America innovates most when government stands behind a stable property rights regime

Approximately ten years after receiving his patent, still not yet having been elected President of the United States, Lincoln delivered his second speech on discoveries and inventions. This often cited second speech was delivered first on February 11, 1859. It is in this speech that Lincoln simply and eloquently explained that the patent system “added the fuel of interest to the fire of genius.”

The entire passage from this famous Lincoln speech is as follows:

Next came the Patent laws. These began in England in 1624; and, in this country, with the adoption of our constitution. Before then any man might instantly use what another had invented; so that the inventor had no special advantage from his own invention. The patent system changed this; secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.

Less well known than Lincoln’s often cited “fire of genius” line is something of even greater significance that Lincoln said shortly before uttering this now famous line. Abraham Lincoln explained that the three innovations in the history of the world surpassed all others. These innovations were above all others because they facilitated “all other inventions and discoveries.” One of these three seminal innovations was the “introduction of patent laws.”

Sadly, what seemed so evident to Abraham Lincoln almost 160 years ago seems all but lost today.

For much of the history of the United States the U.S. patent system stoked the fire of creative genius by enticing creative persons to innovate by giving them incentive to do so in the form of a patent. Increasingly over the last 12 years the U.S. patent system has chipped away at that incentive by making it more difficult to obtain a patent, easier and cheaper for infringers to challenge the validity of a patent, and less expensive to infringe even if they by some freak of divine misfortune find themselves finally adjudicated as infringers. How far rights can be eroded without completely compromising the entire system is a question inventors shouldn’t have to ponder, but these are not ordinary times.

Patent law has always swung like a pendulum. Swinging between more restrictive regimes where patent owners have few meaningful rights and back to a place where patent owners enjoy strong property rights.

Generally these pendulum swings occur slowly, but over the past 12 years the pendulum has been accelerating, and in a decidedly anti-patent direction. Years of chipping away at patents has added up to patent valuations being exceptionally low, a powerful a Patent Board that has been purposefully stacked against patent owners (as difficult as that is to believe), and validity issues in the most cutting edge technological areas: software and biotechnology. Indeed, individuals and corporations can get FAR better protection outside the United States relative to software and biotechnology than within the United States, which just a few years ago would have been a blasphemous statement.

Believing that innovation does not come from risk taking inventors, entrepreneurs, start ups, or even from the likes of those in Silicon Valley, is naïve in the extreme.  Sure, much of the long-term advanced government spending eventually produced things like the Internet, but America has always innovated most and best when stable rules are in place that incentivize risk takers to imagine the impossible and attempt to bring it into being. Simply stated, America works best and innovates most when government stands behind a stable property rights regime and gets out of the way so that risk takers can dream the impossible and set out to accomplish those dreams.

Unfortunately, our patent laws have become one-sided in favor of large technology companies that do not innovate, but rather have made a business of adopting the innovations of others. This efficient infringement business model recognizes that there is increasingly little that patent owners can do to stop infringement, so why pay a licensing fee? The problem for our economy is simple – large entrenched corporate interests do not engage in the risk taking required to innovate because Wall Street does not reward risk taking. Wall Street only rewards meeting or beating quarterly expectations, which is no way to run an innovation based business that is actually trying to accomplish anything worth innovating in the first place.

Dreaming big dreams is not what gets one a corner office in a publicly traded technology company, nor is it what shareholders reward. It is, however, a prerequisite to paradigm shifting innovation, which we all say we want. Even politicians who barely know anything about science, technology, engineering or math praise innovation and the breathtaking advances of those who dare to dream, but they don’t seem to understand even basic truths about the business environment necessary for those innovations to come through to fruition.

Those impossible, or at least lofty, dreams require money, which means investors on multiple levels need to be inspired. While the investor class with a tolerance for innovation risk taking is a different breed, at the end of the day investors invest to make money, which means they expect proprietary rights. In the innovation world that means patents, and not just any patents, but strong patents that are likely to survive challenge. Investors in this space will not just kick tires, they will engage in due diligence and generally speaking are not going to buy a pig in a poke, which is why you see so many start ups struggling to get investor dollars and so many investors going off shore for their investments.

The patent system all three branches of our government has created over the last 12 years has increasingly incentivized the stealing of patent rights rather than engaging in an arm length negotiation with innovators who possess patent rights that are supposed to be statutorily presumed valid. This is antithetical to basic, fundamental principles embedded throughout American law, not to mention basic economic principles.

Laws are supposed to be certain, stable and understandable. When certainty, stability and understandable laws are achieved externalities and transaction costs are low, which allows for the bargaining of rights to ensue. This in turn leads to an efficient outcome where the party that most values the rights can acquire certain, stable rights in a transaction that requires minimal diligence and presents little risk. This is known as the Coase theorem, and is attributed to Nobel Laureate Ronald Coase. According to the Coase theorem the law should maximize certainty and minimize transaction costs in order to facilitate an efficient, arms-length negotiation of rights between efficient parties.

According to Coase, obstacles to bargaining, a lack of certainty and/or poorly defined property rights will lead to an inefficient marketplace. It seems that the utter chaos that has become the U.S. patent system has once again prove the brilliance of Professor Coase and the elegance of his theorem.