By: lesliedware | September 15, 2015

Gene Quinn of IP Watchdog recently published an article that applied the Coase theorem to the patent system. Below is an excerpt from the article. Read the article in its entirety here


"The theory that law should maximize certainty and minimize transaction costs to facilitate an efficient, arms-length negotiation of rights is called the Coase theorem. The Coase theorem is attributed to Nobel Laureate Ronald Coase, who certainly would not approve of the mess all three branches of government have made of the U.S. patent system over the last decade. Wholesale changes to the law both through statutory changes and case law shifts have created sweeping changes to the underlying property right grant, as well as the overall desirability of obtaining patent protection, which drives innovation under ground as trade secrets and makes it ever more difficult (if not impossible) for individuals and startups to monetize innovation. This will lead to less risk taking because funding will increasingly dry up, which means less innovation – the exact opposite of what politicians say they want.

According to Coase, obstacles to bargaining and/or poorly defined property rights lead to an inefficient marketplace. You need to look no further than the current state of the U.S. patent system for proof. Given that all branches of government – the Legislature, the Executive and the Judiciary – have embarked on a decade long, top-to-bottom restructuring of the patent system it is no great mystery that the patent system in America is inefficient and private, arms-length bargaining between innovators and innovation users simply no longer happens. Patents are weaker, less capable of being enforced, and much more likely to be successfully challenged.

The entire government has essentially thrown out the old patent system that was responsible for revolutionary innovations and replaced it with a system that rewards copyists who ignore innovators and infringe patents without concern or consequence. “We used to have, for the most part in this country, what I’ll call an honor system where companies that were using technologies patented by others willingly took licenses without being forced by court orders to do so,” former Federal Circuit Chief Judge Paul Michel explained. “The honor system now is largely gone… So in the environment where the honor system is gone what really is a patent? It’s a ticket to file a lawsuit.”

Ignoring patent rights is called efficient infringement. It is efficient because patent rights are so weak, it costs so much to enforce patent rights, and those rights are so easy to invalidate, why would a reasonable businessperson do anything other than force patent owners to sue? Those engaging in efficient infringement know that at least some, if not many, innovators simply will not pursue them for infringing because of the cost and climate, which is inhospitable to innovators."


-Leslie Ware

Category: Patents 

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