The success and failure of Steve Jobs

December 12, 2011

A review of Walter Isaacson, Steve Jobs: The Exclusive Biography, Little, Brown, London 2011.

By Julian Thomas

Malcolm Gladwell’s recent New Yorker piece (14 November 2011) offers a familiar, contrarian view of Steve Jobs’ career and significance. The key theme is drawn from Walter Isaacson’s extraordinary new biography: the dazzling successes of Jobs, together with his signal failures as a technology entrepreneur, were not the result of great vision or technical genius. Instead, Jobs’ significance lies elsewhere. He was an adept appropriator of other people’s ideas. He unfailingly recognized failure in other people and things. He had a perfectionist love of “closed systems” — that is, he could not relinquish control over the uses and applications to which Apple’s devices might be put. So the machines that Jobs introduced and helped invent – the computers, phones, tablets, and music players – embodied both his strengths and weaknesses; they were and are distinguished by being both brilliantly designed and obstinately difficult to adapt, extend, or modify.

The last three decades of computer history, and the debates that have raged over innovation and control in the technology business, are the background to Isaacson’s book. In a sense he has written, almost inadvertently, a biography of a certain kind of intellectual property. The foreground narrative is a rich new source of Jobs folklore, and this is what occupies Gladwell, and presumably many other readers. Some, maybe most, of these new stories confirm the nightmarish picture of Jobs’ manic, profligate pursuit of technical innovation. Again and again, Isaacson’s protagonist drives himself and others to extraordinary lengths by his oppressive, relentless, contemptuous, and sometimes ridiculous perfectionism. Towards the end of the book, Jobs’ expresses his disappointment in President Barack Obama, whom he thinks is reluctant to offend people. “Not a problem I ever had”. In Gladwell’s version, Jobs’ real significance is as a flawed example of a specific kind of technology developer and marketer. He is the archetypal ‘tinkerer’, not an original inventor, but an improver and tweaker of other people’s ideas. His skills are ‘editorial’, not inventive; his products are derivative, their development driven not by an original vision on Jobs’ part, but by his caustic, unerring grasp of the weaknesses of his competitors. Nothing Jobs did, in this account of things, was entirely new. The Mac’s great original selling points, its graphical user interface and bitmapped screen, were borrowed from technology developed by Xerox. The first versions of tablet computers were produced elsewhere, as were smartphones and music players.

Jobs’ tale, then, is about adaptation and appropriation, and these attributes, for Gladwell, turn out to be the essence of economic progress. Far more than the breakthroughs of visionary inventors, it was the work of engineers and technology entrepreneurs in taking ideas from elsewhere and improving them that powered the industrial revolution in Britain through the nineteenth century. As a tinkerer in this vein, Jobs achieved great things. But his tinkering has an unusual characteristic: his perfectionism, which was necessary to his success, also led him to jealously refuse others the freedom to adapt and modify that he enjoyed.  He was a tinkerer who perversely created obstacles to the tinkering of others, whether amateur users, or firms wanting to make products that would work with his. He resisted suggestions that the early Apple computers should include more (or any) expansion ports for third party add-ons; he struggled with the idea and consequences of licensing operating systems at Apple and NeXT; he tied the iPod to the iTunes store, and would not allow other music stores access to the device. And now, in the case of the newer iPhone and iPad, the development and distribution of third part applications is strictly controlled through the App Store. At the same time, Jobs is enraged when others copy his ideas: he sues when Microsoft copies the Mac’s “look and feel”; he goes ballistic when Google launches the mobile operating system Android, which he believes steals ideas from the iPhone.

So in Gladwell’s account, Jobs was an innovator who lacked the modesty and self-awareness to understand his own role and achievement. He was a ‘tweaker’ (no dishonor in that) who imagined himself a visionary. Famous from early on for his “reality distortion field,” he deceived himself, and became an innovator who stood in the way of innovation. Other contemporary commentators on technology have taken this theme further: Jonathan Zittrain’s The Future of the Internet (And How to Stop It) presents the iPhone as the ultimate ‘tethered device’, designed to ensure Apple’s control over users’ applications and content. For Zittrain, the iPhone is a salutary contrast to the ‘open’ architecture of the classic PC, which, for all its faults, could be far more readily adapted and modified by users and third party businesses. Here we find an old line of argument, that “openness” (and the associated goodness of “open source”) is the real recipe for innovation and inexpensive distribution. In the case of computing, it’s hard to argue with: even deep within the iPhone, there is POSIX, and elements of BSD Unix. The striking thing is that the closed iPhone has itself sparked an amazing wave of innovation. Whole new kinds of software, including locational media and games, educational, creative and social software, have been developed, and are readily and cheaply available for Apple’s devices. The good thing for everyone is that all this new software is now also spreading to a host of other phones and tablets, including the freely licensed (if not precisely open source) Android machines.

Isaacson’s book participates fully in the “closed system” narrative. But it also presents the elements of a more complex and interesting picture, of someone who did possess an unusual intuition for the design of useful machines; and of someone who modified his business strategies as his career progressed. Jobs did want control, and more of it than many of his customers would like, but he also realized he had to make the iPod compatible with Windows machines, and he opened the iPhone to third party developers after originally resisting the idea. He obviously hated Android, but he knew also that Apple had to compete with it. If he was a tweaker, he was (to use a metaphor that would not usually be applied to a Californian) in the Shane Warne league. But I’m not sure that tweaking aptly describes what Jobs did. It should not be difficult to acknowledge that he, together with many others, created novel things, even if they did so on the basis of the work many others had done: after all, that is usually the way. Some of this creating certainly involved adapting, or ‘editing’, but it also required acts of imagination. Gladwell’s generally precise language is vague when he describes Apple’s famous appropriation of the graphical user interface from Xerox: he says Jobs “borrowed the characteristic features of the Macintosh — the mouse and the icons on the screen” — from the engineers at Xerox PARC”.  Whatever that sentence means, in fact Apple successfully and almost completely transformed both the mouse and graphics: the machines it produced in the following years were clearly major advances on Xerox’s Star.

Anyone interested in contemporary debates over innovation and intellectual property will have their own reading of Isaacson’s book, and their own sense of the stakes in Steve Jobs’ daring adventures. Some of the most interesting elements of the story concern the way Jobs re-organised Apple around his characteristically ambitious and romantic idea of connecting the humanities with technology. In a couple of presentations he used the image of an imaginary intersection between two streets: ‘liberal arts’ and ‘technology’. Design and engineering were to be deeply connected in the conception of new products, even if that meant that everything was more difficult, more protracted, more risky, and more expensive. Sometimes in his career Jobs overcooked the aesthetics, but Apple’s results in the end justified the effort. Like much else in Jobs’ story, ideas and aspirations of this kind help us think again about the assumptions we make about computers and their places in our lives, about the relations between technical and creative innovation, the unexpected places we find novelty, and the persistent question of who owns what.

 

Julian Thomas is Director of the Swinburne Institute for Social Research

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CMCL and IPRIA seminar on Human Rights and Intellectual Property

June 2, 2011

By Rebecca Mouy

In a seminar on Wednesday 11 May at the Melbourne Law School, Professors Larry Helfer and Graeme Austin discussed their recently published book Human Rights and Intellectual Property: Mapping the Global Interface (Cambridge University Press, New York, 2011).

The book explores the conflation of two areas of law that have been historically isolated – human rights and IP. The authors note that governments, policymakers and activist communities often raise human rights concerns such as freedom of expression, public health, education, privacy, agriculture and the rights of indigenous people to oppose the expansion of IP rights. On the other hand, creators and owners of intellectual property argue that there are human rights justifications for expanding legal protections.

Helfer and Austin drew our attention to the Universal Declaration of Human Rights as a textual basis for the intersection of human rights and IP. Article 27 reads:

(1) Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.

(2) Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.

Helfer outlined factors that have led to increased engagement between the two traditionally distinct legal regimes:

●        expansion in IP law;

●        increased attention to indigenous IP rights;

●        inclusion of IP rights in the TRIPS Agreement and implementation of treaties that exceed TRIPS standards;

●        growing recognition of human rights obligations of multinational corporations; and

●        multinational corporations’ attempts to invoke IP rights.

Helfer stated that increased engagement between the two legal regimes is inevitable. Areas where we already see conflation are: patents and the right to life; plant breeders’ rights and the obligation to provide adequate food; and trade marks and freedom of expression. It follows, in the authors’ opinion, that the more pressing concern is how the two legal regimes ought to interact.

The authors set out to develop a normative framework in which to approach the interface. Helfer discussed two emerging approaches. The approach asserted by the UN is that of ‘fundamental conflict’. This approach conceives of the two regimes as fundamentally incompatible, and asserts that human rights should take primacy over IP. It has been applied in the context of the global fight against HIV aids to argue that patent rights must be abrogated in order to prevent the deaths of millions of people. Helfer argues that the two drawbacks of this approach are that it is static rather than flexible, and that it lessens incentives to innovate.

Another approach is that of ‘co-existence’. The primary concern under this approach is how to strike the appropriate balance in order to encourage innovation as well as protect human rights. Under this approach, certain policy levers are enacted that favour access to scientific innovations, such as the Doha Declaration 2001 and compulsory licensing in Thailand and Brazil.

Helfer and Austin advocate a normative framework that moves beyond ‘conflict’ and ‘co-existence’ to a pragmatic approach based on regulatory reform. Under this approach, policymakers would ideally identify basic human rights and work backwards to develop government policies to achieve these outcomes. Such government policies would aim to harness the market (ie protect IP rights) in order to achieve human rights outcomes.

Austin spoke about the circumstances that sparked his interest in the interface of human rights and IP including a growing sense in the community that the IP regime was too strong, lasted too long and inappropriately restricted human rights. However, he felt that suggestions to constrain the IP regime were crude, impractical and inconsistent with public international law obligations. Austin sought to develop a legal and normative basis for constraining IP that was rooted in sources of international law, for example international humanitarian law.

Austin also discussed some of the complexities of engaging with human rights and IP. In particular he wanted to resist viewing the two regimes as separate. Human rights, he said, should not be regarded as ‘pushing back’ against IP. He raised the example of copyright in educational textbooks and the right to education. Austin thinks that it is ‘facile’ to say that copyright rights should give way to the right to education, and that there needs to be a very careful balance between incentives and access. Austin pointed out that there is nothing in theory in the copyright regime that prevents the creation of substitute education materials. However, if other people do not have the capacity to take advantage of the structural regime of copyright law then the copyright regime is much stronger in practice than in theory.

Associate Professor Shaun McVeigh provided commentary at the end of the seminar. He commended the authors’ treatment of international law as separate bodies and institutions, rather than an overarching or singular regime. He noted that the authors had avoided the assumption that human rights and IP are necessarily reconcilable. Finally he made reference to the pragmatic approach taken in the book, where emphasis was placed on jurists’ and students’ duties to engage with the interface of human rights and IP. Professor McVeigh also put forward three provocations:

●        How do the authors account for multiplicity of international laws, and in particular the treatment of international law by indigenous communities as opposed to the traditional European conception of international law?

●        What are the responsibilities of office of a person wishing to combine the areas of human rights and IP? Are diplomacy and policy the only ways to approach the interface?

●        Are the authors motivated by a desire to bring some of the technicality and drafting of IP law to human rights law?

Rebecca Mouy is an LLB candidate at the University of Melbourne

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Review: “How SMEs Exploit their Intellectual Property Assets: Evidence from Survey Data” by Gaetan de Rassenfosse

May 6, 2011

By Shaun Larcom

Why does a firm apply for a patent? Using data from an international survey of firms conducted by the European Patent Office, de Rassenfosse answers this question with some interesting results, particularly in relation to how motivations differ by firm size. As expected, he finds most firms, regardless of size, primarily use patents to protect their technology from imitation. However, he finds small and medium enterprises (SMEs) are much more motivated by monetary reasons, while large firms are more motivated by a desire protect their freedom to operate. But perhaps most importantly the paper highlights the importance of patents as a signalling device for SMEs in attracting finance to commercialise their inventions.

The survey analysed by de Rassenfosse asked firms who had applied for a patent to rate a series of statements to determine their motivations. The ratings ranged between 1 (completely disagree) to 6 (fully agree) and included: imitation (I patent mainly to prevent imitation by competitors); secrecy (I will not patent an innovation that I can keep secret); freedom (I patent mainly to protect my freedom of operation); investors (I take patents in order to convince investors or banks of the value of my invention); and licensing (I take patents in view of licensing).

Source: de Rassenfosse (2010), p20.

As expected and visible above, the most popular motivation was to protect against imitation.  Taking the mean score, this was followed by freedom of operation, attracting investors, and then licensing. In relation to company size, the share of SMEs taking patents for what de Rassenfosse terms monetary reasons (attracting investors and seeking to licence their products) is considerably higher than larger firms – 40% for SMEs in contrast to 15% for larger firms. In addition to preventing imitation, larger firms were mainly concerned with protecting freedom of operation.

His econometric analysis largely confirms that the firms’ stated motivations for patenting align with their actual behaviour. For instance, he finds that firms that take patents with the motivation of attracting investors have a lower share of their patent portfolio unused and more patents that are used internally, as would be expected. More interesting is his analysis of how firms actually use their patent portfolios. He found that SMEs utilise their patents more than large companies and he provides two explanations. First, SMEs are more selective in what they patent given the costs involved, and second, large companies apply more for freedom to operate motives, therefore leaving a greater percent dormant.

While not the focus of the paper, the importance of freedom to operate is worthy of comment, as it suggests that many firms, particularly larger ones, use patents for defensive reasons rather than to exploit their technology. This supports the tragedy of the anticommons thesis advanced by Professor Michael Heller at Columbia University.  His work suggests that too many patents can actually lead to less innovation in fields such as biomedical research due to competing property rights and a lack of co-ordination. Curiously, this dataset suggests that larger firms attempt to deal with the anticommons problem by taking even more patents that they let lie dormant. Apart from the obvious welfare losses brought about by excessive patenting, this dataset confirms that larger firms are more able to defensively patent than smaller firms.

As the title of his paper suggests, de Rassenfosse focuses on analysing the motivations of SMEs, particularly by generating revenues through licensing agreements and in attracting investors. He finds that nearly half of those SMEs sampled take out patents for these reasons.

Worldwide royalty and licence revenues were estimated at around US$100 billion in 2005, and de Rassendosse finds that SMEs have a higher per cent of their patents licensed than larger companies. This result is perhaps not particularly enlightening as it is well known that licensing agreements are a useful method used by smaller firms to generate cash flows, whereas larger firms are more able commercialise and market inventions in-house. Of note however, is the degree licensing differs between Europe and the United States. Considering willingness to licence and the size of the patent portfolio, he finds the share of patents licensed by European SMEs is significantly lower than United States SMEs, which he suggests is due to inefficiencies in the European market for technology.

Perhaps the most interesting element of his paper is the analysis of why using patenting to attract investors is such an important motivator for SMEs rather than larger firms. Citing the literature, he highlights the importance of asymmetric information in the R&D process and the signalling effect of patents, especially for SMEs. The concept of asymmetric information applied to R&D suggests that inventors are more knowledgeable about the likelihood of success and market potential than potential investors. The argument goes that external investors have trouble differentiating between profitable and unprofitable inventions and will therefore not invest in R&D or require a significant risk premium. While large firms have the ability to finance R&D internally, this is often not an option for smaller firms, and as a consequence they must rely on external funders. Here patents can play a significant role.  Smaller firms can use patents to serve as a credible signal that reduces information asymmetry.

De Rassenfosse argues that by taking out patents on promising innovations, the inventor can reveal credible information to investors, which helps them differentiate profitable and unprofitable projects. This suggests that the signalling effect for some firms is more important than preventing imitation, and his results support this conclusion. He finds a negative correlation between the motivations of attracting investors and secrecy, suggesting that firms, particularly SMEs, are willing to disclose extra information and bear patenting costs to attract investors even when there is no need in terms of keeping their technology secret. As concluded by de Rassefosse, this makes it all the more important to ensure that the threshold for granting patents is high, and he would no doubt welcome the intentions behind the Intellectual Property Laws Amendment (Raising the Bar) Bill. Raising the bar on patents has the effect of reinforcing the credibility of the signal a patent can provide, which de Rassenfosse has shown to be particularly important for smaller firms in accessing finance.  As he concludes: ‘The more informative the signal, the more confident investors and the more information asymmetry is reduced.’ (p.13)

Gaetan de Rassenfosse, How SMEs Exploit their Intellectual Property Assets:  Evidence from Survey Data, Intellectual Property Research Institute of Australia Working Paper (IPRIA) No. 8/10, December 2010.

Shaun Larcom is a PhD candidate in Law at University College London’s Centre for Law and Economics

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Review article: The role of intellectual property rights in addressing climate change: the case for agriculture

April 7, 2011

By Shaun Larcom

What relevance does intellectual property have to greenhouse policy? The Australian Government recently announced its intention to price carbon emissions from 1 July 2012. This announcement has brought climate change policy back to the forefront of the Australian policy debate, making it timely to review a recent article by Russell Thomson and Elizabeth Webster in the WIPO Journal. Their paper looks at intellectual property in relation to climate change and agriculture, and asks: Are formal IP rights an effective means to promote the development and diffusion of abatement technologies? Or do they simply act as a barrier to the uptake of new technologies?

Agriculture contributes around 12 percent of total anthropogenic greenhouse gas emissions. Most emissions are generated by fertilizer use, methane from livestock and wet rice cultivation. As a sector, it has been identified by scientists and policy makers as having the potential to deliver significant reductions in greenhouse emissions at relatively low cost, compared to other sectors of the economy.

The authors suggest an optimal innovation policy toward climate change and agriculture should be a mix of pricing greenhouse gas emissions, public funding of R & D and IP rights. Despite calls by others, they conclude there should be no weakening of IP in this area, given its role in encouraging investment in greenhouse gas abatement technologies.

The authors survey potential technologies that are IP relevant and those which are not, based on ease of technology transfer, ability to monitor use, and whether the technology is embodied in tangible material. Based on survey data they identify IP rights as being particularly relevant for computer software to aid more efficient fertiliser use, chemical additives to improve the longevity of fertilizer, and pharmaceuticals and plant varieties that reduce methane emissions in livestock. However, they argue that IP rights are not particularly suited to low-tech land management practices and animal husbandry.

Much of their analysis discusses fundamental tensions associated with IP for economists. Strong IP induces investment as it gives businesses the confidence to conduct research, and develop and commercialise abatement technologies. Strong IP combined with a carbon price should generate more R & D in abatement, as farmers will face a higher price for their carbon emissions and will therefore be willing to pay more for new technologies that can reduce their costs. However, IP rights also allow the holder to charge a price above cost, or restrict access to certain markets, as they may  generate monopoly power. Therefore, some farmers may be unable to use products, due to price or limitations on access. Some argue this second effect is a significant barrier to using greenhouse abatement technology, particularly for the developing world. It would seem, setting aside questions of justice or fairness, these tensions are real in achieving significant emissions reductions in agriculture; new technologies need to be developed and be widely adopted.

However, after closely looking into IP relevant technologies for agriculture the authors conclude that the fundamental tension of IP may be more illusory than real. They suggest that the need for adaptive research, such as local data input, and demonstration of complementary assets represent a more immediate barrier to uptake of these technologies than price. Counter-intuitively, they conclude that IP rights may actually increase the diffusion of technologies by providing a financial incentive for firms to adapt the technologies to local conditions. This incentive would be absent without strong IP rights.

The article provides a coherent economic analysis of innovation policy in relation to climate change and agriculture, and will no doubt be of considerable benefit to policy makers. It also highlights the importance of looking deeply into the particular circumstances of a sector when designing innovation policy. The article shows how relying on ‘first principles’ analysis may lead policy makers astray. However, one potential shortcoming of the paper is its treatment of publically funded research, particularly given the current policy environment toward agriculture both in Australia and many other countries.

As noted by the authors, an alternative to using IP as an incentive for private sector generation of new technologies is direct government investment in R & D. Publically funded research has the benefit of being disbursed at cost, or even no cost, to users therefore maximising uptake. However, for the most part, the authors accept the received wisdom that businesses are often better able to identify R & D investment opportunities due to their understanding of market demand and the benefits of decentralised decision making in promoting diversity.

While this may be true for many sectors, agriculture is different. For reasons of food security, the viability of rural societies, cultural heritage, and other less apparent reasons, agriculture is often subsidised by governments in a variety of ways, and greenhouse policy is no different. The Australian Government’s recent announcement of its intention to price carbon emissions suggests the agricultural sector will be excluded, as it is under the European Union emissions trading scheme. Without a price on carbon emissions, the incentives for private R & D in agriculture created by strong IP rights are likely to be lower than in other sectors of the economy because of lower cost pressure on farmers compared to other industries.

In this policy environment, the authors’ analysis can be seen in two ways. One highlights the importance of publically funded research to produce new abatement technologies in the agricultural sector, given the likelihood of an inadequate price signal. The second underscores the importance of agriculture having a price placed on its emissions. While it seems unlikely the agricultural sector will have to pay a tax on its emissions in Australia, another approach being mooted in policy circles is for farmers to be able to gain credit for emissions reductions against a baseline. While this approach would see farmers getting paid for their emissions reductions, rather than being taxed for their carbon production, it would still create a financial incentive to reduce emissions. This incentive, as long as emissions reductions can be measured, combined with strong IP, will create an incentive for the research, development and dissemination of new abatement technologies in the agriculture sector.

Russell Thomson and Elizabeth Webster, The Role of Intellectual Property Rights in Addressing Climate Change: the Case for Agriculture, The WIPO Journal, 2010, Volume 2 Issue 1, 133-141

Shaun Larcom is a PhD candidate in Law at University College London’s Centre for Law and Economics

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Patent fees as a tax on so-called ‘monopoly rents’: a response

March 17, 2011

By Assoc. Prof. David Brennan

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

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