Thursday, March 29, 2007

Charity of the Intellectual Variety

The gentle art of rehabilitating "orphan" patents

IT is generally assumed that companies amass patents with the intention of putting to business use the intellectual advances that those patents protect. However, this belief contrasts rather starkly with the reality, which is that a very large number of patents (by some estimates, upto 95%) lie unused. These idle patents have come to be christened by a rather quaint, if faintly inappropriate, name: orphan patents.

Given the not insignificant cost of earning (and maintaining) a patent, one would correctly be surprised that businesses could be so obtuse as to put them to so little use. How does one explain behavior so apparently wasteful as to be almost apalling? One way would be to realize that patents are often obtained purely for defensive reasons, or simply to prevent a competitor from claiming ownership of whatever intellectual content the patent protects. Thus, even in idleness the patents serve a legitimate business purpose - that of staking out intellectual territory*.

Be that as it may, many companies rightly chafe at the idling of wealth that orphan patents represents. It is thus that a novel form of knowledge transfer has emerged in recent years - that of patent donation. Since the US government also allowed tax deductions for such donations, the practice had become widespread by the 1990s.

And it was a marriage made in heaven - since the patent was unused anyway, the cost to the patent giver was low, and the benefits for the recipient could potentially be very high. And the tax breaks helped. Some companies even took equity in the recipient companies, so that they would benefit if the recipient - typically a startup - made it big. A true win-win.

Why am I speaking of this in the past tense? Because a change in US tax laws in 2004 effectively removed the tax breaks, thus putting the brakes on this practice. The reason for removing the tax concession was apparently misuse by many companies, by inflating the value of patents donated. Such overuse of the donation tax concessions was even systematic, with many consulting companies springing up to "help" make this happen better.

In any case, the practice has clearly dwindled to a trickle. The only major such act of donation in the past couple of years appears to be IBM's initiative, where it threw 500 patents primarily in Open Source technologies, into the public domain.

Should patent donations continue? Obviously they are a good thing, as in addition to the benefits to both donor and recipient outlined above, they help mobilize knowledge that may otherwise lie essentially idle.

Will they? The answer appears to hinge substantially on whether the tax breaks will be reinstated. A Duke Law school paper argues eloquently for changing tax policy to help this practice.

And any right thinking person with an interest in freeing up knowledge and seeing it mobilized in the service of humanity can scarcely disagree: any move that spurs the rehabilitation of orphan patents is welcome.

* in this respect, we in modern society specializing in intellectual wealth generation are not much different from wild animals or primitive humans staking out terrritory. A sobering thought.