A patent grants an inventor the rights to exclude others from making & using the invention for 20 years. Patents are critical in protecting the intellectual efforts of inventors, and thus in encouraging and promoting inventions. Such a 20 year monopoly, however, may impose disproportionately high social costs, particularly because the patenting mechanisms are often imperfect and may be abused. In addition, in the information age, where economical & commercial activities transact in a much faster pace than in the industrial age, the values of patents and thus the incentives they provide are often insufficient to justify the associated costs.
To better appreciate the roles of the patent system in the information age, I have discussed generally some of its pros & cons in this posting. Hopefully, I’ll be able to elaborate on some of the specific points in future postings.
Provide incentives to invent: This is the primary goal of patents, explicitly authorized by the US Constitution to “promote the progress of science and useful arts”. Because of the high upfront costs to obtain patents and the uncertain returns on the investments, however, the incentives can be weak. (In the finance parlance, the present value of potential future cash flows from a patent is very small, because the discount rate applicable to the cash flows needs to be high enough to adequately factor in the high uncertainty in rewards. See, “Fixing Patent Boundaries” by Tun-Jen Chiang, accessible here.)
Encourage invention disclosure: An inventor may not have to disclose her inventions, if it’s viable to keep them as trade secrets. Invention disclosure, however, benefits the society by allowing others access to the invention. Therefore, called the “patent bargain”, an inventor is awarded a 20 year patent monopoly in exchange for disclosing her invention. For the information industries (ie, software), it is generally difficult to reverse engineer a software and thus feasible to effectively maintain trade secrets. (See, eg, here.) The flip side of the coin is that it will be difficult or costly for a software patent holder to detect infringements of the software invention, deterring inventors from seeking patent protections. The patent bargain therefore may not be sufficient to effectively encourage disclosure in the software industries.