Does Stealing Intellectual Property Boost Innovation?

By Joseph Allen
July 20, 2015

thief-steal-mask-jewel-335The announcement that the House of Representatives is delaying consideration of H.R. 9 the pending patent reform bill, proves that inventors, small companies, universities, venture capitalists and the life science industry have raised serious concerns in the minds of many Members of Congress that it weakens the patent system, damaging American innovation. However, that does not mean that the fight is over. The formidable forces behind the bill are not going to meekly walk away after spending hundreds of millions of dollars and years of effort hyping the specter of patent trolls to advance their agenda. A vocal segment of the bill’s supporters dismiss the value of patents in today’s economy. To try and hoist a badly shaken patent reform behemoth back onto its feet, they will try to create doubts about the worth of the patent system in the minds of decision makers and the public.

The latest example is Patents are a terrible way to measure innovation that ran in The Washington Post last week. Here’s the crux of its argument:

Moreover, in the 21st century, technological change just happens too fast, eroding the value of patents once intended to last for years. Innovation life cycles are now measured in months, not years. Innovation is happening around business methods and processes as much as around specific products. As a result, simply stockpiling patents for the long haul doesn’t always work out as planned. By the time you try to use those patents, the market may have decisively shifted away from you…

And that’s the really disturbing feature of 21st century innovation — patent trolls are transforming the patent from a proud badge of innovative activity into something negative — a “tax on innovation.” And that tax adds to the cost of everyday products. According to one estimate, one half of the cost of producing a smartphone is used to pay patent royalties. One professor at Harvard Business School has even suggested that patents might be destructive, rather than creative, in terms of their ultimate economic impact.

That means patents might be a better proxy for how litigious American business has become rather than how innovative a specific company or industry has become. Within the tech sector alone, 90 percent of all tech patent cases involve patent trolls. In the broader U.S. economy, that figure is 68 percent. That’s an enormous amount of legal activity attempting to wring concessions from deep-pocketed tech companies, a massive drag on future economic growth…

The reason why all this matters, of course, is because the subject of patent reform — a seemingly perennial topic — is once again on the radar of legislators and lobbyists in Washington. Instead of viewing patents as we once did — as a way to encourage inventiveness and innovation, we may be better suited to see them for what they have become: an economic drag and an attractive target for patent trolls, who see them as a way to exact tributes from deep-pocketed tech companies. Tesla has even gone so far as to open source its entire patent portfolio. Reforming the patent system, then, will require reforming the way we think about patents and the very nature of innovation.

Ironically, the article underscores why patent reform ran into a buzz saw. Making it easier to take other people’s property goes against the American grain. Thus, it’s a hard sell that paying royalties to use someone’s patented invention is a “tax on innovation.” If fifty percent of a product’s cost goes to paying royalties, doesn’t that imply that it draws heavily on inventions made by others? If these discoveries were just infringed (i.e. stolen) would that encourage innovation?

We’ve often quoted economist Hernando de Soto who argues that the secure ownership of property—both physical and intellectual— is the foundation of wealth creation. Confiscating other people’s property is hardly the way to stimulate prosperity or creativity. If it were, Venezuela would be one of the richest, most innovative countries in the world instead of a place where you can’t buy toilet paper.

Like most arguments driving patent reform, the threat of patent trolls is used to peddle the theory that patents harm innovation. It’s striking after all the hysteria over patent trolls that the proponents of the pending bills are unable—or unwilling—to define the term. The study alleging that “90 percent of all tech patent cases involve patent trolls” sheds an interesting light on exactly who is being labeled a troll, and whose patents the critics target. A highly credible source looked into that study. His findings are devastating.

Professor Adam Mossoff, Director of Academic Programs and Senior Scholar at the Center for the Protection of Intellectual Property, posted It’s Time to Say “No” to Junk Science in the Patent Policy Debates, reprinted below:

Last March, forty economists and law professors submitted a letter to Congress expressing “deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress.”  These concerns were confirmed again last week when Unified Patents released a report on patent litigation with the same kind of “highly exaggerated claims regarding patent trolls” that the professors were concerned about.

The Unified Patents report is another publication in a long line of “studies” that use absurdly expansive definitions of non-practicing entities (NPEs) or “patent trolls” to produce dramatic-sounding, inflated results. In this case, Unified Patents defines an NPE as a “Company which derives the majority of its total revenue from Patent Licensing activities.” Similar to past reports that have been repeated and consistently critiqued for being deeply flawed in both substance and methodology, this definition includes many individual inventors, universities, startups, small businesses, biotech companies, and countless other laudable innovators who are key drivers of the innovation economy in the U.S. It even includes venerable American inventors like Thomas Edison, Nikola Tesla, and Charles Goodyear, among many others. These are the people and companies Unified Patents is condemning as “patent trolls” and whom it is lobbying Congress to punish with patent legislation that would weaken their ability to obtain and to protect their innovation. (emphasis added)

In sum, the core definition in Unified Patent’s report is so broad that it renders the results of its study completely uninteresting, unremarkable, and predictable – it’s like saying that 90% of people who sue over an auto accident own cars. Unfortunately, this report is not being touted so innocuously in D.C. at a moment when Congress is finally waking up to the realization that proposed bills like H.R. 9 (the so-called “Innovation Act”) will do more harm to the innovation economy than good.

At this late date, another junk science report hardly deserves yet another detailed analysis and critique. They didn’t care to heed previous critiques, so why expect that the proponents of this report would act with any more integrity now or in the future? In short, it is long past the time to simply say “no” to junk science reports like this.

Ironically, the same day The Washington Post article questioned the value of patents, Hope for Alzheimer’s: New drugs could unlock neurological mysteries appeared. It discusses more than 400 promising breakthroughs under development to treat serious neurological disorders such as Parkinson’s disease, Alzheimer’s, ALS, and epilepsy. These horrific maladies affect 50 million in the U.S. and untold millions around the world.

Without reliable patent protection and effective licensing these revolutionary treatments requiring decades of effort and billions of dollars to develop will not become available to help desperate patients. Public and private sector alliances, many built on inventions from research hospitals, non-profit organizations and universities being tarred as “patent trolls,” are essential for commercializing these discoveries.

It’s not a coincidence that the handful of countries developing new drugs and the wonders of biotechnology are also those with strong patent systems. Patents and licenses are the life blood of many start-up companies that drive our economy. Rather than being a “tax on innovation,” a strong patent system is even more important today than when the Founding Fathers gave the protection of intellectual property a prominent place in our Constitution, preceding the Bill of Rights.

The patent system is essential for achieving the American dream. A hallmark of the United States is having the opportunity to rise as far as our creativity can take us. Owning what they create is essential to the success of rags to riches entrepreneurs. Innovation isn’t stimulated by confiscation, but by the secure ownership of property. That includes the right to vigorously defend your patents in court when they are infringed without having the legal system tilted against inventors as proposed in the pending legislation.

Now’s a good time to tell Members of Congress to stand up and protect our battered patent system — and that doesn’t mean making a deeply flawed bill just a little less terrible.

The Author

Joseph Allen

Joseph Allen Joe Allen is a Featured Contributor on IPWatchdog.com, and a 30-year veteran of national efforts to foster public/private sector commercialization partnerships, and author of numerous articles on technology management for national publications.

Joe served as a Professional Staff Member on the U.S. Senate Judiciary Committee with former Senator Birch Bayh (D-IN), and was instrumental in working behind the scenes to ensure passage of the historic Bayh-Dole Act. He is our resident Bayh-Dole expert, and will write frequently about Bayh-Dole and issues surrounding the commercialization of university research.

In 2008, Joe founded Allen & Associates, through which he offers consulting services assisting clients in technology transfer issues, including developing effective communication strategies with national policy makers.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 7 Comments comments.

  1. Anon2 July 20, 2015 2:27 pm

    It is good to hear the truth spoken so clearly…

    … and yet at the same time it is sad to be reminded that however principled the arguments about rights, property, the requirements of a free society, and the American dream, things such as “stealing” and violating individual rights are of little consequence to red American statists seeking the lowest common socialist denominator, for whom the ends, an imaginary welfare of a public commune, justify any means to be perpetrated by the State whatever the cost to individual human beings and their rights … but that audience is already hopeless and lost.

    This piece appeals to the last remnants of principled rational American thought on individual freedoms which must yet be held, even if but by a thread, in the hearts of minds of those in Congress who need to hear it. One can only hope their minds are open to it and the idea of America as It once was and should be.

    Whatever the consequence, it is still good to hear the truth.

  2. Nate Browne July 21, 2015 2:35 am

    The informed reader would know, after a calm and measured reading of HR 9, that the Bill does not seek to eliminate patents.

    Have a look for yourselves: https://www.congress.gov/bill/114th-congress/house-bill/9

    Rather, the Bill is an attempt to eliminate opportunistic rent seekers (the so called patent trolls) from launching frivolous suits. It is exactly this practice that is devaluing the US patent system and increasing the cost of research and development.

    The reform it seeks to enact is quite sensible.

  3. Anon July 21, 2015 7:58 am

    Nate,

    This informed reader simply does not agree with your blanket conclusory statement.

    As you provide no additional “analysis” to discuss, my post must naturally be as conclusory as your own.

  4. aldo July 21, 2015 9:38 am

    i can say from experience, having your ideas taken or stolen is not a motivator.
    here is a cbs news story of my experience: http://www.x-itproducts.com/news/

    that being said, our current system is so delayed, costly & distorted that i believe it contributes to aberrant market behavior enabling those with bigger swords or large piles of money take what they want.

    our founding father’s understood some fundamental truths about freedom and prosperity – our ideas and knowledge are what changes in this world and enables a better life that is the foundation of true wealth creation – without effective property rights we are doomed to slavery in different forms…

    it should be noted jefferson was an inventor + founder + the first patent examiner & helped put us on the right course; getting us back on a better course will need leadership from people who know innovation inherently

  5. E.K. Meltzer July 21, 2015 12:08 pm

    Mr. Allen:

    Thank you for your thought-provoking article. It raises a question for me. From a public-policy perspective, what is the reason for anger against speculation in patents?

    I certainly understand anti-trust/anti-monopoly concerns should one entity [or an old-fashioned “combination”] corner the market in ownership, thus controlling an entire sector and charging monopoly rents. We all know the dramatically bad results for prosperity at large. But concern that purchasing patents with the object of re-selling them for profit doesn’t – standing alone – strike me as objectionable. Making a real-property analogy, while the term “real-estate speculator” doesn’t give us a warm fuzzy feeling, we all understand that if people want to sell their real-estate to someone, it’s their right to do so. The fact that a speculator can re-sell for profit is something we consider okay as long as the purchase is legal (e.g., speculator didn’t bribe officials to condemn property so buyer could swoop in and purchase it at a steeply discounted rate; speculator isn’t trading on insider information) and doesn’t result in an anti-trust situation.

    Once made the owner of the property, the speculator – which can include multiple investors – is entitled to protect it from trespass. Certainly unfairness can result from false accusations of trespass. However, consistent with the concept that an owner is entitled to protect property (and, in the intellectual-property realm, evidence of vigilance is often an important factor), why should vigilance in protection of rights in a purchased patent be considered distasteful? The concern can’t be with ensuring the actual inventor reaps monetary reward since we already permit assignment of inventions.

    Real property owners don’t have to make the most economically productive use of their land, and eminent domain actions are generally viewed even less favorably than private-sector speculation.
    Patent owners, of course, are not required to make, use, or sell, so the current patent right may be viewed as something of a dog-in-the-manger right anyway.

    Is the remedy sought really an amendment to 35 U.S.C. §154, requiring the inventor (or assignee) to make, use, and sell the invention? If not, I think I’m still missing something – unless the issue truly is that some companies have IP trespass as part of their business models and simply don’t want to pay licensing fees.

    Mr. Quinn:

    I am a long-time reader of IPWatchdog. Thank you very much for your own articles as well as those of guest writers.

  6. Gene Quinn July 22, 2015 7:58 pm

    E.K.

    Thanks for reading!

    -Gene

  7. Gene Quinn July 22, 2015 8:03 pm

    Nate-

    You really need to re-read the bill. Your comments suggests that you have read the bill, but the substance of your comment suggests you are quite in the dark.

    The problem with patent reform is that it will not stop the so-called patent trolls at all. As I’ve pointed out before, large corporations settle patent disputes with patent trolls as a matter of course. When there is a settlement there is no prevailing party, which means there will be no fees shifted. Those who will be hurt by the patent reform bills are true innovators engaged in real research, development and licensing. Without those true innovators the patent infringer lobby won’t have anything to steal and innovation will crawl forward at the pace of a snail.

    So, after you read the bill and inform yourself better you will realize that the reforms are not at all sensible, which is why the bill is having so much difficulty and will eventually fail.

    -Gene