The Economics of Patents and Patent Abuse

Once upon a time, American technology companies viewed Washington D.C. as the boogeyman, a place to avoid just as much as the Golden Gate Bridge at 5 o’clock. But times have changed, and companies like Google, Amazon and Apple now top lobbying expenditure lists, sitting alongside mainstays like Shell or Monsanto. For the past four years, the topic of “patent reform” has ranked near the top of their legislative priorities.

Given the many problems with U.S. intellectual property landscape that put domestic economies of all size at risk, this is a positive development.

A well-functioning patent system forms an essential basis for the dynamic process of ‘creative destruction’ that ensures market evolution. The economics of the patent system is one of the most important areas of microeconomics, although it rarely receives the attention it deserves in larger policy discussions of competition, monopoly and the impact on consumers. According to a recent poll, most Americans are “clueless” about efforts to reform patent policy, with nearly 50 percent of respondents having no opinion or knowledge of the continuing discussion regarding patent trolls – dubious characters known for extorting undeserved payments under allegations of patent infringement.

The most recent  Special Edition of World Economics  examines recent patent trends and examines existing hurdles to a well-functioning system. Lawmakers and regulators aim to prescribe policies which can keep pace with innovation while quelling misuse from those seeking to exploit weaknesses within existing intellectual property policies. This challenge is global, particularly as global trade between nations requires global intellectual property cooperation like never before.

One of the highest profile concerns about the patent system, an area of focus for U.S. lawmakers, is the widespread emergence of damaging litigation tactics employed by patent assertion entities (PAEs), or so-called patent trolls. A less frequently discussed emerging issue though  is the rise of patent privateers, a scheme in which a patent licensor will spin-off valuable sub-portfolios of patents to any number of third-party partners to enhance the value of the portfolio and deceive the licensee who believes it is licensing the entire portfolio.

As quickly as lawmakers and regulators can address the vagaries and loopholes which foster many misuses of the patent system, courts seem to be establishing new precedent with rulings opening up new opportunities which the deviously innovative abusers can leverage to further line their pockets.

In the first article of this Special Edition of World Economics, Julie Hopkins, an intellectual property attorney, provides a clear understanding of U.S. property rights, including distinctions between utility and design patents.

An example of the challenges faced by patent system regulators and lawmakers trying to adapt to fast changing precedent and trends can be easily made through the U.S. Appeals Court May 18th ruling in the case Apple brought against smartphone rival Samsung. The court’s ruling affirmed the contentious notion that design patent infringement damages can be awarded based on the total profit for the entire product which is found to infringe – in this case the court ruled the  infringement was of Apple’s design patent over a rectangle with rounded corners. Conversely, utility patent infringement awards are based on the value of the specific technological function for the alleged infringement.  In this case that infringement was based on Apple’s design patent over a rectangle with rounded corners.

This ruling will invite an unprecedented ramping up of patent litigation claims based on alleged design patent infringement, and a windfall for patent assertion entities as well as the trial lawyers whom they pay. Litigants will be able to recoup damages from an entire product’s profits without regard to the value of the alleged infringed technology. This is aided by weaknesses in the U.S. system which continues to grant protections for those with the foresight to claim shapes as their own, or to acquire these rights from others and vigorously assert them for total profit without regard to actual patent value or contribution.

Legislators may well address the threats associated by patent abuses through direct action, but state intervention has a tendency to exacerbate a problem and too frequently create a fresh set of problems that require their own new solutions. Avoiding state intervention by finding voluntary agreements that can go with the grain of commerce would make far more sense.

The perpetual march of trickle down consequences, albeit unintended, from rulings like the Apple-Samsung case, appears to be inevitable.  A well-functioning patent system can help stimulate economic growth in the modern economy so measures which encourage innovation and spur productivity gains are the only positive way forward. Regulators and judicators would be wise to be vigilant as an army of clever, but negative, patent abusers lie in wait for their next opportunity.  It is crucial that Europe, and the U.S., ensure that our system fosters innovation and benefits our economies without issuing new means to permit a payday for abusers.

Brian Sturgess is the Managing Editor of World Economics

Morning Consult