The ability to obtain patents is vital to a well-functioning market economy. But changes that are now being planned at EU level risk undermining protections for innovations in sectors such as digital innovation.
Next year, economic freedom in Sweden – established in the Decree of Extended Freedom of Trade –will be 160 years old. These freedoms have been, and continue to be, crucial reforms that have transformed Swedish society, especially in terms of the growth of prosperity they made possible. In the current political debate, however, many have apparently forgotten the various components of economic freedom, something which in turn risks undermining the fundamental tenets of the market economy. It is therefore necessary to constantly remind people of these freedoms and to protect them. These freedoms include functioning intellectual property rights.
Economic freedom is a part of the wave of freedoms that followed the French Revolution. In France, they were introduced by decree as early as 1791. This paved the way for the introduction of similar freedoms in several countries, such as the Gewerbeordnung in Germany in 1871.
The introduction of economic freedom rapidly brought a number of benefits to the economy. It became easier to establish new businesses and to do things in new ways. Where guilds previously prevented the emergence of new companies and new services, entrepreneurs could now change entire markets through innovation. One problem that occurred in many markets, however, was that stagnation often followed an initial wave of innovation as a sort of plagiarism economy took hold, where those who invested in creating new things immediately saw their innovations copied. This resulted in fewer people wanting to invest in new products and services.
It is against this background that various intellectual property protections, such as patents and copyrights, emerged towards the end of the 19th century. These protections are simply a function of the economic system we have, with its robust freedoms in the shape of the freedom of establishment and freedom of contract, for example. Freedoms that are without boundaries risk however to be abused and thereby result in unwelcome outcomes. Complete freedom of contract, for example, can lead to anti-competitive agreements. To maintain the freedom of competition, certain parts of the freedom of contract must be limited through competition law and the prohibition of restrictive agreements.
This way of looking at intellectual property rights tends not to be highlighted in current political debate. The fact that protections are constantly balanced to fulfil their intended purpose without becoming too extensive is seldom discussed. Yes, intellectual property rights entail exclusive rights. Yes, exclusive rights create monopolies. And monopolies are otherwise entirely at odds with the pursuit of free markets.
Like it or not, long-term growth requires patent legislation.
On December 10, 2018, Paul M. Romer received Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel for his research on the importance of patent law for idea-driven growth. In the absence of protection for innovations, technological development may still take place, but not to the same extent as if those protections exist. Like it or not, long-term growth requires patent legislation.
However, if the benefits of innovations are to be optimised, that right should not be unlimited. Patent legislation should achieve a balance that a) encourages innovation by creating an exclusive right in the form of a patent; and b) promotes the spread of new ideas by limiting such rights to a certain extent. Restrictions may concern the amount of time a patent is valid, its geographical reach, or how much it costs, for example.
When debate becomes heated, on everything from vaccine patents to copyright to software patents, the above points are rarely considered. Nor is it discussed that several large companies have built their success on patents that either did not apply in certain countries or had expired. Ericsson, Philips and Lego are all companies that initially benefited from the limits of patent law.
When intellectual property rights are discussed without consideration of this type of trade-off, the risk of poor political decisions increases. This is precisely what is about to happen now, especially at EU level. In spring 2023, the EU Commission presented a patent package which can be compared to how the EU handled tobacco. The EU felt that something had to be done about the widespread use of tobacco, and therefore implemented the admittedly powerful but also counterproductive measure of banning snus (oral tobacco pouches). Similarly, several of the proposals on patents may seriously damage the innovative capacity of European countries, and have significantly more serious effects than Swedes, say, living in France not being able to buy snus at their local shop.
The EU’s patent package is part of the European Commission’s action plan for intellectual property rights. That action plan is, in turn, part of the industrial strategy that the Commission presented in 2020. As a Swede you might be forgiven for thinking that Romer has been read at EU level, unlike in Sweden, because generally, the EU Commission talks about the value of knowledge-based assets. However, the practical consequences of the proposals will see the watering down of protections. There is also a lack of proposals to solve the more genuine, pressing problems.
The patent package consists of three proposals. One on standard essential patents, i.e., compensation rules for holders of patents related to technical standards; one on a uniform Supplementary Protection Certificate (SPC) and one relating to compulsory licensing. The latter proposal is of particular concern as it claims to solve a problem no one has identified or experienced. Compulsory licensing allows the use of a patented invention without the consent of the patent holder. The proposal is intended to make it easier to obtain a compulsory license but goes far beyond the actual needs of such a situation and risks undermining the entire patent system. Furthermore, no analysis has been conducted into the potential impacts of the proposals.
The result is that no one really knows what applies to biotechnology patents in Europe.
Most unfortunate, however, is that the patent package does not solve the real problem of patent law, namely the fact that the development of patent law is neither regulated by Member States nor the EU. Europe has a patent convention managed by the European Patent Organisation (EPO), which has 39 members. Previous attempts to develop patent law have therefore been slowed or stopped when the EPO has exercised its independence.
One area affected by legal uncertainty over patents is biotechnology, which is important to the food, agriculture and pharmaceutical sectors. An added dimension of uncertainty stems from the fact that patents can also cover areas such as ethical considerations. Therefore, a number of years ago, the EU adopted a directive on what can be patented areas biotech inventions. When the EPO has addressed such issues, it has, figuratively speaking, given the EU the finger and said that they are independent of EU law. The result is that no one really knows what applies to biotechnology patents in Europe.
Patent law also needs to be developed in terms of digital innovation. Is it possible for Sweden to act at national level? Well, we are bound by the European Patent Convention and EU law. Can the EU do anything? Not until it can overrule the EPO. Can the EPO do anything? Only if it manages to get all 39 countries that have joined the European Patent Convention to agree. Which it has so far barely even attempted.
This results in Europe falling behind in key areas such as digital innovation and biotechnology. The patent package addresses the wrong issues, in the wrong way. Rather than tabling proposals for side issues, the EU should actively work to create a system where the development of patent law is not held back. The EU must take the initiative to start a reform of patent law in Europe, not just the EU.
Debate on the patent package is yet to address how freedom of competition and exclusive rights should be balanced. Nothing in the debate relates to the role of economic freedmom and what best serves the interests of the economy. Nothing in the debate relates to the genuine challenges of patent law. The risk is that we let the fruits of the knowledge economy wither on the vine.
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