My colleague, Ben Gornall, Patent and Trademark Consultant, has continued our earlier discussion. My initial post was “IP Litigation as a(n Illegal) Business Model“, to which Ben commented here. I replied with “Patent Assignment: Trolling the Gap between Potential and Actual Usefulness“, and Ben e-mailed me his more detailed analyses. I apologize, mainly to Ben, for my delay in posting them. Without further introduction, here is the second of Ben’s replies:
Part 2:
Regarding the optimal length of patent terms it seems to me the key question is this: At what point does the marginal economic cost from extending the patent monopoly begin to exceed the marginal economic gain from increased incentive to innovate?
This is a challenging question and the answer is highly sensitive to the prevailing cost of capital for investments of comparable risk to the patenable subject matter. For example at a 5% discount rate the present value of monies to be recieved 20 years in the future is 38 cents on the dollar, but if the discount rate is 15% the present value of that dollar drops to 6 cents and the effect of increasing the patent term beyond that point becomes much less significant in terms of incentive to innovate. Now the prevailing discount rate for investments in new technologies is generally quite high as there is no track record from which investors can reliably project sales (either their own or those of their potential infringers) and assess risk. Thus it seems that within 20 years a patent holder should be able to realize most of the value from his invention. This of course varies with the industry and the competitive environment for goods that can serve as substitutes to the invention which is all the more reason for inventors to obtain professional valuations of their inventions.
Now for society overall there is likely a lower discount rate than for an individual inventor due to the spreading of risk. For example a government can borrow money at 2 or 3% by issuing treasury bills or government bonds but go to your bank and ask them for that rate and see what they say. This implies that the present value to society of monies generated from an invention after 20 years will likely be higher than the present value to the inventor.
Applying similar analysis to copyrightable subject matter such as software begs the question of why protection needs to endure for so much longer than for patents. It may be that the risks and discount rates for copyrightable subject matter are much lower than is typical for patentable subject matter but that seems highly doubtful. The explanation may lie in the lower historical returns and risks for older forms of copyrightable subject matter such as books or paintings. This suggests that policy regarding copyright terms should be reviewed and possibly varied based on prevailing discount rates for the relevant category of subject matter.
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