A place to convene. A place to discuss. A place for ideas.

Bruce A. Lehman: Patents are Indispensable to 21st Century Commerce

By Bruce A. Lehman November 1, 2012

In this point-counterpoint series, the Chairman of International Intellectual Property Institute argues for patent law, a question raised in a recent working paper by the Federal Reserve Bank of St Louis.

Commerce in the 21st century is characterized by two phenomena that set it apart from anything before: the intangible nature of the goods and services traded in the marketplace and the global nature of that marketplace. A recent analysis by Ocean Tomo documented that the reported book value of intangibles in S & P publicly traded companies has risen from 17 percent of those companies’ assets in 1975 to 80 percent in 2010. And, a report issued by the Department of Commerce in March of this year found that for the year 2010 IP-intensive companies accounted for 60.7 percent of U.S. merchandise exports, 32.8 percent of GDP and 40.4 million U.S. jobs.

The intangible nature of corporate assets and the disproportionate contribution of IP-intensive companies to the nation’s well-being are related. In certain industries such as biotechnology and pharmaceuticals, a product’s entire value is established not by the pennies associated with manufacturing a pill but by the patent that rewards risk taken by shareholders who invested in the R & D required to invent the active ingredient in the pill. Similarly, in the film, music and software businesses a product’s entire value is encompassed in the copyrights that protect it. In the case of software embodying an actual invention, a patent may be the defining element of value. In other industries, the relationship of patents, copyrights and trademarks to a company’s value may not be so easily definable, but a quick glance at the annual report will show beyond doubt that shareholders have been investing in assets that are largely intangible. And, it is extremely rare that the company’s patent portfolio is not a part of that value. As we have seen in some well publicized recent cases, when a venerable company with a historic brand and strong trademark goes under, the patent portfolio is sometimes the only asset left to satisfy creditors.

The vital role of intellectual property rights in wealth creation, competitiveness and international trade has been acknowledged formally by the vast majority of nations in the world that have joined the World Trade Organization. While the 1994 WTO treaty eliminated most tariff barriers to imports of manufactured goods, it also required adherence by member states to a new global regime of IP protection embodied in the TRIPS agreement. These landmark 1994 agreements reflected a quid pro quo among the signatory countries. The most developed and wealthiest nations, including the United States, conceded to their lesser developed trading partners a comparative advantage in the cost of labor with the result that millions of unskilled factory jobs moved offshore to low wage countries. In return, developing countries agreed to provide to the exports of their more developed trading partners the high levels of patent, trademark and copyright protection necessary to ensure a meaningful and growing market for technology intensive products with a high percentage of intangible value.

In the eighteen years since the WTO and TRIPS Agreements were negotiated, emerging markets in Asia and Latin America achieved unprecedented growth with the explosion of international trade. And, the United States and other developed countries have benefited from being able to supply high value, technology-dependent goods to these growing markets. However, the growth in trade has not been balanced. The United States, in particular, has experienced chronic trade deficits year after year.

While these deficits can be expected to ease as wages rise in the growing economies of countries such as China, there is no question that part of the chronic imbalance is due to the fact that – while the U.S. kept its part of the bargain by opening markets – other countries have failed to provide the full protection promised to the patents and other IP rights essential to receiving full value for exports where a high percentage of that value lies intangible elements.

In recent years there has been a lot of controversy about whether patents are necessary to the efficient functioning of a modern economy. While there may, indeed, be room for differences of opinion on the mechanics of patent prosecution and litigation, it seems to me that the history of international trade since the WTO and TRIPS agreements, provides strong evidence of the economic loss associated with failure to respect and recognize the role of patents in a global economy where jobs of Americans depend on extracting fair value from the creation of intangible assets.

Bruce Lehman is chairman of the International Intellectual Property Institute. 

Read Robin Jacob’s counterpoint on the case of abolishing patents.

Prof. Jacob and Mr Lehman responded to The Case for Abolishing Patents, a recent article in The Atlantic describing the Federal Reserve Bank of St. Louis Working Paper by Boldrin & Levine: The Case Against Patents.