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Patent Primer

By Bob Huff

February 2002

Ideas aren't real estate. But when ideas and technical know-how are protected by a legal creation known as a patent, they become a temporary kind of property. Patented ideas are often referred to as intellectual property, a class that also includes copyrights and trademarks. Like other forms of property, intellectual property can be sold, traded, misused and defended in court.

In the world of patent law, new knowledge about how to make or use some form of matter is called an invention. Individuals who believe they have invented something useful can ask the government to decide if their idea is sufficiently different from similar previous inventions that it should receive patent protection. A patent simply grants the legal right to stop other people from using the invention for commercial gain for a period of time -- 20 years in the U.S. If granted a patent, an inventor can market the product or process for his own profit, sell or assign the right to do so, or license the right to third parties.

Under U.S. law, a patent gives the inventor the "right of exclusion," that is, the right to prohibit others from using their invention. This is a limited right and doesn't mean that just any invention can be marketed. For example, someone may invent and patent a new kind of poison, but the patent gives him no right to make and sell poison outside of the usual restrictions that apply to the sale of poisons. The patent only grants a right to try and stop anyone else from making and selling that poison within the U.S.

The first step to obtaining domestic patent protection for an invention is to have it evaluated by an examiner from the U.S. Patent and Trademarks Office. The examiner compares the invention to earlier, similar, inventions and tries to determine if three tests are met: The invention must have some kind of use, it must be substantially new or represent an improvement on earlier inventions, and it must not be "obvious." A claim on the use of water for human hydration (drinking) is an example of an obvious use of water and therefore not patentable.

Since patents are legal grants by the government, they are not absolute. In the same way that government can take someone's real estate in order to build a new road or other public amenity, the rights to an invention can be denied or reassigned in the interests of national security. For example, no invention pertaining to atomic weaponry may be granted a patent -- it automatically becomes the property of the government.

Companies that depend on innovation to give them an edge in the marketplace use patents to help protect their investments. Enterprises are more confident about spending money to develop new ideas into products if they are assured that they have a legal right to stop others from using their inventions. Patents limit the risk of developing new products by guaranteeing the patent holder a competition-free head start to recoup costs and hopefully make a profit.

Patents are used to protect investments in all phases of product development, not simply to reward the discovery of an idea. Although patents are granted to individual inventors and recognize authorship, they only take on economic value when a company is willing to launch a commercial exploitation of the invention. The economic value comes from the assurance of a guaranteed period of market exclusivity. Typically, companies that employ researchers and engineers contractually require their employees to assign any patents they obtain to the corporation. Often a product will be protected by more than one patent on more than one of its novel aspects.

Patents are considered particularly crucial to pharmaceutical manufacturers. Extended periods of protection are sought since it may take several years after a patent is granted for a new drug to be thoroughly tested and proven safe and effective enough to sell. Long periods of market exclusivity after approval allow companies time to recover development costs for the approved drug, absorb costs for unsuccessful attempts, support the development and marketing of new drugs, and generate profits. The costs associated with the discovery of an invention leading to a patent are typically only a small part of the expense of bringing a drug product to market.

After a drug patent expires, manufacturers of generic medicines are free to begin making and selling an approved equivalent version of the drug -- usually at a substantially lower price based on the actual cost of making and distributing the drug. Although some kinds of products are able to retain brand identity and market domination even after patent protection has expired, in the pharmaceutical industry the potential to generate revenue from an unprotected drug is cut drastically. Insurance companies, HMOs and other payers often opt for the cheaper generic version of a medicine as soon as it becomes available.

Because patent protection is a legal device, it is dependent on governments to grant, adjudicate and enforce. Worldwide, patent laws have varied considerably, with some countries respecting U.S. and European patents explicitly, others limiting what kind of inventions can be patented or for how long they should be protected, and other countries offering no protection at all. Often a company will not seek patent protection in a country in which it perceives no market potential. Recently, in an effort to stabilize the worldwide business climate, proposed new international trade agreements have insisted that all participating countries establish patent laws in conformity with those in the U.S. and Europe. One consequence of this has meant that some countries are faced with adopting unfamiliar legal concepts of property, which may result in the disruption of certain evolved business practices particular to weak economies. Yet signatories to the international agreements are given little leeway -- they must accept international corporate conventions or face exclusion from the world economy.

Some countries with longstanding systems of patent protection for most inventions treat pharmaceutical products as a special category. In India, for example, foreign drug makers have not historically been offered market exclusivity for their medicines themselves -- only for the methods of making them. This exception has allowed a vigorous market to flourish for domestically produced generic versions of drugs that had been developed and patented elsewhere. For a poor, highly populous country with ambitions of economic independence such as India, this accommodation has supported development of technical infrastructure, provided jobs and supplied medicines that would have been otherwise unaffordable.

Patent protections may be lacking altogether in other, less developed, countries. In the case of pharmaceuticals, though, since there may be no domestic capacity to produce drugs and few individuals affluent enough to afford them, the absence of protection in these countries has had little consequence for patent holders doing business elsewhere in the world.

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