05 September 2012

Should Compulsory Licensing Provisions be Abolished?

RestrictionsWe wrote recently about the ‘issues paper’ which has been released by the Australian Government’s Productivity Commission in relation to its inquiry into the compulsory licensing provisions in the Patents Act 1990 (see Compulsory Licensing Inquiry – Issues Paper Released).

On 15 August 2012, senior representatives of the Licensing Executives Society (Australia and New Zealand) – a.k.a. LESANZ – met with members of the Productivity Commission, at the Commission’s invitation.  Following the meeting, LESANZ published a summary, and an invitation to members to provide input to a formal written submission (currently available here, on the LESANZ web site, dated 16 August 2012).  This publication includes the intriguing statement that LESANZ proposed to the Commission that:

…consideration be given to replacing the existing statutory provisions with a streamlined, potentially deregulated access regime which better reflects market forces in technology transfer.

It is interesting to take this notion of ‘deregulation’ to its logical conclusion – the complete abolition of all of the non-voluntary access provisions (compulsory licensing, Crown use and compulsory acquisition) in the current Patents Act.

The fact is that these provisions are rarely used.  They are complex and expensive to invoke.  In many ways they are anachronistic, having their origins in an earlier time when there were genuine concerns that patent monopolies might be used by unscrupulous proprietors to slow the rate of industrialisation within the realm.  Such fears turned out to be largely unfounded – actually providing an increasingly affluent society with desired products and services has generally proven to be more lucrative than holding it to ransom!

So do we really have anything to fear from the abolition of non-voluntary access provisions, or would we be better off removing this burden from the statute books?  And how would someone go about persuading the Productivity Commission to recommend such radical reform?

PATENTS AND THE ‘INNOVATION MARKET’

The Productivity Commission is largely concerned with the efficiency of the Australian economy.  Contemporary economists are not known for championing the patent system, having been raised in a culture in which competition within a free market is seen as the key to producing efficient outcomes.  Patents represent an intervention in the market, through which limited monopolies are granted to patent holders as an incentive to invest in innovation.

Provisions which effectively allow the monopoly right to be undermined in appropriate circumstances are therefore potentially appealing to a free-market economist, providing a form of ‘safety release valve’ which can be deployed in cases of abuse of a patent monopoly.

However, economists might be engaged by an alternative view of the patent system.  According to this view, patents are not simply monopoly rights to be asserted against competitors.  Rather, the patent system creates an ‘innovation market’.

In the absence of effective intellectual property rights, anybody is free to copy the innovations of others.  However, once an innovation is protected by a patent it can be effectively traded, for example by sale (assignment) or rent (licensing).  Companies that invest in innovation can obtain a return on that investment, over and above any benefit they might obtain by limiting the activities of competitors.

EFFICIENCY AND INTERVENTION IN THE INNOVATION MARKET

The Productivity Commission could opt to look at the efficiency of the innovation market enabled by patents, and ask whether there is any need to maintain non-voluntary access provisions as a form of intervention in that market.  Indeed, in this context such provisions might be viewed as unjustified regulation of the innovation market!

The fact is that if a demand exists for an product or service, and there is someone who is able to satisfy that demand, a properly-functioning market will find a way.  If a third party holds a patent which is required in order to produce the product or service, yet the third party is unable to satisfy the demand by itself, then there is a clear benefit in licensing the patent to the party who can.  It is irrelevant that the licensor and licensee may be competitors, if neither one of them is able individually to meet the full demand.  By licensing its patent, the proprietor earns money from every sale, not just its own.

A properly-functioning market will also set a competitive price for access to IP rights.  If two parties genuinely cannot agree on a price, there are dispute resolution mechanisms in place already, without the need for special provisions in the Patents Act.  In the worst-case scenario a dispute may end up in court.  But even so, this is no worse than the current system, in which any application for a compulsory licence must be filed in the Federal Court of Australia in the first instance.

In short, there is a good argument to be made for eliminating the interventionist non-voluntary access provisions altogether, and allowing the market for patented innovations to regulate itself.  The compulsory licensing, Crown use and compulsory acquisition provisions have been rarely (if ever) used, and never with any great degree of success.

For any product or service for which a real demand exists, the market will find a way.  A patent holder, if it has the capacity, will seek to satisfy the demand itself.  If it lacks the capacity, a profitable course is to license the patent rights to one or more other companies that are able to meet the demand. 

Viewed in this context, non-voluntary access provisions exist only as extraordinary means to deal with market failures – by which we do not mean failures of the market for patented products or processes, but failures of the market for access to the intellectual property itself.  Aside from a suitable mechanism for the government to intervene in extreme cases of national emergency or overarching public interest, there is a strong case to be made for abolition of the existing non-voluntary access provisions.  We note that this is, essentially, already the position in the USA.

AN END TO ‘LEVEL 1 THINKING’?

We recently reviewed the new edition of the classic text Edison in the Boardroom (see Edison Updated for a New Decade), which reacquainted us with the five level ‘Value Hierarchy’.  The very lowest and most basic level in the hierarchy is ‘defend position’, at which the main concerns are the creation and management of sufficient numbers of patents to protect core intellectual property and to ensure defence against potential infringers. 

‘Level 1 thinking’ is common in industries that are not particularly IP-intensive, in companies that have yet to recognise the potential to extract additional value from their IP and (unfortunately) among politicians, bureaucrats and the general public.  The associated assumption that patents are fundamentally a defensive asset leads to very rigid notions of what constitutes patent use and abuse – for example, defending against flagrant copyists and rip-off merchants is generally ‘good’, while rent-seeking by non-practising entities is generally ‘bad’.

In fact, there are beneficial and harmful ways of using patents at every level of the Value Hierarchy.  Asserting dubious patents is not the sole preserve of trolls – market participants can threaten and sue competitors using ‘defensive’ patents of questionable merit, in order to tie them up in court proceedings and slow the entry of competitive products onto the market. 

Non-voluntary access provisions, such as compulsory licensing, can only address problems which arise at the lowest levels of the Hierarchy.  In a more sophisticated IP marketplace they should be unnecessary, and may undesirably distort the market by placing an additional bargaining chip in the hands of prospective licensees.

CONCLUSION

Maybe the Productivity Commission needs to be asking whether Australia is ready to be – and be seen as – a sophisticated innovation- and IP-intensive society.  Are we ready to break free of the limitations of ‘level 1 thinking’?  Are we ready to abolish outdated non-voluntary access provisions, including compulsory licensing, in favour of creating a level playing field in a substantially deregulated innovation market?  Since the provisions are rarely used anyway, their abolition would be largely symbolic.  But that does not mean it would not be significant.

Readers with an abiding interest in this subject are reminded that the deadline for submissions to the Productivity Commission’s inquiry is Friday, 28 September 2012. Further details are available on the Commission’s web site.

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