World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data

Special Edition: Patents

World Economics has published a new special edition of its Journal. The theme is on Patents and the competition and economic welfare problems caused by the growing activities of Patent Assertion Entities. This has become a controversial issue involving law and economics in the USA and in Europe.

This special edition is complementary to the four quarterly issues and access to our archives that annual subscribers receive.

The Special Edition can be downloaded here

Is the Patent System Fit for Purpose?
The health, welfare and economic security of literally billions of people depend on a well-functioning patent system. In the pharmaceutical sector, for example, intellectual property plays a crucial role, safeguarding the rights to use newly developed drugs. The patent system encourages firms to invest in research and development to produce an end product that is relatively easy to define and protect. In information technology and electronic products in general, the patent system is now having to address an array of issues relating to the use of a myriad number of components with respect to such products as smart phones, computers, televisions and a wide range of domestic and industrial goods that tend to rely on digital systems. A modern smart phone, for example, contains dozens of components that were originally developed by different individuals or firms who went through the necessary procedure to formally protect these discoveries through patents.

Companies investing in research and development need to be satisfied that, should they discover a commercially viable innovation, they can recoup their costs over a period of time through earning an appropriate economic rent. Otherwise, the incentive to innovate is atrophied and original research and innovation will be significantly deterred. This would be extremely damaging to economic prospect since innovation is a fundamental feature of a growing economy. Therefore, a well-functioning patent system is necessary to underpin economic growth.

Threats to the US Patent System
Unfortunately, there is a growing concern that the US patent system is showing signs of not working as effectively as it has done in the past. One of the most serious concerns about the US patent system is the widespread emergence of damaging litigation tactics employed by patent assertion entities (PAEs) or so-called “patent trolls.” PAEs are predatory rent-seekers who hold and actively acquire patents merely as non-operational assets, which in turn are used to prosecute an infringement or, more commonly, employed to negotiate licensing fees that are way of line with their contribution to the alleged infringer’s product or service. Failure to pay the inflated sums demanded can lead to litigation claims that are often frivolous. The activities of PAEs already dominate the US legal system relating to patents.

However, although the phenomenon is best documented in the United States, there is growing evidence that the problem is reaching European courts. There are grounds to be concerned that this threat may intensify over the next few years. There is even the danger of a global patents ‘arms race’ driven by the recent trend to create Sovereign Patent Funds (SPFs). This would undermine innovation and effective competition in Europe, the US and elsewhere.

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