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Patent Pragmatism and Patent Ideology

· October 1, 2012

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In one of the more interesting twists in the patent wars, Judge Richard Posner dismissed with prejudice a high-profile case in which Apple sued Motorola as part of its thermonuclear war against Android and Motorola, counterclaimed with standards-essential patents.  The decision has drawn attention because it was based on the parties failure to show damages or grounds for an injunction.  Generally, damages are determined only after patents are found valid and infringed, but Posner found no point in trying validity and infringement with no prospect of remedy.  Apple and Motorola have both appealed.

Fast forward to the controversial Apple-Samsung case two months later: a Bay Area jury had no difficulty deciding validity and infringement and assessing over a billion dollars in damages against Samsung in favor of Apple involving three utility patents and four design patents (plus deciding that four patents owned by Samsung were not infringed by Apple).  Remarkably, the jury delivered the entire verdict, including a model-by-model assessment of damages, after a mere three days of deliberation, a process that most observers thought would take weeks.  Perhaps it was easier because the foreman was a patent owner determined to “send a message,” Apple was the hometown champion fighting an East Asian giant, and research shows that juries favor domestic patent litigants 64% of the time (for judges, it is roughly half and half).

In contrast to the Apple jury, Judge Posner deserves credit for showing how difficult the damages problem is for products that combine tens of thousands of functions and components – and are sold at a price that ordinary people can afford.  The smartphone is best example yet.  Patent aggregator RPX estimates there are some 250,000 active U.S. patents for smartphone technology; how much can each of those patents be worth?  And who is going to figure the relative value of each? – bearing in mind that much of the value of the smartphone is not in the sum of the individual patented elements but that of all the components and functions, most of which are unpatented, plus how they are all connected and integrated.

In July, Judge Posner published an article in the Atlantic, “Why There Are Too Many Patents in America.”  The main theme of the article is that:

With some exceptions, U.S. patent law does not discriminate among types of inventions or particular industries. This is, or should be, the most controversial feature of that law. The reason is that the need for patent protection in order to provide incentives for innovation varies greatly across industries.

Nothing that economists haven’t known for decades.  As duly noted in a just-published National Academies of Science study:

In many fields intellectual property protection plays only a small role in enabling firms to reap returns from their innovations. And in some fields it would appear that for the industry as a whole aggressive patenting is a negative sum game.

A well-known survey by economist Edwin Mansfield showed that on average only 14% of commercialized inventions would not have been developed if patents had not been available.  For pharmaceuticals, however, it was 60%, a figure that greatly elevates the industry average.

Posner vs. Epstein

Although a federal appellate judge, Posner is usually considered the father of the law and economics field, which believes that the law respects or should respect economic analysis and benefits.  Yet Posner’s article elicited an impassioned but somewhat inscrutable rant from his University of Chicago colleague, Richard Epstein, also associated with the law and economics movement.  In principle, no area of the law should be more appropriate for economic analysis than patent law, since the law is supposed to have economic results.  But Posner is a pragmatist, while Epstein wears his ideology on his sleeve:

The fashionable academic attack on patents is just one part of the full-scale attack on market institutions that has led to an economy mired in 1.5 percent annual GDP growth.

So it is academic criticism, not market conditions, that it is at the root of our economic malaise?!  Shame on Posner for taking unfair advantage of a market economy too weak to stand up to academic criticism.

Epstein continues:

The basic debate in this field can be summarized in one proposition: Strong patent protection is a threat to the overall operation of the legal system, so the appropriate set of remedies calls for narrowing the scope of the patent system at every opportunity.

Really?  Patents a threat to the entire legal system?  There are many in high tech who believe that an overambitious patent system is the legal system’s threat to technology innovation.  And there are a number conservatives who think that the legal system is a threat to the economy….

Patents are not even a market institution.  The patent system is a government-enabled legal institution devised as a response to a perceived market failure:  Inventions are nonrival goods, and if they can be freely copied by others, inventors will presumably underinvest in innovation.  The patent system is a creature of federal legislation, patents are granted by a federal agency, and patents can only be enforced by taxpayer-funded federal courts.  Markets for patents are emerging, but the speculation, holdup, and strategic behavior that they bring is not part of the traditional case for patents.

As Posner points out, the market-failure case for patents applies best to pharmaceutical industry where the costs of discovering, testing, and marketing a new drug are very high.  In many cases, there will be just one primary patent behind the drug.  Software lies at the other end of the spectrum in terms of low cost barriers and high number of potential patentable functions.  There was also plenty of innovation in software before the Federal Circuit (the appellate court with jurisdiction over all patent cases) decided to impose the patent system on innovators in these areas.  As Posner once explained, “a specialized court tends to see itself as a booster of its speciality.”  The result is mission creep.

Posner’s point is that there are other means for “appropriating returns to innovation.”  These include lead time, learning speed, secrecy, complexity, service, complementary assets, reputation, and copyright in the case of software.

Inviting the government in, however desirable in some industries, inevitably introduces the potential for government failure, the public sector counterpart to market failure – whether through monolithic thinking or over-regulation.  A one-size-fits-all patent system that offers a single primary patent for a drug can create vast problems for complex technologies.  If there are 250,000 active U.S. patents facing a smartphone with an average of 20 claims per patent, that amounts to some 5,000,000 regulations on smartphone innovation.

While Epstein’s rant against Posner is a bit baffling, other writings make clear that he is an advocate of what could be called the “Efficient Patent Market Hypothesis” – the lawyer’s version of the Efficient Market Hypothesis.  Under EPMH, the 250,000 U.S. smartphone patents are a triumph of market specialization.  The owners of these patents know who has what patents, what they cover, how good they are, and what they are worth.  They will gladly get together and negotiate a complete set of licenses that grant everybody as much freedom to operate as they are willing and able to pay for.  In effect, the mighty market will readily contract to undo the operation of the patent system.

The key to make this market work is to grant patent owners stronger and stronger rights and remedies.  In this way, innovators will be forced to hire the battalions of lawyers needed to negotiate the thicket, fully mindful of the existence, validity, true meaning, and true value of every patent.  But what about widespread perceptions of poor quality?  Epstein’s answer is “to put the government agencies and courts on high alert against, for example, weak business method and software patents and frivolous arguments in a dispute.”  In other words, smarter government intervention?  Familiar rhetoric but just how do you that?  And who pays for a smarter, more alert government?

The law and economics movement accommodates divergent perspectives.  Epstein is an advocate; he discloses that he gets paid for his time by Data Treasury and Qualcomm, companies with, let us say, uniquely interesting patent positions.  Posner is a judge, who is paid to look at disputes impartially.  However, he is perhaps better known as America’s leading public intellectual.  He even wrote the book on the subject.  He has made himself accountable to the public and has not shied from holding public institutions accountable.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.