Patents are instrumental to our current innovation system. They encourage inventors to share their ideas, rather than keeping them secreted away, by offering the inventor exclusive rights to exploit their idea for a limited period.
Yet they also cost money to administer, and much of this cost is passed on to the inventor. If that cost is too great, then there’s a risk the patent system will fail to do its duty.
A 2013 review of the Australian patent system focused on the importance of patent rights to innovative activity. But little or no attention has been paid to whether patent protection is actually affordable.
For example, fees paid to IP Australia form part of the “patent bargain” – to provide an incentive to innovate while limiting the social cost of patents – but the revenue generated from the fees goes directly to the running of the patent office, which is a self-funding agency of the government.
If we want a functional and efficient patent system, one that encourages innovation yet is also self-sustaining, the ultimate questions become: how are the fees set, and what would an optimal fees schedule look like?
The patent race
If you apply for either a standard or innovation patent, you can expect to pay around A$1,000, depending on the type of patent, and before factoring in any attorney fees.
But new users may be surprised to be confronted by additional renewal fees, due after the fourth year of filing a standard patent or two years for an innovation patent. Skip them and the patent holder forfeits all legal protection.
In Australia, we have seen steady increases in renewal fees for standard patents holders. Similar increases in the US have led some to ask what is the optimal policy towards patenting costs.
Are patentees fee sensitive?
An emerging issue is how renewal costs affect the demand for patents (known as the price elasticity of demand).
If inventors regard patent protection as a necessity, demand could be price-inelastic, meaning an increase in costs will not affect the patentee’s propensity to seek legal protection.
But if the cost of patenting is a large share of an inventor’s budget and other options are available, such as keeping their inventions a trade secret, patent demand could become sensitive to fee changes, or elastic.
As patent offices rely on filings and renewals as a source of income, this issue should be of particular concern to them, not least because if patent demand is not price sensitive, increases in renewal fees could help raise revenues.
Empirical research to date suggests that patentees are sensitive to fee changes and that patents are inelastic goods. As the authors of this study reveal:
The fact that a patent is an inelastic good does not mean that patent fees are an ineffective policy tool. It does, however, mean that a change in fees must be sufficiently large to have observable effects.
Impact of cost-recovery