Why patents matter: their benefits and disadvantages

By Alex Navarre

Dr. Alex Navarre, PhD, MBA, is vice-president of Numinor Conseil Inc. in Quebec. He taught innovation management and intellectual property at École de technologie supérieure and Université de Sherbrooke. He is a former regional manager of NSERC, former president of Société d'accélération du tranfert de technologie Grand Centre, and former director of the technology transfer operations at McGill University and Western University.

Letter patents have been in use since the Middle Ages. These legal instruments, in the form of a published written order issued by a monarch, president or other head of state, allowed an exclusivity of usage that translated into significant economic returns. Examples included tinted glass in the Netherlands, porcelain wares in France and recipes in Rome.

Today, patents constitute a unique competitive privilege and an economic force. today. The number of patents is steadily increasing every year, reaching 16.5 million worldwide in 2022, according to the World Intellectual Property Organization. China, the U.S. and Japan represent more than half of that number, along with 72 per cent of new filings.

The House of Commons Standing Committee on Science and Research, in its report in November 2023, noted that Canada’s performance in securing patents is less than enviable despite the country’s excellence in research.

So why do patents and intellectual property (IP) protection vehicles matter so much? By patents, I mean here generic IP protection vehicles that include copyrights, plant varieties or design patents. While patents are well entrenched in our economic fabric, they are not without their detractors or weaknesses.

Patents in a snapshot

Patents imply a public disclosure of inventive results and their novel applications, by way of claims registered in national and international jurisdictions. Typically, patents grant a 20-year monopoly to the sole allowed user, but not without obligations – mainly to fully divulge the novelty and to be able to defend against infringers.

While it may seem easy to comply and report an invention, the legal environment has evolved over the years, due to patents’ growing economic importance. This environment has resulted in a maze of complexities that requires highly skilled professionals at the interface between science, technology and the law.

The dilemma facing inventors, researchers and companies alike is the choice between keeping their invention a secret with no further protection, or divulging it with a time-limited monopoly to practice, or use, the patent and reap the rewards. Other IP protection vehicles, such as trademarks, may be used as standalone or in addition to a patent to extend some of the early advantages gained by the IP protection.

However, patents are not cheap to obtain and are only generally meaningful when their issuance – which may take several years – is shorter than the product market entry and the product’s useful life. The cost of an early filing may be under $5,000, but the cost of a patent family (world coverage for a single invention) may be in excess of $100,000 – excluding improvements and prior art licences or cross-licences required to practice the patent.

The growing economic importance of patents

R&D-intensive companies have built considerable portfolios of what constitutes today their intangible assets which often represent more than 85 per cent of a company’s market value.

Apple, for instance, owns over 100,000 patents that protect its market of expanding networked products and the company’s stock market value. The increasing importance of patents has also led to new opportunities, including: sale of considerable patent portfolios (held by Kodak, for instance, or Research In Motion); cross-licenses (common among IT majors and “Big Tech”); and mega-sized court cases for potential patent infringement. This has created a thriving new industry – the IP trade ecosystem.

Patent infringement and inventorship issues may result in considerable financial challenges. For example, a jury in the U.S. District Court for the District of Delaware recently ruled that U.S.-based Nanostring Technologies (NT) must pay US$31 million in an infringement case to 10X Genomics. NT shareholders responded by sending NT’s NASDAQ-traded stock from $1.28 per share down to fifty cents per share in a matter of days.

Clearly, managing patents requires constant monitoring of the IP landscape and being able to respond to and sustain actions from unforeseen infringers. This is certainly an issue for SMEs, and new policy approaches are being used by the Canadian government and those in other countries to avert or contain predatory practices and protect companies.

Patent mapping allows for advance notice about competitive activities through a number of market intelligence software platforms that detail a company’s core interest, competitive positioning, trends and country positioning. In the pharmaceutical sector, where product development includes lengthy staged clinical trials, without the monopolistic privilege provided by patents companies would unlikely pursue such risky pathways. Therefore, patents provide an incentive to invest that has been the driving force behind pharma and biotech companies’ growth in the past few decades.

A large part of “orphan patents” is the source of tech startup firms supported by venture capital firms and incubators. Orphan patents constitute a patent or patent portfolio owned by a company or a university in a technical field in which the company or university is not interested in being a development participant and seeks a partner. In this way, patents have had an indirect impact on the corporate value chain and on potential initial public offerings.

For academic researchers, the patent literature is an additional source of potential ideas and enables an understanding of industrial technological challenges. University inventors are generally rewarded for their patented inventions, often receiving up to 50 per cent of a licence’s royalty revenues as well as equity positions in the case of company spin-offs.

In some university circles, “accidental” successes (Gatorade invented at the University of Florida, or VoiceAge voice and audio technologies at the University of Sherbrooke) have led to expectations that commercialization of inventions could be a source of predictable recurrent revenues. Experience shows this not generally the case.

However, in AUTM reports, ShanghaiRanking (global ranking of academic subjects) and government data tracking, universities are increasingly recognizing and promoting patents, not only as a form of publication but as part of performance criteria for securing tenure.

The downside of patents

Given the strong arguments in favour of patents’ benefits, one wonders why there are skeptics as to the value of the patenting system.

A world without patents would certainly allow for far less legal complexities. More democratic approaches have been proposed and, in some cases, adopted under the general label of “open science.”

A variety of free vehicles exist, especially in ITC and software development where networked developers thrive, for instance Creative Commons Licenses, GNU General Public License, open source software and some simplified licenses (such as MIT Licence or BSD licenses). While effective, some free software licenses may still require compliance obligations.

Patents are traditionally only effective in domains where the useful life of the IP is sufficiently long to take full advantage of the monopoly situation and the initial investment. As a result, one might conclude that software, digital and ITC domains are less prone to patent filings. However, lengthy court battles over infringement are taking place in these domains, often involving the “GAFA” tech giants (Google, Apple, Facebook and Amazon) and their monopolistic restrictive practices.

Patents may be discriminating against SMEs and startups since the onus is on these businesses to defend against infringers. The extreme case is illustrated by “trolls,” non-practising entities that exist solely to acquire large patent portfolios in order to block competition or extract entry fees.

Patents also touch upon sensitive health and social issues such as genetic modifications of plants or animals, artificial intelligence and newer forms of knowledge. For instance, gene-edited plants is currently a much-debated topic in the European Parliament. Regulations from such jurisdictions have far-reaching implications, including in the patent ecosystem.

Looking into the future

Given the international nature of patents (through the World Intellectual Property Organization, United States Patent and Trademark Office, European Patent Office, and Canadian Intellectual Property Office) and their role in international trade agreements, a departure from this environment is unlikely in the future. However, improvements and adjustments are needed to meet new issues and national security concerns.

Academic institutions have been shy to enforce policies overtly favouring IP exploitation, claiming or perceiving that doing so distracts them from their core mission. Industry has relied much on universities and government incentives for its frontier research. Thus, recognition of the value of better exploiting inventions as a by-product of research has taken a renewed priority, especially in a highly competitive international environment.

Governments around the world have realized the value of patents as the pathway to technological and economic transition. They have incentivized universities to protect their IP gems – those rare inventions that pave the way to so many cross-sectorial applications and “gazelles,” or high-growth companies. However, commercializing those disruptive inventions is a long process: laser technology took about 30 years to develop, as did nuclear energy or speech compression and recognition.

As Abraham Lincoln once wrote: “The U.S. patent system adds the fuel of interest to the fire of genius in the discovery and production of new and useful things.”

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