Patent Power

Tuesday, June 19, 2007

High-profile patent cases such as last year’s litigation threatening to shut down the BlackBerry service have drawn sharp criticism. Many commentators propose a variety of rules to weaken patents, seeking to provide sufficient rewards to inventors while avoiding the perceived problems that patents diminish both competition (by acting like monopolies) and access (by conveying a right to exclude). Typical reform proposals include new rules on both patent validity and infringement, each of which would undermine the strength and predictability of patents.

The credible threat that the owner of a valid patent will be able to win a court order is what keeps the patent system operating, bringing new technologies and new competitors to market. Weakening patents would keep out competition. Strong and predictable patents are part of the solution, not part of the problem.

Why have patents, anyway? Lord Justice Robin Jacob, today’s leading English jurist and patent scholar, often reaches across the Atlantic to remind us of Mark Twain’s Connecticut Yankee, who went back in time to King Arthur’s court, where on the very first day of his new administration he created a patent system in the hope of inducing technological progress. But Lord Justice Jacob also reminds us to be appropriately skeptical of intellectual property because even the word “‘intellectual’ confers a respectability on a monopoly which may well not be deserved. . . . [A] squirrel is a rat with good PR.”

Many see patents as providing direct incentives for inventors to invent. And patents probably have this effect, to some extent. Dangling a carrot in front of a rabbit is more likely to provide an incentive for the rabbit to leap forward than not, all things being equal. But when the rabbit is being chased by a dog and sanctuary lies off to the side of the carrot, the impact of the carrot on the rabbit’s direction is likely to be greatly attenuated, if even observable. Designing a patent system targeted at providing a direct incentive effect for inventors to invent would be tricky. To what extent does the promise of a patent truly affect an individual inventor’s decision to invent? Is necessity the mother of invention? Or does the promise of fame and other kudos drive inventors? How accurate must those offering inducements be in targeting truly inventive efforts to achieve the desired effect?

A British jurist reminds us to be appropriately skeptical of intellectual property, because even the word “‘intellectual’ confers a respectability on a monopoly which may well not be deserved. . . . [A] squirrel is a rat with good PR.”

Substitutes for strong patents may even match the patent system’s ability to provide a direct incentive to invent, although I am skeptical that this could be done without imposing other large costs. But most reforms and substitutes—even direct cash payments to inventors—utterly fail to achieve the main goal of a well-functioning patent system.

The late judge Giles Rich—a principal drafter of the present U.S. patent system, leading jurist, patent scholar, and all-round dean of patents—criticized the focus others placed on the incentive to invent. Writing a decade before America’s 1952 Patent Act, Rich urged that focus be placed on what he called “the inducement to risk an attempt to commercialize the invention,” referring to “the ‘business’ aspect of the matter which is responsible for the actual delivery of the invention into the hands of the public.”

Patents HELP BRING INVENTIONS TO MARKET

When patents are enforced with clear and robust rules, and backed up by a strong right to exclude, they serve an essential role in the complex process of getting inventions commercialized. Patents help get inventions put to use broadly and rapidly.

Bringing an invention to market requires coordination among many complementary users of that technology, including capitalists, developers, managers, laborers, other technologists, manufacturers, marketers, and distributors. Patents help this diverse group act in a coordinated fashion in at least two distinct ways.

First, the right to exclude associated with a published patent acts like a light in a dark room, drawing to itself all those interested in the patented subject matter. This beacon effect gets the diverse individuals to interact with each other and with the patentee.

Second, everyone’s expectation that the patent can be enforced is exactly what provides these individuals with the required incentive to strike deals with each other. This bargain effect falls apart if everyone knows the patent can’t be enforced.

The profit potential associated with an enforceable patent gives everyone an incentive in the commercialization process. For example, the promise of financial payoffs is what brings in the essential capital investments to start and sustain businesses.

Strong patents increase competition

Although some worry that adding patents to an industry could decrease competition, the history of biotechnology shows the opposite. As the leading jurist Judge Jerome Frank stated over 50 years ago: in the context of a David versus Goliath battle, successful competition depends upon investment in David; and this investment will not occur unless David is armed with the patented slingshot.

The landmark Diamond v. Chakrabarty decision by the U.S. Supreme Court in 1980 resolved what some thought of as an open question and confirmed the availability of patents in basic biotechnology. The rest of the world made the opposite decision and thus still blocks effective patent protection for biotechnology. As a result, only in the United States and only since 1980 have patents been available in modern biotechnology.

While the United States, Europe, and Japan each had large biotechnology companies (often collectively called Big Pharma) before 1980 and since then, and while companies in all three regions have access to comparable technological and capital resources, only in the United States and only since 1980 has the biotechnology industry also included a pool of roughly 1,400 small and medium-sized companies that is consistently turning over. The unique growth in the biotechnology industry in the United States has directly benefited both the basic biological research community, by providing expanded resources such as funding, and the general public, by providing better goods and services in important industries such as health care. Adding patents has spurred the U.S. biotechnology industry to be the most vibrant and competitive in the world.

using weak patents to BLOCK competitors

Coordination that leads to increased commercialization is not the only kind. A bad type of coordination exists as well, one in which large, established businesses keep out competitors. The paradox of many of the reforms urged by patent critics is that they would end up facilitating the bad type of coordination that decreases competition and access.

When patents are enforced with clear and robust rules, and backed up by a strong right to exclude, they smooth the complex process of getting inventions commercialized.

Consider the keiretsu strategy for dealing with patents. The term refers to the large conglomerates in Japan, where the patent system holds a great many weak patents and no strong ones. The transaction costs of litigation and conflict that arise in a system populated only by large numbers of low-value patents make it easy to have large numbers of skirmishes while avoiding death blows. These skirmishes buy a great deal of benefit for those doing the fighting.

First, they allow the battling keiretsu to communicate with each other in a more forthright way than a direct conversation. Seeing where an opponent will spend resources to fight can say more than a conversation about what territory is most coveted. And the extensive exchanges of documents and sworn deposition testimony that are so infamously ingrained in the U.S. litigation system further help those playing the keiretsu strategy to communicate vast quantities of detailed information.

Second, these lawsuits allow the keiretsu to share information in a way that may be more protected from antitrust review than a direct conversation. Taking one territory while yielding up another through a set of court battles and related settlements will more easily escape scrutiny—and more easily mitigate the damages awarded if any antitrust action is brought and won—than would a direct conversation about dividing these territories. Ensuring that each deal is struck in front of a federal judge helps decrease both the chance of later scrutiny by antitrust enforcers and the chance that a later judge or jury siding with those enforcers would determine that the conduct was so egregious as to merit a particularly harsh penalty.

Third, having large numbers of patents can be a simple tool for extracting a higher price after regulatory interventions, because in the big antitrust actions brought against large patentees, such as the well-known IBM patent litigation in the United States, the regulators often allow a company to charge an amount based in part on the number of patents in its portfolio.

What is essential to the keiretsu model is that only weak patents be available, because strong patents could end up as the slingshots able to take down the Goliaths.

THE DANGERS OF A SUBJECTIVE APPROACH

When it comes to reforms, the large players would far prefer to have rules that depend on expensive lobbying and litigation efforts, because they will then predictably beat the little guys. Legal rules that boil down to the personal judgment of a government official, such as a judge or commissioner, fit the bill perfectly.

For example, much is made of the problems of so-called upstream patents and the benefits of so-called downstream patents. According to these critics, upstream patents are bad because they block downstream use, whereas downstream patents are good because they help important industries.

This dichotomy is entirely false and narcissistic. Terms such as upstream and downstream are so ill-defined that in the end they apply to anything bought or sold by any particular individual—who will of course want everything she needs to buy to be free and everything she wants to sell to be protected with property rights. No principled or objective set of facts is offered as a test of whether a given patent would pass muster.

When it comes to reforms, the large players would far prefer to have rules that depend on expensive lobbying and litigation efforts, because they will then predictably beat the little guys.

In contrast, to the extent that the legal rules hang on questions of pure fact, such as whether a particular thing occurred by a certain date, then the information needed to decide the question is available to everyone in the patent game upfront—patent holders and infringers alike. More important, the ability to influence a court or agency decision on a question of fact hangs less on the relative size of the parties’ litigation and lobbying budgets. Eventually a true answer can be found.

The bottom line

Most proposals for patent reform are responding to an imagined problem. The data show that strong and clear patents don’t keep others from accessing patented technologies or cause monopolies. To the contrary, the credible threat of an injunction behind a patent is essential to fostering the coordination among complementary users of a technology that can bring it to market.

Creating a system of weak patents, as most patent critics demand in the name of increasing access and decreasing competition, would probably improve the large, established players’ ability to coordinate with each other to keep out competitors and frustrate commercialization of new technologies.