A patent is a contract between society as a whole and an individual inventor. The objective of a patent is to provide the holder a temporary monopoly on his or her innovation and thus to encourage the creation and disclosure of new ideas and innovations in the marketplace. A patent provides the owner exclusive rights to hold, transfer, and license the production and sale of the product or process. Patents are part of the area of intellectual property law that covers copyright and related rights, trademarks and service marks, appellations of origin, industrial designs, layout designs of integrated circuits, and undisclosed information such as trade secrets.
Patents are provided for products or processes that are new and/or involve new steps and that can have industrial application. A patent is the result of a unique discovery, and patent holders are provided protection against infringement by others. In general, machines, products, plants, compositions of elements (chemical compounds), and improvements on existing items can qualify for patent protection.
Patents go back as far as ancient Greece and Rome. Pliny wrote that one day, an inventor came before Emperor Tiberius to show him his invention of unbreakable window glass and to beseech him for an inventor’s fee. Tiberius asked whether anyone else knew the formula. The man assured him that the invention was absolutely secret, whereupon the emperor immediately cut his head off “lest gold be reduced to the value of mud.”
In 1623 England enacted the Statute of Monopolies under King James I, which declared that patents could be granted only for “projects of new invention.” In the 18th century, the English judicial systems developed the prerequisite that a written description of the invention must be submitted. These developments led to modern United Kingdom and U.S. patent law. Now all member countries of the World Trade Organization (WTO) are duty bound to enforce minimum standards of patent protection. Any noncompliance is liable to attract legal action.
International And National Provisions
The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) provides the international standards for patents. TRIPs requires country signatories to allow the patenting of product or process inventions subject to the normal tests of novelty and inventiveness. Three exceptions to patentability exist: (1) inventions contrary to morality; (2) innovations dangerous to life, health, or the environment, or to treatment of humans or animals; and (3) plants and animals (other than microorganisms) used for the production of plants or animals.
TRIPs confers an exclusive patent on making, using, offering for sale, selling, and importing for these purposes. Process patent protection must give rights not only over use of the process, but also over products obtained directly by the process. Patent owners also have the right to assign, or transfer by succession, the patent and to conclude licensing contracts. The term of protection is 20 years, counted from the filing date. Under all patent systems, after this period has expired, people are free to use the invention as they wish.
Although all WTO members are subject to the patent provisions in the TRIPs agreement, patents are actually granted under national laws, so the rights are also national in scope. An Australian patent, for example, can be defended only against infringements in Australia. But the Patent Cooperation Treaty (PCT), concluded in 1970, allows inventors to patent an innovation simultaneously in other countries. A patent application filed under PCT is called a PCT application. After an inventor makes an application under PCT, the International Searching Authority (ISA) carries out a thorough search and provides a written opinion on the patentability of the invention. Again, granting procedures are handled by the relevant national authorities. No such thing as an international patent exists.
One new form of patent deserves special mention. Business method patents claim new methods of doing business. This type of patent emerged in the late 1990s, with Amazon.com’s famous one-click- shopping patent. IBM owns a patent on a process for paying software developers. Such business process patents may actually hold back innovation.
As important as patent protection is, numerous controversies have arisen, such as the excessive prices of patented human immunodeficiency virus/ acquired immune deficiency syndrome (HIV/AIDS) medicines in South Africa. TRIPs unwittingly has caused a problem in that pharmaceutical companies can charge excessive prices for patented antiretroviral medicines. In this case, U.S.-patented triple therapies for HIV/AIDS could cost more than $10,000 per person per year—far beyond the ability of sick South Africans to pay. Meanwhile, competitors launched generic equivalents of these patented drugs, forcing large pharmaceutical companies to cut their prices to around $1,000 per person per year. As dramatic as this cut was, the cost was still three times higher than the cheapest offer from the Indian generic company, Aurobindo: $295 per person per year. The pressure from generic-drug firms has played a pivotal role in decreasing the prices of patented drugs.
Planning, Application, And Use
Because quite often the patent process is complex, typically taking three years, careful planning is required. Experts recommend the following basic rules:
- Pursue patents that are broad, are commercially significant, and offer a strong position.
- Prepare a patent plan in detail.
- Have your actions relate to your original patent plan.
- Establish an infringement budget.
- Evaluate the patent plan strategically.
Patent applications must include detailed specifications of the innovation that any skilled person in the specific area can understand. A patent application has two parts: specification and claims. The specification is the text of a patent and may include any accompanying illustrations. Its purpose is to teach those fluent in this area of technology all they need to understand, duplicate, and use the invention. The specification may be quite long. Claims are a series of short paragraphs, each of which identifies a particular feature or combination of features that is protected by the patent. The entire claims section, at the end of the patent, typically is one page long or less. After the application is filed, an examiner will determine whether the innovation qualifies for patentability by researching technical data in journals as well as previously issued patents. Based on those findings, the application will be rejected or accepted.
Although intellectual property may represent a significant share of some firms’ market value, only a small percentage of issued patents is commercially valuable. Also, many patents go unimplemented, and so firms may want to sell unused or underused patents to monetize intellectual property assets for other purposes.
A survey of 150 technology firms and research universities in the United States, western Europe, and Japan found that only 15 percent had no unused patents. Although patent holders may have many legitimate reasons not to exploit their patented inventions, the situation led to the creation of patent exchanges or patent licensing markets, which set a fair market value on a patent and facilitate its sale.
Value Of Innovation Versus Cost Of Patent
Any inventor must weigh the value of the innovation against the time and money spent to obtain the patent. Also, it is important to remember that many patents are declared invalid after being challenged in court. One reason is that the patent holder waited an unreasonable length of time before asserting his or her rights. A second reason is that those bringing suit against the patent holder are able to prove that the individual misused the patent rights. A third reason is that other parties are able to prove that the patent fails to meet tests of patentability and therefore is invalid.
Truth be told, the entrepreneur might waste a lot of money on protecting intellectual property that could have funded marketing and product development. Another factor is whether the invention will be obsolete before the patent is issued, especially in a fast-moving market. Neither is there any guarantee that a patent is valid. Many cases have been lost by showing that the patent examiner was mistaken and missed an important precedent. A good example is the Toyota RAV4, which was copied perfectly as the Chinese-built Jonway UFO. Toyota has not been able to stop UFO sales because it did not get proper patent protection for the car’s design in Europe. The UFO is identical to the RAV4 down to the body panels and doors, which are interchangeable with the original Toyota model parts. BMW and Daimler have started lawsuits to try to prevent the launch of Chinese clones of their own cars. The brands argue that the lookalikes could hurt their brand images.
If, after careful review, an entrepreneur concludes that the innovation will withstand any legal challenge and is commercially worthwhile, a patent should be pursued. If a challenge is mounted, legal fees may be sizable, but a successful defense can result in damages sufficient to compensate for the infringement plus court costs and interest. In fact, the court may award damages of up to three times the actual amount. In addition, a patent infringer can be liable for all profits resulting from the infringement as well as for legal fees.
- Arora, A. Fosfuri, and A. Gambardella, Markets for Technology: The Economics of Innovation and Corporate Strategy (MIT Press, 2001);
- Martin Bader, “Managing Intellectual Property in the Financial Services Industry Sector: Learning From Swiss Re,” Technovation (v.28/4, 2008);
- Robert Choate and William H. Francis, Patent Law: Trade Secrets—Copyright—Trademarks (West, 1981);
- Moses I. Finley, “Technical Innovation and Economic Progress in the Ancient World,” Economic History Review (v.18, 1965);
- Andrea Fosfuri, Marco S. Giarratana, and Alessandra Luzzi, “The Penguin Has Entered the Building: The Commercialization of Open Source Software Products,” Organization Science (v.19/2, 2008);
- David E. Gumpert, Burn Your Business Plan!: What Investors Really Want From Entrepreneurs (Lauson Publishing, 2002);
- Dietmar Harhoff, Patent Validation at the Country Level: The Role of Fees and Translation Costs (Centre for Economic Policy Research, 2007);
- Justin Malbon and Charles Lawson, Interpreting and Implementing the TRIPS Agreement: Is It Fair? (Edward Elgar, 2008);
- Roger LeRoy Miller and Gaylord A. Jentz, Business Law Today (West, 1997);
- Nuno Pires de Carvalho, The TRIPS Regime of Antitrust and Undisclosed Information (Kluwer Law International, 2008);
- Al H. Ringleb, Roger E. Meiners, and Frances L. Edwards, Managing in the Legal Environment (West, 1996);
- Ronald D. Rothchild, “Making Patents Work for Small Companies,” Harvard Business Review ( July/August 1987);
- Carl Shapiro, Patent Reform: Aligning Reward and Contribution (National Bureau of Economic Research, 2007);
- Ronald P. Taylor and Paul Germeraad, “Visualize Your Intellectual Property,” Research-Technology Management (v.51/4, 2008).
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