce the incentive effects of the patent system.
Underlying Larcom’s approach is the philosophical view that ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’. A person owning a patent is not a monopolist any more than is a person owning a block of land – indeed the land owner has stronger property rights than a patentee. Once the basic social choice is made to have a patent system, its justification is the incentive effects of the promise of patent property. Property, while central to the operation of many markets, is a concept defined in law. The defining attribute of property is the owner’s entitlement to exclude the world from carrying out certain activities, and to secure the assistance of the law in carrying out a decision to exclude. Exclusive rights therefore require most third parties desirous of lawfully exploiting the patent resource to bargain with the owner. In that licensing bargain, the owner is able to appropriate to itself some of the value accruing from a third party licensee’s exploitation. Value will be appropriated by the patent resource owner which is vastly in excess of the marginal cost to it – typically zero – of providing of the patent resource. This is an inherent feature of patent incentives in the first place. The promise of appropriating some third-party value from the licensing of an owned patent resource with a zero marginal cost of provision is the very incentive which justifies the patent system.
Therefore if (as Larcom says) ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’, and if that is to be done (as Larcom suggests) by changing the law so as to tax through patent office fees that appropriated value, such taxation must reduce the incentive effects of the system.
It is far from clear that current patent incentives are excessive and require such a change. Whether or not existing incentives are excessive such as to create ‘monopoly rents’ and misallocations of resources is highly contestable. Is there evidence, for example, of over-investment in R & D caused by such excessive incentives? This uncertainty is especially so given that the promise of the patent system enables a prospective patentee to invest in different avenues, knowing that one commercially successful patented technology can offset expenditures in avenues that prove unsuccessful. It is equally unclear that there are strong policy justifications that patentees’ revenues should be subjected to higher taxes than others engaged in industry – whether those industries are intellectual property dependant or not. While the patent system should be self-funding through fees set under sensible user-pay principles, taxing patentees more highly than others in industry should not be considered unless an informed policy decision has been made to reduce current patent incentives.
David Brennan is an Associate Professor at the Melbourne Law School