3.1.1. A blend of dynamic efficiency and static inefficiency

These rights combine elements of dynamic efficiency and static inefficiency [NOR 69]. On one hand, they are socially desirable and advantageous insofar as they make it easier to enable risky investments in innovation activities by allowing innovators to reap their rewards. Thanks to this dynamic and positive effect, they eventually help to ensure a wide and diversified supply of goods and services. On the other hand, the exclusive right conferred by intellectual property may have anticompetitive effects from a static point of view or, in other terms, at a certain point in time. This happens because the fact of enjoying exclusive rights confers to the entitled party market power, namely the ability to establish the sales price above the marginal costs of production and therefore on a relatively high level in relation to the competitors. Related to monopolistic competition, this way of fixing prices therefore penalizes the consumers and generates for them what economists call deadweight loss, which corresponds to a loss of efficiency. This market power phenomenon, which may be substantial for radical innovations, is an integral part of the logic of the intellectual property system. It leads to a distortion in the allocation of resources, as compared to the reference of the competition called “pure and perfect”. For the society as a whole, intellectual property rights also entail costs in terms of impediments to the access to knowledge and its use. Similarly, if these rights are to be enforced, it is necessary to mobilize a significant amount of financial resources that are ipso facto subtracted from the innovation process itself. Thus, due to the social costs that they entail, intellectual property rights correspond to a second best, while the first-rate optimum is unattainable [ENC 06].

3.1.2. A right to try to exclude rather than a guarantee of monopoly

Naturally, the scope of this monopolistic power should not be exaggerated, especially in relation to patents, since a monopoly right does not necessarily correspond to an actual economic monopoly, in particular if there are substitution technologies that curb the market power conferred by a patent [POS 05]. Also taking into consideration that a patent may be invalidated by a court, the exclusive right it confers is not absolute. A patent confers a priori to its holder merely a “right to try to exclude” by asserting the patent in court [LEM 05]. A patent merely constitutes the legal ability to defend a temporary exclusive right through legal action. The effective appropriability conferred by a patent depends on the holder’s will and ability to ensure its enforcement in a court. Similarly, patents differ from the forms of property that concern material goods in that they in no way guarantee the ability to implement (to market) an invention. They only correspond to a right to prohibit third parties from doing so [BES 08].

In legal terms, this right to exclude boils down to the notion of opposability, that is the principle that no one can expect to get away with ignoring or flouting this property right. In economic terms, this exclusivity generally exists only to allow the entitled parties to avail themselves of their intellectual property and organize its implementation of the protected good in their relations with third parties. This is the case for copyright, which is designed to be applied to works put into circulation. A commercial trademark, similarly, becomes meaningful only through the involvement of third parties, namely customers in this specific case. Moreover, a trademark holder must be able to justify the fact that the trademark is being used, otherwise a judge may invalidate it. As a result, intellectual property entails regulation issues: a certain balance between the different parties involved must be found [ABE 05].

3.2.1. Which is the optimal term for patents and copyright?

In relation to the intertemporal dimension of the trade-off between the benefits and the costs of protection, the duration issue is significant for patents as well as copyright. When these rights expire, the works and inventions in question fall into the public domain and are added once and for all to common funds that can be publicly accessed without any restrictions and in particular without any transaction costs. This unlimited duration helps constrain the monopolistic effects of patents [POS 05].

Although the maximum term of legal protection for patents is generally 20 years – from the date it was filed onwards – and is uniform in principle, there are certain distinctions, especially because a supplementary period is often granted to pharmaceutical patents. In this specific case, we should take into consideration that a new drug can only be commercially exploited when its active ingredient has been allowed to be launched on the market by the authorities that regulate the field. To compensate for this, a patent holder may then ask to have his protection extended for up to five years, especially in the United States and Europe.

Therefore, the issue varies according to the sectors, but globally this maximum term of 20 years for patents may be regarded as relatively short. It is in any case considerably shorter than the term of copyright – 70 years after the author’s death – or the most common one for industrial design right – 50 years – let alone trademarks, which is a field where protection may be a priori extended indefinitely.

3.2.2. Which is the optimal breadth of patents?

Another major limitation to the rights conferred by patents, their “breadth” defines the dividing line between what is protected and what is not. It corresponds first of all to the scope claimed by the person filing a patent in their application and accepted by the Patent Office after the examination process and a series of exchanges between the applicant and the examiner. It also depends on its legal interpretation in case of litigation. It is evidently broader for a basic invention that is likelier to be used in a large number of fields than for a subsequent invention destined to a narrower application scope [GRE 10]. Once again, it is a matter of balance. Patents that are too narrow, which may be easily bypassed by “inventing around” them, hardly drive innovation. The more restricted the scope, the higher the number of entitled parties with whom patent agreements must be negotiated to obtain the authorization to implement a technology based on a given patented knowledge domain. On the other hand, the broader the patents the higher the potential incentive for radical innovation – through disruptive technologies [POS 05]. However, a patent that is too broad confers an exclusivity on a disproportionate field of applications, tends to allow the entitled party to dominate the area altogether, and involves a clearly excessive loss in terms of social welfare [CLA 13]. Finding the right balance is also especially hard in those fields where innovation is cumulative, namely based largely on previous innovations – for example, in biotechnologies, the software industry, and ICT – as an excessively broad protection scope may hinder downstream innovation whereas, on the other hand, a protection scope that is too narrow tends to discourage upstream innovation.

Furthermore, something should be said about the optimal mix for the term and scope of patents. These considerations point out that although term and scope both determine the limits of the protection conferred by the patent, they do not do so in the same way. Thus, broad patents make it harder to imitate or improve the invention patented, whereas an extended term spurs imitation and improvement of this invention. Some types of innovation call for specific solutions. For an isolated innovation, the optimal combination seems to involve a narrower scope and a longer term. For sequential and cumulative innovations, the assessment is more uncertain [ENC 06].

Finally, the scope of patents is not limited to the coverage in terms of number of claims included in the patent, since it furthermore depends not only on the extent of the protection against infringement but also on the range of restrictions on the right of the patents as well as on the scope of the patentable domain. If we consider the drug industry as an example, product innovations started being patentable only fairly recently: in 1949 in the United Kingdom, in the 1960s in France and Germany, and in the 1970s in Italy, Sweden, Japan and Switzerland. Currently, patentable domains include exceptions on an international level: article 27 in the TRIPS agreements of the WTO authorizes member countries to exclude medical diagnoses, surgical methods, as well as those inventions that may harm our health or the environment.

3.2.3. Which is the optimal height for patents? The issue of the patentability criteria

Other adjustment issues concern the third main aspect of patents, that is their “height”, which corresponds to the thresholds that a given patent must cross to be considered worthy of being patented. In patent offices, examiners generally take decisions based on three main criteria in this respect.

The first one – the novelty requirement – is quite intuitive and is rarely at the center of debates. It means that the invention on which a patent application is based must be unknown and not included in prior art.

In the United States, the second criterion is that of non-obviousness, which corresponds to the European criterion of the degree of inventiveness. It ensures that a person skilled in the art, namely a professional or an individual with ordinary expertise in the field considered, does not consider the invention in question trivial, for example involving a mere recombination of existing technologies. In this respect, patent laws changed profoundly right after the end of the Second World War. Beforehand, it was necessary to demonstrate a “creative flash of genius” in order to be granted a patent. Such a patentability criterion had at the time become too constraining for several patents for antibiotics, which were by then devised with well-known technologies based on routine and large-scale R&D activities. This is why the Patent Act of 1952 in the United States adopted the current criterion about the non-obvious nature of inventions. Over the following years, other countries adopted a similar reform: the non-obviousness requirement or “inventive step” was thus introduced in Japan in 1959, in Sweden in 1967, and then in France and in the United Kingdom in 1968 [WIP 15].

In any case, assessing patent applications in relation to the two first criteria – novelty and inventiveness – involves the analysis of prior art to a large extent, namely the knowledge related to the patent application found either in previous patents or in various publications.

In Europe and Japan, the third main criterion involves the potential industrial application and technical nature of the invention considered. The United States consider the broader criterion of utility and thus regard an invention as potentially patentable even if it does not possess any technological characteristic.

3.3.1. Patents: a disclosure requirement that favors the diffusion of knowledge

When filing a patent, an applicant is asked to disclose a substantial part of the underlying knowledge by providing a technical description that must in principle allow a person skilled in the art to reproduce the invention considered. This technical documentation is made public when the patent application is published – namely, in most countries 18 months after the date on which the patent was filed – and even while it is still pending. This disclosure is compulsory. If the patent filing does not meet the requirement whereby the invention must be sufficiently described, in principle no patent should be granted for this application and, if it is nevertheless, it may later be invalidated by a court in case of litigation.

In any case, this requirement contributes to the diffusion of technological knowledge and consequently the promotion of technological progress. Naturally, third parties are not allowed to implement the invention patented on their own, i.e. to market it as it is without the entitled party’s agreement. However, they may legally use the knowledge disclosed to add to the invention by improving it, potentially leading to an improvement patent. Further to this, they may draw on the invention while also bypassing, namely “inventing around” it. Therefore, competitors may use it indirectly and derive competitive benefits from it without clearly infringing the inventor’s rights. This proves that a patent, as an appropriation mechanism, does not work perfectly for the entitled parties; its private remuneration potential represents merely a part of the social benefit of the innovation.

However, this imperfect efficiency on a microeconomic level is coupled with a virtuous circle on a societal scale: positive spillovers derive from the effect of the diffusion of technological knowledge. The role of patents as a means of dissemination of technological information is all the more important as innovation is very often a cumulative process where new technologies are produced based on pre-existing knowledge. Besides, the fact that the underlying information is disclosed through patents reduces the risk of duplication of research efforts. Due to this effect of knowledge dissemination induced by the disclosure requirement, patents are a priori preferable to trade secrets in terms of social welfare.

3.3.2. The role of filter played by courts and by opposition and reexamination proceedings

In the intellectual property system, another important moderating role is played by the judicial system, in particular to test the validity of patents. In most cases, this validity is not challenged in courts, but close to half of the patents disputed in the courts are declared invalid.

Apart from courts, there are other ways to prove the validity of patents. More specifically, there are opposition procedures such as those allowed by the EPO or in Japan which allow third parties to challenge the validity of a patent before its issue (pre-grant procedure). In the United States, a different procedure involving a reexamination carried out by the Patent and Trademark Office (UPSTO) has been in place for a long time. This reexamination procedure was as advantageous as the EPO’s opposition procedure in terms of speed and costs but it was 30 times less likely to be used in the period considered, between 1980 and 1998 [COH 03]. However, the system changed after the reform introduced by the Leahy-Smith America Invents Act at the end of 2011. Since then it has included two new opposition procedures that follow a patent’s registration. The first one, called post-grant review, may be initiated in the nine months that follow the date on which the patent has been filed, and is similar to the EPO’s opposition procedure, while the second one, called inter partes review, replaces the previous contradictory review procedure.

There is a similar opposition procedure for trademarks, especially in relation to the European Union trademark system. It is used very often and makes it possible to lodge an objection at the European Union Intellectual Property Office (EUIPO) for a period of three months to ask for the rejection of a competing trademark.

3.3.3. Licensing and the interaction with competition policy

Granting licenses on patents, trademarks, copyright, etc. is also one of the mechanisms that helps to best adjust the degree of protection. It allows third parties to exploit, in return for license fees and through appropriate contracts, intellectual assets that they do not themselves possess.

In this sense, and especially in relation to competition policy, there is a case for public intervention to facilitate access to protected knowledge but only in certain cases, as the approach adopted in terms of intellectual property and competition policies shares the same ultimate goal, namely increasing society’s welfare by promoting a wide supply of goods and services – either new or existing – at affordable prices. As a result, competition policies do not in principle have to interfere with intellectual property rights that protect innovation, even if the latter involve a certain amount of monopoly right. However, tension may arise between the two, and competition policy is entitled to intervene when there is an abuse of dominant position, as was clearly underlined by a ruling of the American Supreme Court in 2004. Competition policy and courts may then require compulsory licenses or other decisions that mitigate the effects of exclusive rights so as to avoid potentially serious blocking positions.

As a typical case of classic compulsory license, a so-called dependent or improvement license may thus be required in relation to two consecutive inventions in case of serious litigation between the holder of a prior patent and the holder of a subsequent patent that depends on the previous one. It prevents innovation from being hindered after the initial invention by authorizing the use of a dependent patent. A broad patent, therefore, does not necessarily imply that its holder will be the only user to exploit all of its range.

The issue of the interaction with competition policy is particularly significant in the current world and in the era of the digital transformation. The digital world promotes radical innovation and exasperates “patent races” where the winner takes all. However, the notion of compulsory license is very old and dates back to the beginnings of intellectual property rights. In international law, it was already included in the Paris Convention of 1883. The study carried out by Baten et al. [BAT 15], which focuses on close to 80,000 chemical patents issued by the German Patent Office between 1900 and 1930, draws the conclusion that compulsory licenses may be particularly effective for the promotion of inventiveness by increasing the competitive threat in technological sectors previously defined by a low level of competition.

A more particular case, which may go beyond competition policy, concerns what is commonly called statutory (ex-officio) licenses. This provision corresponds to public authority acts that may be motivated, among other things, by national economic interests, or issues of national defense or public health. The WTO’s TRIPS agreements (article 31) point out that this type of decision can only be taken at the end of a legal procedure or by an administrative higher authority. This kind of license allows, among other things, the governments of developing countries to grant local businesses licenses for foreign patents without the agreement of the entitled parties. Countries like India, Thailand and Brazil have recently made use of it to obtain drugs for HIV or other potentially lethal diseases at a lower price. Naturally, such cases are still rare enough. Most often, however, statutory licenses need not be used to be effective and act as a deterrent by leading the actors involved to negotiate settlement agreements.

3.3.4. The regime of exceptions: the case of research exemption and fair use

There is also a series of exemptions to the general law, such as the research exemption, that can limit the scope of intellectual property rights in some cases. This exception determines the conditions in which and up to which point researchers in both the private and the public sector can freely access knowledge protected by intellectual property rights for their research needs. For experimental use with no commercial goal, this special derogation is well established in several countries and in continental Europe in particular. The situation is markedly different in the United States, where the experimental use exception is interpreted in an extremely restrictive way by courts. This tougher judicial stance has become particularly sensitive after a series of rulings by the Court of Appeals for the Federal Circuit (CAFC), specialized in questions of intellectual property, especially in 2002 in relation to the Madey versus Duke University case.

Besides, research exemption is a central element of the sui generis right established in Europe and in the United States to protect new varieties of seeds.

Other types of exemption are more focused on copyright and once again, naturally, only in certain conditions. They authorize third parties to integrally or partially copy documents or works covered by copyright without first requiring the explicit authorization of the entitled party through a license agreement. Among other things, it is a matter of taking into consideration the researchers’ need to consult works, just like there are exemptions for educational purposes, for parodies, or in literary criticism. Let us consider an example. The draft European directive on “copyright in the digital single market” presented in September 2016 announces the creation of an exception to copyright and the rights of database producers in relation to TDM (Text and Data Mining). This arrangement allows researchers to use TDM techniques to explore large amounts of texts and data without being required to seek permission beforehand from the entitled parties.

In the English-speaking world, governed by case law, this type of arrangement involves a legal notion called fair use in the United States and whose British and Commonwealth equivalent is named fair dealing. As for copyright, this logic of fair use is equivalent to the knowledge disclosure effect produced by patents, since it allows third parties to exploit the intellectual property of an entitled party to a certain degree without being required to obtain his or her explicit agreement [POS 05]. We can consider as an example the enormous Google Books Library Project focused on the digitalization of works that have not fallen into the public domain yet. Google shows online excerpts drawn from them by relying on the fair use clause. In April 2016, the American Supreme Court largely validated its principle, rejecting the complaint of the Authors Guild, which has been opposed to making protected contents accessible to the public without the authors’ consent ever since 2005.

3.3.5. The cost involved in obtaining and maintaining patent rights

Another way of improving patent systems is related to the numerous costs involved in obtaining a patent, from the moment it is filed to its expiry date. They include filing fees, several procedural fees, translation costs in case of an application for protection through the EPO or the WIPO’s PCT, as well as the annuities paid to maintain one’s rights after the patent has been granted. As an example, the cost for a patent filed by applying to the EPO and designating four European countries where protection is wanted for a ten-year term is currently estimated to be at least 30,000 euros. The amount of fees involved in maintaining one’s rights year after year generally increases according to a progressive schedule, so that only those patents that holders deem worthy will be kept until the maximum 20-year term.

Thus, as [ENC 06] underline, the system in place is less “one size fits all” and more flexible than it seems. Let us consider an example. Utility patents are tools explicitly designed for inventions with a narrower scope and offer innovators the possibility of obtaining, if they so wish, titles that are granted without (strict) prior examination and which, in relation to real patents, offer a narrower but cheaper protection. Similarly, an inventor may file a patent either at a lower price – at a national patent office – or at a higher price for inventions that have greater economic potential and present a higher degree of inventiveness on a broader scale – for example, through the EPO. Let us consider a third example. The so-called PCT international procedure allows those filing patents to benefit from provisional protection while postponing their decision to apply for a patent or not for a period of up to 18 months, entailing higher expenses as a consequence in the relevant cases. All these three mechanisms result in a certain amount of self-selection. Just like in annuity schedules for the renewal of patent rights, as [ENC 06] explain, these differentiating elements represent the levers of a policy that aims to improve the economic properties of patents as incentives and may be further improved in the future (Box 3.1).

Taking into consideration this set of parameters that can potentially best configure the patent system, how can we assess the strength of the protection provided by patents? The scope of a patent depends on several elements, among which its breadth and its robustness in case of litigation. To find general information about this topic, several authors resort to synthetic indexes about patent law, among which is one created by Ginarte and Park [GIN 97] which considers the scope of coverage, the duration of the rights, whether the country in question has signed international treaties on patents, the restrictions on patent law, as well as the mechanisms that aim to enforce these rights. Ginarte and Park's index [GIN 97], however, does not consider the effectiveness of these enforcement mechanisms, which is hard to assess [GAM 16]. Quite similarly, the notion of patent strength is ambiguous if not misleading, as two of the main features characterizing the strength of a patent – namely the breadth of its claims and its enforceability – are potentially at odds [COH 03, GAL 02].

Thus, the elements of our analysis show that there are not only various ways to protect innovation – whether intellectual property rights or alternative mechanisms – but also a wide diversity in the companies’ propensity to rely on one of these tools depending on numerous factors. The empirical works available indicate that patents in particular are necessary and only represent an incentive in some cases. It is also suggested that intellectual property certainly represents an exclusive right, but its exclusive nature is not absolute. Besides, the scope of the protection it provides is relatively flexible and may be adjusted in several ways, especially in relation to competition law. We still need to point out how users handle these intellectual property rights for their needs in terms of innovation.