Patent Truths

C. P. Chandrasekhar

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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5 Responses to “Patent Truths”

  1. The value of patents for society is grossly exaggerated, and so is the story about the inventor or innovator as entrepreneurs. Most major scientific and technological progress have been made in the context of major societal efforts, often military. Which is even the case for the internet. It is first when all those major discoveries have been made that (capitalist) entrepreneurs transform these into profit-making business.

    Intellectual property rights is just another way of privatizing our commons. Most clearly is this seen in farming and the privatization of genetic resources.

    read more in my blog post:

  2. Maybe these things are true in India, but not in the US. Some of the most important inventions of the 20th century were made by individuals or by small groups.

    Also in the US no patent is granted unless the patent examiner is convinced that the invention is BOTH Novel AND Non-obvious.

    The only difference between hardware and software is bandwidth. Everything realized in software could be accomplished with hardware and no software needed.

    The case for patent (which means “open”) is to encourage invention by granting inventors a limited monopoly in exchange for disclosing the details of the invention. The alternatives to a patent are (1) give your intellectual property away with no compensation or (2) keep the details of your invention secret.

    The is a reason why the industrial revolution took place in England in the 18th century, not at another time or in another place: Patents. Inventors flocked to England to innovate because they learned that in England, they could own their intellectual property.

    When you say that the value of patents is “grossly exaggerated” do you mean that they are not worth what people say they are or that they are worth a lot more than they should be?

    I could go on and on, but I’m not currently in the mood for a rant.

  3. Tom, I meant that the value (for society) of patents as a mechanism for development is grossly exaggerated. The idea of “intellectual property” is a societal institution serving the interests of a few over the many; the rich over the poor.

    It is an undisputed fact that capitalism is very good in making business out of innovation, but that doesn’t mean that most groundbreaking innovations in society have been made by private companies. On the contrary, most big innovations have taken place in very different arenas. Automobiles, television, radio, nuclear power, antibiotics, wind power, sailing, electrification and the Internet are all examples of groundbreaking technologies that were driven primarily by governments or by curiosity and the ‘wish to know’ rather than by capitalist innovation (Hourihan and Atkinson 2011). When a big leap in technology has already been made, entrepreneurs find commercial uses for the new technology. The Internet is a very good example of this. Entrepreneurs are also very good at moving those technologies out to the people. Technological development was rather slow before capitalism, and one of the reasons was that there were few incentives for people to improve efficiency. The rich could extract value added by serfs, tenants or slaves and didn’t need mechanization and the poor had neither resources nor real possibilities to turn any innovation into business. Having said that, there is certainly no reason to believe that innovation will cease without the profit motive. To make the job easier or more entertaining is a driver for innovation as well. Human nature is curious and innovative and that will be the case also without profit motives. To do something new, something good, not only for oneself but for the whole community can be a forceful driver. If you read my blog post (link above) you find a very nice quote from the inventor of the polio vaccine. Asked why he had not obtained a patent on the phenomenally successful vaccine, Jonas Salk reportedly replied, ‘That would be like patenting the sun.’

  4. Woj says:

    In theory, both sides of the political aisle should be willing to get behind proposals that aim to transform patent laws back into a means of supporting “creative destruction.” Conservatives can oppose the broad extension of government interference in the market. (Modern) Liberals can oppose the usage to enforce monopolies that aid increasing income inequality. That these considerations are rarely considered, if even discussed, is a reminder that big government and big business generally work together to support and increase each other’s power.

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