[David J. Kappos] Myth Number 4: Patent Thickets Obstruct Innovation

 

[David J. Kappos] The *Real* Innovation Economy—
Myth Number 4: Patent Thickets Obstruct Innovation

Below is the fourth of nine serialized essays examining current debates over technology, standards and standard-essential patents (SEPs) aimed at educating readers about an area of law and economics that is increasingly in the news. This essay has been adapted from a speech Mr. Kappos, former director of the U.S. Patent and Trademark Office and U.S. Undersecretary of Commerce, delivered in Taiwan in March at the International Symposium on Standards, SEPs and Competition Laws.

 

David J. Kappos, former director of the USPTO

[email protected]

The fourth myth is that patent thickets impede innovation. In nature, a thicket is a dense, tangled growth of bushes or trees.

The concept of patent thickets is the same: a dense, tangled growth of overlapping intellectual property rights, through which innovators cannot easily pass.

However, history demonstrates that innovators are bushwhackers. They are able to take advantage of tools such as licensing and lawsuits to use so-called thickets as supportive scaffolding from which to build continually better products.

Smartphone litigation makes headlines, and yet smartphone technology continues to advance at a breakneck pace. Manufacturers continue to reap substantial profits, despite the ever-increasing density of the smartphone patent thicket. Smartphone technology is hardly the first thicket to be falsely deemed impassable.

The same was said of DVD technology, yet the DVD successfully emerged and proliferated. The airplane and sewing machine industries provide even earlier examples of purportedly vicious thickets, yet innovators in both of those markets also thrived. 

During the sewing machine wars of the 1850s, headstrong and ostentatious patent owners took some time to identify the value of cooperating. However, the sewing machine barons were ultimately able to innovate innovation by inventing the first patent pool.

Once inventors have pooled their patent rights and issued cross-licenses to other members on a portfolio rather than an individual basis, a patent pool enables tremendous value creation. Pools can even bring litigation against third parties to efficiently enforce members’ rights. Though sewing machine patent litigation frustrated nineteenth century inventors for a time, and caused significant expense until the tycoons thought of pooled cross-licensing, no one could credibly contend that this litigation stymied the success of the sewing machine industry. Sewing machines were a tremendous success. Today we have unquestionably successful iPhones and Galaxies.

The truth is that patent thickets ironically promote the type of open innovation that mythtellers claim strong patents obstruct. Successful innovators have increasingly recognized the value of engaging ideas from multiple sources, and often rely on a combination of open and proprietary models. The result is that strong patent rights serve to facilitate collaboration among innovators by providing clearly interpretable markers of value for each idea that the parties bring to the collaboration.

Where conversations may otherwise falter due to distrust between participants, patent rights can provide a form of synthetic trust. This backstop of protectible rights allows inventors to bridge potential confidence gaps. In this way, adept innovators are able to meld the proprietary and open development models. The proprietary model is used when technology is not already available in the market and patent protection is available to prevent copying. The open development model can provide fast and inexpensive answers through crowd-sourcing and other purposeful knowledge inflows where ubiquitous collective solutions are available.

Mythtellers also complain that patent thickets result in antitrust violations, asserting that thickets lead to artificially inflated prices caused by monopolistic behavior. It is true that the temporary exclusivity offered by patent law allows patent holders to command higher prices than would otherwise be obtainable. That is the entire purpose of patents—to incentivize and recompense investment through ex-post price increases. History has shown that the benefits of this system far outweigh the costs. 
This truth is well-illustrated by the Boston Consulting Group study’s finding that the cost per megabyte for the average mobile subscriber decreased by a dramatic 99% between 2005 and 2013. Over the same time period, infrastructure cost per megabyte transmitted dropped 95% with the jump from 2G to 3G and 67% from 3G to 4G. All of these exponential cost decreases occurred while the mobile patent thicket has continued to grow, with the latest 4G standard including significantly more SEPs than were part of the 2G standard. The thickening of the cellular technology thicket would ostensibly have increased SEP owners’ ability to demand outsized monopolistic prices. The fact that this doomsday scenario has never occurred is a testament to the ability of the intellectual property regime to properly balance the rights and incentives of each interested party.

Some mythtellers suggest that antitrust laws should trump intellectual property laws. However, the truth is that in situations where intellectual property laws and antitrust laws conflict, preference should be given to intellectual property law. Intellectual property law is forward-looking, flexible and focused on the dynamic optimization of competition going forward. Antitrust doctrine, on the other hand, is backward-looking and is focused on static optimization of competition in the present state of the industry at any given time. Historical evidence demonstrates that even the most contentious and extended bouts of patent litigation cause no decline in output or innovation. 

This is the case because intellectual property laws incentivize stakeholders to resolve disputes as efficiently as possible in order to jointly capture market value. Intellectual property laws support pooling and cross-licensing solutions, which allow innovators to traverse patent thickets. It is only when antitrust limitations defeat these cooperation tools that would-be innovators find themselves deadlocked.

Fortunately, some antitrust regulators have recognized the need to regain control of themselves in order to facilitate innovation. A U.S. regulator, impliedly recognizing that antitrust interference at the intersection of patents and standard-setting has gone too far, recently acknowledged that, for the U.S. Department of Justice’s Antitrust Division, deliberate restraint from action is just as important as the Division’s enforcement activities when it comes to facilitating innovation. The comment was made with specific reference to SEPs, noting that antitrust concerns arise when membership in a standard inflates patents ‘values, but that cooperation in the standard-setting context offers sufficient precompetitive benefits to counteract the antitrust concerns.

The DOJ specifically explained that it would be improper and counterproductive to revoke lawfully obtained monopoly profits. It shunned the practice of governments mandating the licensing of patents that prove valuable. It is this sort of forward-thinking antitrust policy that can unlock substantial innovation potential by working in concert with intellectual property law, rather than against it.

Providing a model for success, the U.S. DOJ explained that the best way to support innovation is for a legal system to be transparent, accessible and predictable, overseen by an “independent judiciary, where decisions are reached through rigorous advocacy based upon facts, law and economics.” This is an area in which progressive antitrust agencies have been able to successfully mesh with the modern intellectual property landscape, allowing innovators to maximize the exchange of ideas and the corresponding capacity to innovate, while minimizing the risk of collusion and the related likelihood of legal sanctions.

These are the sort of progressive policies that can drive the ongoing innovation that citizens of every country are now demanding. Boston Consulting Group’s worldwide survey demonstrated that mobile consumers are hungry for more advances: 90% of 3G and 4G consumers report wanting faster data speeds, greater coverage and longer battery life. Global data usage is doubling every year, suggesting that data traffic will exceed today’s levels by 1,000 times within the decade. In order to accommodate this skyrocketing demand, investment in new technologies will be crucial.