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January 25, 2013

Patent Nonsense

The patent troll gets a bad rap. Guarding and managing intellectual property helps everyone. By Rod Cooper, Richard A. Epstein, and Stephen H. Haber.

Patent wars involving cellphones, tablet computers, and other indispensable high-tech products are much in the news. Some reports focus on controversial court decisions like federal Judge Richard A. Posner’s curt dismissal of every patent claim that Apple and Samsung brought against each other. Others fret about the anticompetitive implications of Federal Trade Commission reports on the role of patents in setting technological standards. And still others applaud Congress for considering whether to limit the power of the International Trade Commission to exclude from the United States products that infringe on domestic patents.

This anti-patent onslaught makes several distinct arguments. One is that the Patent and Trademark Office issues too many patents of dubious quality, thus cluttering the market for product innovation. But it is dangerous to rest that charge on a few dramatic examples like the notorious “one click” patent from the world of online shopping. The proper fix is not to alter patent law’s remedial structure but to put government agencies and courts on high alert against, for example, weak business-method and software patents and frivolous arguments in a dispute. To this concern, in 2011 President Barack Obama signed the Leahy-Smith America Invents Act, which provides for an expansive agency post-grant review of business-method patents.

Current patent law offers ample protection against the launch of a secret patent assault.

Today’s narratives also give a major role to a villain dubbed the “patent troll.” As in fairy tales, the patent troll pounces on the supposedly unwary and innocent, here manufacturers who are forced to pay extortionate fees for using some product or process. But the patent troll story also includes this irony: the same large technology companies that once condemned patent trolls have become trolls themselves. Large corporations are spinning off their patents into wholly owned subsidiaries, or selling them to third-party nonpracticing entities that make money by licensing patents and by litigating to prevent infringement by nonlicensees.

Before 1995, the patent troll was indeed a more dangerous figure. Its “submarine” patents took effect only when issued, not when the original claim was officially filed. By delaying the issuing date, these old-style trolls could trap unsuspecting companies and exact heavy damages. Now that the patent period runs from the day the application is filed, companies have every incentive to get the most out of their patented technologies rather than just lie in wait.

The newest version of the fairy tale prefers companies that use patents over the trolls that only license them. It is the intellectual-property version of the Luddite view that only people who put their shoulder to the wheel create enduring value. In fact, sound business logic often runs in the opposite direction. Selling a license to use a patent—especially a nonexclusive license—allows the technology to be employed across a vast market and be more readily distributed to the ultimate beneficiary: the consumer. By contrast, a company that keeps a patented technology to itself is restricting its use.

Licensing works only if contracts are secure against potential infringement. The system will break down if the patentee cannot obtain an injunction against nonlicensed third-party users. Why would anyone pay a handsome license fee if outsiders can unilaterally infringe the patent? Why, for that matter, would anyone bother to develop a new product or process if the invention could be appropriated with impunity?

Bias is implicit in the lore against companies that invent to license, and it imposes an unnecessary obstacle to product innovation. Successful entities often specialize in niche research areas (often requiring extensive human and financial capital), and thus do not build up extensive manufacturing operations in which to deploy their patents. Universities, research institutes, and small businesses across the globe readily come to mind. To hinder them in their dealings with third parties reduces the returns from licensing, which reduces their incentives to develop technologies in the first place.

The big tech companies that once condemned patent trolls have become trolls themselves.

Against this background, it is socially destructive to denounce the patent owner as a nefarious troll. Assembling portfolios of patents helps everyone in the market buy or license some or all of the portfolio, as each applicant sees fit. Contrary to conventional wisdom, this business model doesn’t inhibit the use of new technology: it expands access by assembling useful portfolios that allow third parties to deal with one vendor instead of many.

A strong patent system, as research of the late UCLA economist Kenneth Sokoloff shows, allows small companies and inventors to create and enforce intellectual-property rights that drive economic growth. Indeed, a strong patent system was essential to the emergence of such modern industries as pharmaceuticals, medical devices, and electronics.

Current patent law offers ample protection against the launch of a secret patent assault. It’s wrongheaded to think that patent-contracting strategies allow Goliath to bludgeon David, or David to hijack Goliath. Instead, they enhance the operation of competitive markets that work as well for intellectual property as they do everywhere else.

Rod Cooper is an overseer of the Hoover Institution.

Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).

Stephen Haber, Peter and Helen Bing Senior Fellow at the Hoover Institution and A.A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences at Stanford University, is also professor of political science, history, and (by courtesy) economics at Stanford. He has been awarded every teaching prize at Stanford, including the Walter J. Gores Award for distinguished teaching. His research examines political institutions and economic policies that “hold up” innovation. His current research examines the creation of regulatory barriers to entry in finance, the economic and political consequences of hold up problems created by different systems of agricultural production, and the comparative development of patent systems. Haber’s most recent book, Fragile by Design (with Charles Calomiris), examines how governments and industry incumbents often craft banking regulatory policies in ways that stifle competition and increase systemic risk.

Reprinted by permission of the Chicago Tribune. © 2012 Chicago Tribune. All rights reserved.