At the heart of the defence of modern day capitalism is the view that it is an innovation machine powered by competition and rivalry. In its ambit, the fittest survive and the leanest grow, goes the argument. In practice, however, it is precisely in the area of innovation that capitalism today affords private firms legal monopolies in the form of patents. And such protection is proving increasingly difficult to justify in the context of the huge investments being made by firms in acquiring and hoarding patents (not inventions) and financing litigation costs incurred to defend themselves against patent violation suits. Since these investments rarely lead to new innovations and often serve to block technological advance by others, patents are losing their sheen even in the mainstream media.
Consider some of the much-discussed recent examples. Microsoft paid AOL $1.1 billion for 925 patents that reportedly include some of those granted in the early days of evolution of the World Wide Web and on which a lot of subsequent Internet innovation was built. Weeks later Facebook is sold a clutch of these very same patents by Microsoft for $550 million. The reason why Facebook opts for the purchase is that Yahoo has filed a patent infringement suit against Facebook in the run-up to its IPO hoping for a settlement that would shore up its sagging revenues. Yahoo’s action seems typical of the company: it had done the same to Google ahead of its IPO in 2004 and won 2.7 million Google shares, worth $230 million. Facebook, having learnt well, uses the patents acquired from Microsoft as the basis for a countersuit against Yahoo for patent infringement that would inevitably lead to a settlement between the two.
These moves and countermoves are not the exception but the rule in areas such as the Internet and the smartphone industry today. Having the wherewithal to file a countersuit is crucial because in most cases the issue is never allowed to go through to final judgement by the courts, but is settled early to avoid incurring large litigation costs. Thus, any half-credible challenger gets a pay off. Sensing the possibility of getting money out of patents that are never worked but merely used to challenge others for infringement, the industry has been now populated with “patent trolls,” who acquire patents to earn money by initiating infringement litigation. Among the more infamous of such trolls is Intellectual Ventures, established by Microsoft’s former Chief Technology Officer, Nathan Myhrvold.
These tendencies reflect the fact that patents are now increasingly being acquired not to promote invention and innovation, but to push for division of the large surpluses garnered by one or more companies in particular areas where a winner-takes-all syndrome prevails. In the process, small players with new ideas are unwilling to commercialise them, for fear of having to finance costly litigation. Patents seem to limit rather than promote innovation.
The case for patent protection is that invention and innovation require large investments, and only a few of all efforts at generating inventions and commercialising them are likely to be successful. Hence, unless firms are protected from competition for a reasonable period of time when they can recoup their investments, they are likely to avoid risking the required resources. Even in the case of conventional, tangible goods there is reason to believe that there are only a few areas, if any, where the time required and/or the costs of imitation are such that patents are warranted to encourage innovation.
Moreover, intellectual property protection is to be afforded, if at all, only to inventions and innovations that are novel and have some claim to originality. What the software experience clearly establishes is that in the case of many innovations, more than one agent thinks up the same idea in different forms. Further, novelty, if any, is incremental, since useful software must be built on and compatible with pre-existing software knowledge. This has two significant implications. The first is that there is little that is fundamentally novel or original. The second is that each developer is also in some sense an infringer. In sum, the software sector is typically an area where patent protection should not prevail. Yet, in today’s capitalism it is the knowledge industry in which patents proliferate.
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