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This article further debates Richard Epstein’s The Goldilocks patent dilemma

How patently absurd?

Richard Epstein offers me an irresistible invitation. To specify, in 600 words or so, what’s wrong with the US patent system. Where do we look if we want to learn of its problems? Like most people, I would begin with a recent book by Josh Lerner and Adam Jaffe, two distinguished empirical economists. The book’s title is “Innovation and its Discontents” but its wordy subtitle nicely captures the thrust of their argument: “How our Broken Patent System is Endangering Innovation and Progress, and What to do About it.”

Lerner and Jaffe diagnose a number of problems. The lowering of standards of patentability by both the Patent and Trademark Office and the main Appeals Court. The underfunding of patent examination – I would add – the PTO’s unbalanced conception of its institutional role. Far from seeking Epstein’s Goldilock’s balance, the PTO started to refer to itself as “a client-service organisation.” Its clients? Not the public. Those seeking patents.

Some of the legal problems came from overt lowering of subject matter standards – such as the court’s rulings on business method patents, software and – arguably – gene sequences. Others were less heralded, but probably even more important – examples include refinements in the standard of obviousness, or technology-specific judgements about the scientific qualifications of the hypothetical observer whose knowledge is used as the benchmark of what is obvious. In other ways, the court tried to cut back on patent extent, perhaps to counteract for its enthusiasm elsewhere, but ended up making the situation even worse. Among some patent scholars the joke runs that the court believes that everyone should have a patent, but that it should be very small and of uncertain scope. The mines are widely scattered, their mapping is the subject of dispute and their triggers are extremely hard to perceive. For patent lawyers this is great. For business people and scientists, as Jaffe and Lerner recount, it is often the worst of all worlds.

Jaffe and Lerner’s work by no means exhausts, or can even hope to discuss, the entire enormous patent literature. And each of the tendencies I described above has its own sophisticated chroniclers. (For example, I discussed a thoughtful empirical analysis of software patents in a prior column.) The objections are not unanimous, of course, and not always directed at exactly the same points. It would be worrying if everyone saw the same picture. But I think it is fair to say that over the last ten years there has been a growing chorus of informed scholarly concern about the direction in which the patent system is headed. That chorus is now pretty loud, so loud that policy makers may be beginning to pay attention.

What needs to be done? Some common suggestions include raising the obviousness standard, funding the PTO at higher levels and increasing training in specific technical areas, instituting a pre-grant “challenge” procedure, simplifying post-grant challenges, codifying a statutory research exemption to patent infringement actions, greater use of “march in” rights on publicly funded medical patents, and the abolition or dramatic reduction of business method patents. Each scholar has a different list of suggestions, but the lists overlap and many of these proposals are agreed to even by those who take a more sanguine view of the patent system. The consensus seems to be emerging that change is necessary.

Like Professor Epstein, I am an admirer of the idea behind the patent system. Patents require public disclosure of the innovation and, at least compared to our absurdly long copyright terms, are of relatively short duration. At the end of the term the fully described invention is, in theory, now part of the public domain. We give a limited period of private exclusivity on truly novel and non-obvious innovations and get in return general public availability of technology and knowledge. The idea is a wonderful one. But it is an idea that the courts and the PTO have lost sight of, and to which they must be recalled.


Here James Boyle responds to Thomas Hazlett’s piece Pay-for-play can help music


Tom Hazlett’s column is a refreshing take on payola. I agree with him that monetary pressures on news are more important than those on music. Like him, I am a fan of Ronald Coase. But the most interesting part of Hazlett’s column is what it tells us about the use of economic analysis in making policy.

On the surface, Coase’s article on payola was everything that economics should be. He took a practice that was widely condemned and quietly asked what was wrong with it? What would be the costs and benefits of banning it? Wasn’t this just an example of product advertising, serving the benign goal of getting those records the companies thought were most likely to be popular onto the airwaves for listeners to hear? And isn’t “willingness to pay” a more precise signal of their estimation of ‘quality’ than “willingness to hype”? If the objection is that big companies will be given an advantage over small companies, because of their bigger coffers, surely this would apply to any advertising budget? We do not condemn the blockbuster movie for saturating the airwaves with trailers, even if my home movie cannot compete.

Not all aspects of Payola escape criticism. Most economists would agree with disclosure requirements – give the consumer the information that the airtime is being purchased. But after that, where is the foul? Some critics have even suggested that anti-Payola campaigns simply allow the record companies to save money by having the state enforce a ban on what could otherwise be a costly advertising bidding war. (I am sceptical of that argument.)

But whether or not you like a particular conclusion, this willingness to challenge popular assumptions about fairness, to demand a cost-benefit accounting, represents exactly the clarifying benefit that economic thinking can give to policy makers. And scepticism that public officials have indeed correctly grasped the public interest is always warranted.

But should we not apply the same scepticism to whether the market, or its current institutional configuration, is in fact producing the optimal social result? It is there that an economist’s assumptions may lead us into a complacency just as thick as the one Coase sought to puncture. Is advertising merely the provision of information or does it shape the preferences that economists assume are simply given? Are there network effects – music that becomes “must- hear” because Payola makes it ubiquitous, a practice which in turn helps to lock us in to an obsolete and centralised structure for the music industry?

Then there are the leaps the the model lets us take, as the definitional assumptions mount with dizzying speed. Hazlett asks “how do they know what gangsta rap track is top quality? Payola helps them learn, because record companies will tend to value airtime the most for releases for which they have the highest expectations of future sales.”

We might agree to measure quality by sales. Britney is better than Bach. Well maybe, at least if the alternative is having a cultural elite dictate the tastes people should have. We might even assume that record companies are good at picking which songs will sell, though it is not clear why they would be better than radio stations who have a similar economic motivation. But we certainly cannot assume that all this will maximise social utility or consumer surplus. Neither payola, nor Clear-Channel playlists take much account of intensity of preferences. If I had the chance to hear them, I might value Pere Ubu and King Crimson at 1000 utiles. You might hate them with a passion. The strains of Piaf, or the Pretenders – both anathema to my ears – would bring ecstasy to you, if you ever encountered them. In the end, what we will probably both get is risk-averse music. The music that will not make you change the channel.

As my colleague James Hamilton reveals in his book, “All the News that’s Fit to Sell”, the same phenomenon works in news. The economic pressures on news gathering go beyond the simple “newsola” that Tom Hazlett rightly warns about, to produce structural tilts in the way mass media presents news

In the end, I think Coase and Hazlett make good points about payola. When we have managed to apply the same rigour to our faith in the optimal outcomes produced by markets that they applied to our faith in the evils of payola, we will have come a long way.

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