III-2.8 : Les Marchés des brevets dans l’économie de la connaissance (Patent Markets in The Knowledge Economy)

- The development of a market, the purpose of which are patents, is a new and important, rapidly expanding phenomenon. Beside the traditional forms (direct negotiation and contracts by mutual agreement), this market takes on new forms (as observed above). We have since observed that initiatives are on the rise. The aim of the Report, in a global context, where once again United States today ranks first and where Japan is already present, is to go beyond a superficial overview in order to fully analyze the phenomenon, to assess the stakes and to try to determine what the French and European public policies must be.

 

- Reviewing the basic characteristics of a patent, the Report stresses the fact that the Patent Markets establish an alternative path to the traditional tradeoff between the necessity to guarantee the patentee’s ability to exclude third parties, on the one hand, and to go far enough to include the potential users of the invention, on the other. The Report further underlines the importance of this “commoditization” (we can note incidentally that this English word is preferred in the Report to the French word “marchandisation”, which has the same meaning, although it is deemed to carry a negative connotation).

 

Yet the idea of ‘commoditization’ may not be considered a new and revolutionary discovery, as it has been traditionally organized on a case-by-case basis and by mutual agreement. The authors attest that the novelty lies in the apparition of the tools mentioned above, which ultimately allow for the reduction of transfer costs between players in the market and the costs of working on a larger and more structured scale in, for instance, market places. “The separation between the invention itself and the assets allowing its economic implementation (physical capital, trade infrastructure, etc.) is a major trend in this beginning of the 21^st Century”. Markets encourage this tendency, by making it possible to “mobilize” the inventions and by assigning them a price. Thus they can, in various ways, ameliorate their “allocation” in the economy.

 

A key component is the facilitated circulation of technologies, which represent a source of productivity gains within the economy (where firms can make use of more efficient technologies) and of productivity gains within the realm of technological inventions (through a more specialized division of research tasks and facilitated access to sources of knowledge). This phenomenon contributes to the appearance of new forms of financing for research investments, (where capital could be directly invested in the “inventive assets,” valorized separate from other assets).

 

That being said, difficulties are obviously important to note: How to estimate the value of the patents and consequently the transaction price? How to match supply and demand, both of which are extremely specific? How to lead to the divulgation of information from “sellers” and “buyers” necessary to make the contracts possible? Different experiments are in progress to shed light on these issues (sale by auction, brokers’ intervention, or electronic platforms, and even patent pools). Patents and licenses can often figure as the purpose of transactions. The possibilities are infinite and thus the report observes that, in effect, it is quite difficult to foresee today what kind of models will emerge tomorrow.

 

The authors underline that this plethora of possibilities must encourage the public authorities to take great prudence, as we noted above. At the same time, “in the light of the opportunities the Patents Markets present”, they estimate that the idea of a “positive and offensive approach” of the question must be adopted. Concretely, that means to encourage experiments as “patents funds” or new modes of valorization. This also requires that the Patent System play its role, i.e. in providing the delivery of high quality patents (“covering in a strong legal way true inventions”), which is indeed a recurrent question. The creation of a cohort of professionals of intermediation is also recommended, and of course, in the present context, a European approach must be sought after first. As a final observation: in order to ensure the development of the Patent Markets, they must not be substituted by other instruments.

 

On a final note: “Patent Markets are one of the fields where France’s position in the global knowledge economy is at stake and for that reason they merit real and sustained attention from the public authorities”.

 

- Those are the main aspects of the Report put forth by the authors themselves. But of course there are many other elements that come into play in this paper.

 

The Report is divided into 6 points, plus a chapter dedicated to conclusions and recommendations (we shall go back over these):

1.             The current transformations of the knowledge economy;

2.             Patents in the knowledge economy;

3.             Patent Markets;

4.             Value and quality of patents;

5.             Theoretical and historical references of the development of patent markets;

6.             Development of central market places.

 

It is obvious that those different points are not found to be on the same level: some are more theoretical while others are more practical, some more descriptive and others more prospective...

 

I shall select some of the topics that seem especially interesting and will begin with the place of patents in the knowledge economy. The growth of the number of patent is a well-known phenomenon. Some commentators spoke about of “patent explosion” or “patent inflation”. The opinion expressed here is more balanced: the Report compares the figure of the patent applications and the figure of R & D, from which it is evident that the first figure is scarcely superior. For the Report, the link must be done with the number and the value of the inventions, above all else. Nevertheless, the explanation cannot be found only in that single observation, although the correlation does exist. But, for instance, in the Member States of the OECD, the growth of R&D is equal to 70% but the growth of patents covering inventions from those countries is approximately 110%. Can the explanation be found in the emergence of a global strategy with new actors? Or in the drift of the US Patent and Trademark Office away from its longstanding practice of granting patents to ‘things’ that were unlikely to be patentable under a strict interpretation of a law (but which has today been largely stopped)? Explanations are neither lacking, nor fully convincing. There is also uncertainty surrounding Small and Medium Enterprises’ (SME) access to Intellectual Property (IP) protection. The Report brings to light that, contrary to current belief, it is not certain that these SMEs do not use IP. Unfortunately (and there is no skepticism to this statement) French SMEs appear less innovative in the global context. However, it is interesting to note that there exists a specific challenge for these kinds of firms, both in France and elsewhere, and that is to find adequate partners. In light of this, an open market would be a particularly useful tool to overcome these difficulties.

 

Patents Value: this is also a very delicate issue, which merits special attention. It is obvious that determining the exact value of a patent is key when setting up a patents market, but as the authors of the Report rightly note, a patent is a “contextualized” possession. In other words, the patent value can vary considerably according to its specific context. For instance, a “narrow” patent, at first sight, can have an important value if it completes a portfolio and permits to secure a complete technical domain. In this case, the practice of valuation is particularly difficult. The methods are varied but each one presents drawbacks. One of the great attributes of the Report is that it provides a large panorama of those methods: private, econometric and synthetic – even if one must admit that these pages are not very straightforward for a lawyer to comprehend. In fact, literature on this subject is very important (for instance 100 econometric studies are listed!) but the results are varied and it can be somewhat troublesome to read that, in these sorts of studies (i.e. econometrics), the value of the patents remains “either speculative or declarative and therefore subjective”. The synthetic methods (the most “up to date”?) are built on the choice of criteria of interest of the patent. Ocean Tomo is probably one of the most well-known firms that use this sort of approach. Yet Patent Cafe has a similar practice, with twenty significant characteristics grouped together in three main categories: legal, technical and economic. Nevertheless, for the authors of the Report, those tools remain fragile. The first auction made by Ocean Tomo revealed a ratio of almost 2 to 1 between the expected value of the patents based on the theoretical calculation, and the actual sale price. We shall remember that, in the opinion of the authors of the Report, a more subtle analysis of identification is necessary.

 

This issue did not prevent the development of marketplaces for patents. This is the last point we should like to emphasize because it is also here where the Report makes a peculiarly interesting contribution regarding a perfectly new “object”. It highlights three market places: auctions, quotations on (a specific) stock exchange and financial markets. Each system is examined, but one must keep in mind that the general and abstract approaches are not pertinent. For instance, for the reasons mentioned above, it is unrealistic to try to reach a real quota for stand-alone patents, but the system seems capable of working for patent pools. Resorting to financial markets is undoubtedly the most delicate (and much debated) question. It is certain that “patents, as IP assets, can be used in order to attract outside financing or to represent incorporeal assets on the financial market”. It is also certain that patents can comprise the basis of different financial products. Yet even if some form of securitization came into being, securitization in this field is something very questionable. The Report once again underlines the difficulty of valuation (and how to carry out securitization without valuation?), but at the same time points out other difficulties: the problem of “encumbrances” (i.e., in our case, of the licenses linked to a patent) and the need in many cases to reveal the existence of these licenses when they are secret, or the will of many actors to preserve their anonymity. 

 

One can understand the Report’s appeal for prudence.

 

Conclusions: The report’s conclusions are articulated in 11 points. The first one underlines the need to increase the legal quality of patents. More directly linked to the practice of the markets in particular, the Report outlines, among others recommendations, the need: to encourage the creation of an experimental place of sale by auction of patents/licenses; to prepare the development of new financial products incentives to the orientation of saving towards research; to promote an active policy of development of a competitive supply of brokers in the knowledge economy. As we note above, it proposes to develop initial and continuing education of high-level professionals. The following is a very original proposal that must be specially noted in a review dedicated to regulation: to introduce adequate provisions in European Competition Law. This point appeals to a specific valuation: to start a coordinated analysis between the European and the national competition authorities, following the study of the US Federal Trade Commission, with the idea that “that study would have to list the recent developments on the patent markets and would try to conceptualize the notions of competition and of violations of competition in the specific context of those markets”. It is thus not astonishing to read that the last proposal is the creation of a research institute devoted to patents. As the authors of the Report observe, knowledge in this field is still “modest”.