But that also describes recent markets in collateralized debt obligations and credit default swaps. And with these markets, as anyone who has read a newspaper (some people still do that) during the last month knows, the result is a bit more ominous. My former venture capital investor and all-around Wise Man, Ben Rosen, sums up the current financial crisis in three words: “Nobody Knows Anything.”

Property rights have the potential to be strong institutions promoting economic growth. But, as these examples show, if the rights are not well-designed and well-implemented, they can be perverted from this goal. Brian Kahin draws the parallel between the financial/real-estate “bubble” with the still-expanding “bubble” in patents. As Brian suggests, combine that bubble with a Ponzi scheme (Intellectual Ventures) and you might have a real perversion.

Unfortunately, Mike Masnick confuses our call to evaluate the functioning of patent institutions by comparison to other property institutions with some of the more general rhetoric about “patents as property.”

There is little doubt that “property” has long been a great rhetorical confection. Property is, after all, “theft” (Proudhon) and also the source of “economic freedom” (Friedman). Some people argue that “patents are property” and by this they mean that patents should have very strong and very rapid enforcement. As Masnick points out, Mark Lemley used this viewpoint as a straw man in a recent paper. Lemley describes a “real property system” as one where patents with uncertain validity or uncertain boundaries (so you can’t tell upfront that they are infringed or not) are strongly enforced.

Clearly, this is a bad idea and it is hardly what Mike Meurer and I are talking about. In our view, patents with uncertain validity or uncertain boundaries are not at all like tangible property and strong enforcement of such rights is not justified.

Unfortunately, there is a tendency to reduce property to a single dimension: “strength.” But real property systems, as opposed to rhetorical confections, involve complex institutions and there is value in understanding how they can and should work.

…in new areas of patenting such as software and business methods, there is strong evidence that existing intellectual property arrangements are hampering innovation. …The inventive steps required to qualify for patents should be considerable, and the resulting patents must be well-defined, so as to minimise litigation and maximise the scope for subsequent innovation.

We are pleased to note that the evidence mustered to support this conclusion (p. 84) includes this blog’s discussion of “Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry” by Iain Cockburn and Megan MacGarvie and also Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk

But one thing is clear and is often forgotten: the early patent system lacked basic institutional features necessary for an effective property system. For example, it was very difficult to find out what had already been patented, aside from actually infringing a patent and then receiving a complaint from the patent owner. That is, the basic “notice” function of property was largely missing.

In 1845, Rufus Porter, an itinerant mural painter and sometime inventor from western Maine, began Scientific American as a publication that summarized new inventions. In 1846, he sold it to Munn and Company, the largest patent agent, and they began systematic reporting on new patents. Prior to the 1840s, occasional Annual Reports from the Patent Office would list granted patents, but little detail on claims and no drawings were available to the public without visiting the Patent Office in Washington (or corresponding with a patent agent, also time-consuming and imperfect). In 1843, the Annual Report included claims of the patents granted. In 1854, the Annual Report first included selected patent drawings. Only with the Act of 1870 (and the advance of lithographic printing) was the Patent Office required to provide copies to the public, including libraries. At that time the Official Gazette replaced the Annual Reports.

A similar pattern seems to have played out in Britain, where the first complete index of patents was published in the Abridgements of Specifications in 1853.

Thus, however much judges might have viewed patents as a form of property, it seems that the role of patents to function as an effective property system was significantly compromised during the first half of the nineteenth century.

Judge Plager writes that as a former law professor who taught property law for twenty-five years, he found our general thesis about analyzing patent law from a property law perspective “quite comfortable.” The book argues that many of the key institutional features and much of the economic performance (and many of the problems) of the patent system can be analyzed by treating patents as a property system. In his speech, Judge Plager suggested that this approach might require rethinking the patentability of software and business methods, doctrines of claim construction, patent scope and the doctrine of equivalents.

Judge Plager also pointed out a disagreement he has with us. In the book, we support the view of John Duffy and Craig Nard, who call for multiple appellate courts for patents (see Tim Lee’s recent summary). In a paper with Lynne Pettigrew, Judge Plager argues against this view.

Often, rethinking something is a lot harder than thinking it out in the first place. This is particularly true for judges, whose decisions are published and used as precedent. Indeed, this “path dependence” of the court is one of the concerns that Duffy and Nard raise.

In this light, Judge Plager’s call to rethink patent law is more than a little courageous. And I suspect that the willingness of Judge Plager’s colleagues on the CAFC to join in the project he proposes will shed light on the correctness of Duffy and Nard’s proposal.

Patents as property was also front and center in the thoughts of one judge on the Court of Appeals for the Federal Circuit, the main appellate court for patent disputes in the US. Senior Judge S. Jay Plager, speaking at a symposium at George Mason University, called for a “rethinking” of several aspects of patent law by returning to its origins in property law.

According to the BNA, Plager “called for a renewed focus on setting recognizable patent ownership boundaries and on strengthening the notice function that patents are intended to serve. Such a reevaluation might require a reassessment of whether software and business methods are patentable subject matter, Plager said. It might lead to limiting a patent’s scope to what was known at the time of the application filing, and to an abandonment the doctrine of equivalents as a basis for patent infringement liability.”

In addition to rethinking claim construction,

Plager said he regretted the unintended consequences of the decisions in State Street Bank and AT&T. Those rulings led to a flood of applications for software and business method patents, he noted. If we “rethink the breadth of patentable subject matter,” he said, we should ask whether these categories should be excluded from patent protection.

This new thinking is certainly encouraging. Let’s see how it develops.

Last week in the Wall Street Journal, L. Gordon Crovitz writes “…in the case of patents, poorly defined property rights for inventions are leading even the biggest companies to take desperate measures…” He goes on to highlight our argument that the patent system provides much stronger incentives for pharmaceuticals than for software and communications technologies because of the nature of the rights granted:

New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.

In modern hi-tech industries where technology is complex and cumulative, a new innovation is likely to infringe on existing patents. Hence, an entrant firm is under potential threat of litigation from a competing incumbent firm that has accumulated a patent portfolio. It is not clear, therefore, how entrepreneurial activities may be sustained in the same technological terrains as those of powerful incumbent firms.

In a model where an incumbent faces a sequence of potential startups and the incumbent’s chance of winning an infringement lawsuit increases with the size of its patent portfolio, we demonstrate a positive dynamic impact on the startup innovation that is generated by an interplay of takeover deals (out-of-court settlements) and carefully selected levels of IP protection. The core insight behind this result stems from the observation that the benefit of a takeover for the incumbent goes beyond commercializing the new innovation. This is because the incumbent capitalizes on the enhanced bargaining position that the current takeover will bring about in all potential future deals by incorporating the current startup’s patented ideas to its own patent
portfolio, which allows it to better barricade its technological territory, increasing its chances of prevailing in future infringement lawsuits. Since this prospect of future surplus for the incumbent hinges on the current takeover, a part of the surplus accrues to the current startup, enlarging its bargaining share in the takeover deal. We show that this feedback effect of future prospects on the current deal can motivate the startups’ innovation activities that would not take place without it, and as a consequence, increase the social welfare.

We emphasize that for maximum effect the level of IP protection should be selected carefully at a moderate level. The aforementioned increase in the startup’s bargaining share, being proportional to the marginal benefits brought by the last patent added to the incumbent’s portfolio, would be too small to be effective if the IP protection is too weak. An excessive IP protection, on the other hand, would accumulate the incumbent’s bargaining power too quickly, killing off the innovation incentives for startups prematurely. We illustrate this point further by way of computer simulations.

Not sure how this plays out in a world where any player (e.g., troll) can acquire patents that can be used as bargaining tokens…