Technological Innovation and Intellectual Property

A Time to Rethink

Patents as property was also front and center in the thoughts of one judge on the Court of Appeals for the Federal Circuit, the main appellate court for patent disputes in the US. Senior Judge S. Jay Plager, speaking at a symposium at George Mason University, called for a “rethinking” of several aspects of patent law by returning to its origins in property law.

According to the BNA, Plager “called for a renewed focus on setting recognizable patent ownership boundaries and on strengthening the notice function that patents are intended to serve. Such a reevaluation might require a reassessment of whether software and business methods are patentable subject matter, Plager said. It might lead to limiting a patent’s scope to what was known at the time of the application filing, and to an abandonment the doctrine of equivalents as a basis for patent infringement liability.”

In addition to rethinking claim construction,

Plager said he regretted the unintended consequences of the decisions in State Street Bank and AT&T. Those rulings led to a flood of applications for software and business method patents, he noted. If we “rethink the breadth of patentable subject matter,” he said, we should ask whether these categories should be excluded from patent protection.

This new thinking is certainly encouraging. Let’s see how it develops.

The idea that patents can be analyzed as a property system—both regarding its strengths and its weaknesses—seems to be gaining currency in influential circles.

Last week in the Wall Street Journal, L. Gordon Crovitz writes “…in the case of patents, poorly defined property rights for inventions are leading even the biggest companies to take desperate measures…” He goes on to highlight our argument that the patent system provides much stronger incentives for pharmaceuticals than for software and communications technologies because of the nature of the rights granted:

New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.

Andreas Panagopoulos sent a brief note on a theoretical paper on startups and innovation. In this model, the startup’s patents add value to an incumbent’s patent portfolio when the incumbent acquires the startup. There is a trade-off between the incumbent’s patents deterring entry and the acquisition prospects increasing startup value. Andreas write:

In modern hi-tech industries where technology is complex and cumulative, a new innovation is likely to infringe on existing patents. Hence, an entrant firm is under potential threat of litigation from a competing incumbent firm that has accumulated a patent portfolio. It is not clear, therefore, how entrepreneurial activities may be sustained in the same technological terrains as those of powerful incumbent firms.

In a model where an incumbent faces a sequence of potential startups and the incumbent’s chance of winning an infringement lawsuit increases with the size of its patent portfolio, we demonstrate a positive dynamic impact on the startup innovation that is generated by an interplay of takeover deals (out-of-court settlements) and carefully selected levels of IP protection. The core insight behind this result stems from the observation that the benefit of a takeover for the incumbent goes beyond commercializing the new innovation. This is because the incumbent capitalizes on the enhanced bargaining position that the current takeover will bring about in all potential future deals by incorporating the current startup’s patented ideas to its own patent
portfolio, which allows it to better barricade its technological territory, increasing its chances of prevailing in future infringement lawsuits. Since this prospect of future surplus for the incumbent hinges on the current takeover, a part of the surplus accrues to the current startup, enlarging its bargaining share in the takeover deal. We show that this feedback effect of future prospects on the current deal can motivate the startups’ innovation activities that would not take place without it, and as a consequence, increase the social welfare.

We emphasize that for maximum effect the level of IP protection should be selected carefully at a moderate level. The aforementioned increase in the startup’s bargaining share, being proportional to the marginal benefits brought by the last patent added to the incumbent’s portfolio, would be too small to be effective if the IP protection is too weak. An excessive IP protection, on the other hand, would accumulate the incumbent’s bargaining power too quickly, killing off the innovation incentives for startups prematurely. We illustrate this point further by way of computer simulations.

Not sure how this plays out in a world where any player (e.g., troll) can acquire patents that can be used as bargaining tokens…

Patent trolls or sharks have been in the news recently. Verizon, Google, Cisco, HP and other companies have created a joint effort to buy up patents that trolls might otherwise use against them. It will be interesting to see whether this strategy will take bad patents off the market or whether it might, instead, simply increase demand, thus increasing the rewards to obtaining overly broad patents, encouraging even more disputes and litigation.

Also, the June issue of the Harvard Business Review has a nice piece on patent sharks by Joachim Henkel and Markus Reitzig. They point out that the strategy of amassing large “portfolios” of patents does not work against trolls,since the trolls have no business that can be threatened with a countersuit. Moreover, they suggest that this strategy may have contributed to the current problems large firms experience with trolls. Because they flooded the patent office with thousands of applications for patents on trivial inventions, these large firms might well have contributed to the decline in patent standards that has allowed patent sharks to flourish.

Tim Lee has an interesting post on a paper by Gerard Magliocca that compares patent sharks of the 19th century to modern day trolls. Lee writes,

The best patents—pharmaceutical patents, say—apply to a well-defined industry. Pharmaceutical companies need to monitor pharmaceutical patents in order to determine what they’re allowed to do. In contrast, every business on Earth uses software and “business methods.” Therefore, every business on Earth is a potential target. That means it’s much easier for trolls to find potential victims. It also means that the targets—many of whom don’t think of themselves as being in the software industry or the “business method industry”—will be ill-equipped to respond to the lawsuit.

Precisely the same observation applies to 19th century patent sharks. Because most people in the 19th century were farmers, patents on farm tools were likely to be infringed by millions of individual farmers who lacked the expertise to evaluate the patent and the resources to hire lawyers to defend themselves.