Are Patent Laws Stifling Innovation?

In their articles, Posner and Becker discuss the current patent situation in America.  Patents exist as a way of ensuring that the inventor of a product has sufficient ability to profit from their investment in the product.  Posner makes the argument that as the difference between the cost to invent and the cost to copy becomes greater, patent protection becomes increasingly more necessary.  He uses the example of pharmaceutical drugs.  Due to extreme R&D costs and the relatively low cost of copying a new drug, pharmaceuticals require a greater degree of patent protection.  Patents assist in creating a necessary monopoly power for the inventor.  Without this protection, there would be very little incentive to develop new medications.

Both Becker and Posner agree that the area of patent law that has become excessive is the software industry.  Increasingly, companies have been filing patents for software code in the hopes of coercing other companies into licensing their software.  When licensing offers are rejected, the patent holders then seek damages for patent infringement through expensive legal action.  For example, Microsoft has made more money from licensing deals for Android phones than from their own Windows Phone line.  The difference between the cost of development of software code and the cost to copy it is very low.  This difference signifies that the need for patent protection is very minimal.

Usually, prior art has been a useful tool in invalidating patents that should not have been granted; however, due to the rapid changes in technology and generally uninformed patent officials, many companies have been awarded patents that give them an unnecessary edge over their competitors.  Companies are being awarded patents for rectangles with rounded corners.  Posner argues that when patent protection is excessive, the market prices increase to levels that are inefficient.  This also has the effect of decreasing the efficiency of resource allocation. When taken as a whole, this has the effect of stifling innovation and creating unnecessary barriers to entry.


Dave Tufte said...

Tyler: 100/100.

Like a lot of situations involving government bureaucrats and enforcement, Posner is identifying the problem here as applying a one-size-fits-all law to different industries. The pharmaceutical industry needs tighter patents granting more monopoly power, while the software industry needs something much more lax.

The thing is, allowing those to differ would conflict with our desire that everyone be equal before the law ... and I don't think anyone is ready to sacrifice that yet.

This is a situation in which we need a more complex "mechanism design". There are probably some good ideas in this area (where two Nobel prizes have been awarded to 5 people over the last few years) but I'm not up on that stuff. :(

Trevor said...

Tyler, thanks for this post, and thanks to Dr. Tufte for recommending the reading of it. My last comments were relevant to patent laws as they pertain to the pharmaceutical industry, and I had yet to consider how the US’s confusing and convoluted patent laws are playing out (or reducing play) in the software and technology industry.

After doing a bit of reading, it seems to me that part of the problem with the patent abuse in the software industry is also largely driven patent trolling. IPWatchdog writer Gene Quinn defines a “patent troll” as an organization that buys up and owns a considerable amount of both US and non US patents. However, these organizations are usually non-practicing entities and do not acquire patents to use them in further development, but to enforce them as a legal tool to bring lawsuits against competitors.

Patent trolls levy lawsuits with little or no due diligence prior to filing to determine if there is, in fact, a patent violation. In effect, this is a shake-down of smaller organizations because those that bring these specious infringement suits know it will be far less expensive to settle with defendants (resulting in a licensing fee for them) then it will be to go to court, even if there is never clear evidence of infringement in the first palce.

Quinn gives this example, discussing a non-practicing patent holding portfolio called Lodsys, LLC who recently filed infringement lawsuits against Apple and Android App developers concerning the game Angry Birds.

“Lodsys is correctly characterized as a patent troll, or at least as one exhibiting signs and symptoms of being a patent troll. They acquired these patents from Intellectual Ventures, who had already licensed Apple, a license Apple claims covers their App Developers, which sounds correct on its face. This would mean Lodsys is suing at least some, namely the Apple App Developers, who have every right to be doing what they are doing.”

It seems that this type of behavior is typical for non-practicing, patent-owning entities. These organizations are not innovators, but they are creating an unfair business market effectively eliminating many practicing entities that are.

Dave Tufte said...

Trevor: 50/50

I agree with everything you've said here.

I think patent trolls are a symptom though, and not a cause. Instead, the fault lies with our legal system, which isn't really designed well to prevent tort abuse.