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June 20, 2008

Sauce For The Goose

Damien Geradin, Anne Layne-Farrar, and A. Jorge Padilla, in "Elves or Trolls? The Role of Non-Practicing Patent Owners in the Innovation Economy":

Clearly, patents in the hands of non-practicing entities can increase competition, lower downstream prices, and enhance consumer choice... Clearly, patents are a complex subject that cannot be portrayed as either all good or all bad; tradeoffs will always be involved. Without a better understanding of the many complicated effects of patents in high technology markets, we run the very real risk of misguided policy decisions.

It's much simpler than that.

From "Elves or Trolls?..."

Firm structure and the degree of vertical integration lie at the core of a key intellectual property concern currently under debate. "Patent trolls"--those patent holders that prey upon manufacturers and other downstream firms by charging "supracompetitive" rates for their patents--have figured large in many of the latest theories of competitive abuse involving intellectual property licensing. Under a popular although highly controversial definition of a troll, the concern is that firms holding patents that they do not practice (i.e., "non-practicing" or "non-competing" firms) impose undue costs on downstream manufacturers by charging more in licensing fees than their patented technology justifies (Shapiro, 2006; for opposing definitions of a "troll" see Golden, 2007; McDonough, 2007; Lemley, 2007). The contrast under this theory is to practicing patent holders--that is, vertically integrated firms implementing their own patented technologies in a downstream market. According to this view, trolls are assumed to have an enhanced ability to hold up licensees with "too high" royalties because they do not operate in the downstream market and thus do not require cross licenses from competitors or other quid pro pros that might militate against unjustifiably high royalty rates. Without the constraint that cross licensing poses, so the argument goes, non-integrated patent holders are free to hold manufacturers' capital investments hostage in order to increase the imposed royalty rate.

Apprehension over patent trolls and their capacity to hold up downstream players has emerged as an important factor in a number of policy arenas. For instance, in the US Supreme Court's 2006 eBay Inc. v. Mercexchange decision related to injunctive relief for patent holders, Justice Kennedy's concurring opinion cautioned that in deciding whether or not to grant an injunction the lower courts should recognize that "An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees." The subtext here is that the courts should consider denying injunctive relief to non-practicing patent holders, and in fact this is how many district courts appear to be interpreting eBay (Dauer and Cleffi, 2007).

We offer a counterpoint to this negative view. In particular, we argue that the definition of all non-practicing entities as patent trolls is far too broad and is unjustified by economic theory and evidence... As our analysis shows, non-practicing entities can play a decidedly pro-competitive role in an industry.

The focus in the literature has often been on a comparative advantage for vertical integration because such integration can help to reduce the double marginalization problem that can plague industries with goods composed of complementary components (Cournot, 1838). The complements problem, however, is but one aspect of complex firm structures and inter-relationships in high technology industries. Disintegration has positive effects of its own. Among these are the benefits arising from specialization. As the economic literature reaching back past Adam Smith has well established, specializing enables firms to focus on what they do best, enhancing productivity and increasing output. Thus the mirror image of the comparative advantage for integration in terms of reducing potential complements problems is the fact that non-integrated upstream firms (or "pure" innovators) can have a comparative advantage in R&D and innovation. These upstream specialists can have superior skills and business acumen for a relatively narrow slice of the production process, even though (or perhaps because) they lack the interest, the ability, or the resources necessary for commercializing their innovations in-house.

Patents are a crucial factor making the separation of upstream and downstream functions possible... When two parties are negotiating over some physical product, the owner of the product can threaten to take it away at any time if the other party does not live up to his end of the bargain. Thus people are evicted from apartments when they fail to pay the rent... [et cetera]. Intellectual property, on its own, allows no such threat of exclusion or removal. Once an idea has been shared, it cannot be taken away or unlearned. Without rights of some kind, then, recipients of intangible knowledge goods would be in the profitable position of taking the property without paying. As a result, inventors and IP holders are typically reluctant to share their innovations without some form of protection (Anton and Yao, 1994). This is where patents come in. By providing IP holders with an enforceable right, patents enable the sharing of information without the inevitable risk of appropriation. And when knowledge is tradable in this manner, various parties can coordinate and contract as necessary to produce a commercial product for a downstream market.

A key element in the argument that patents facilitate exchange and contracting is the point that patents lower the transaction costs of contracting... A second key factor is that patents can facilitate funding for startup companies... Combining, then, the points of easier contracting, the potential for comparative advantage in R&D and innovation, and the relative ease of entering a market as an upstream specialist, it becomes clear that patents have the potential to play a pivotal role in industry structure. In particular, patents can increase competition, and product quality in the process, as they facilitate entry by upstream specialists.

[P]atents held by non-practicing entities can offer a number of pro-competitive benefits. First, patents assist the entry of specialists into a market, which has direct implications for the level of competition and therefore the prices that consumer pay. Second, as is well recognized, specialization can mean higher quality. This is true across the economy and is no less a factor in IP contexts among upstream or downstream specialists in high technology industries, where the motto is often "innovate or die". Third, when it is upstream, specializing can also translate into more innovation, as rival firms are pushed to innovate in order to remain competitive in the market.

Yes, patents play in multitudinous scenarios vis-a-vis various players, but this is academic (which, to this writer, is a swear word for delusional). Economics overdone to no effect. The simple fact is that patents are a tradable commodity, and their transactions logically should be treated equitably.

IBM patented an invention later found useful in chest surgery. The only surgery IBM does is on other companies' wallets. So, the only way to profit from its invention is to enforce its patent as a vehicle for licensing revenue. What is the difference between IBM and a garage surgeon cum inventor? Absolutely nothing.

If you think, like Justice Kennedy, that money is good enough, i.e., that compulsory licensing should be de rigueur for non-practicing entities (NPEs), why not for competitors? If a product comprises numerous patents, such as cell phones, which pack around 300 patents into a handheld squawk box, why should Nokia be entitled to stop Motorola? Why isn't money good enough there too? Injunctions are inherently non-competitive. The ITC ought to close up its embargo shop.

The bottom line is that patents are about money. If money is good enough for one, money ought to be good enough for all. Sauce for goose is sauce for the gander.

There is no economic justification for discrimination against patent holders based upon their marketplace activity. To do so is corporatism, mollycoddling of corporations by the State, like a huge bigoted leech, favoring big taxpayers, i.e., corporations, at the expense of the small fry. Fifty years ago, corporate taxes rates were higher than individual rates. Now the opposite is true. Corporate favoritism, paid for by individual citizens, is happening in this country and across most of the world, plain and simple.

I (or you) can argue until blue in the face about economic justifications regarding equity in patent enforcement. But Congress is on the take, the President knows who has buttered his bread, the courts play along to support the State's interests, and nothing is going to change in this country adverse to corporate interests.

Posted by Patent Hawk at June 20, 2008 11:24 PM | The Patent System

Comments

«When two parties are negotiating over some physical product, the owner of the product can threaten to take it away at any time if the other party does not live up to his end of the bargain. Thus people are evicted from apartments when they fail to pay the rent... [et cetera]. Intellectual property, on its own, allows no such threat of exclusion or removal. Once an idea has been shared, it cannot be taken away or unlearned. Without rights of some kind, then, recipients of intangible knowledge goods would be in the profitable position of taking the property without paying.»

But this whole argument is thoroughly intellectually dishonest, for very many reasons:

* There is no property in inventions without legal rights defining that property. Until and if a legislature grants exclusive rights to inventions they are are not property

* Also, the patent system is based on confiscation of the rights of most inventors to practice their own inventions: the Government prevents any inventors but the first (to find or file dependent on jurisdiction) from practicing their own inventions, which according to the dishonest argument above constitutes confiscation of property. A log of inventions are created independently.

* Anyhow *trade secrets* don't have the disadvantages above, and they are founded on contract law, which is very enforceable. It is false that "Once an idea has been shared, it cannot be taken away or unlearned." because a trade secret shared with a customer according to a contract can be taken away.

* Quite shiftily the statement above is about "Once an idea", "patents enable the sharing of information" and ideas and even less so information are not patentable in just about any jurisdiction, only *inventions* are, and inventions by their very nature are subject to trade secrets.

* Again, as the deliberate confusion between patentable inventions, and the very different concepts of ideas, information and "when knowledge is tradable in this manner, various parties can coordinate and contract" happens, any parties can trade and contract for trade secrets quite freely, without the Government having to confiscate the right of other parties to practice their own independently invented trade secrets.

The intellectual dishonesty in the argument is based on the pretense of ignoring that patents are not the enabler for the sharing of ideas, information or knowledge between licensor and licensee, because contract law allows that very easily and cheaply under trade secret doctrine.

The role of patents is solely to encourage the *publication of trade secrets*, because while private parties may fully benefit from trade secret doctrine, it is in the public interest to have trade secrets published to advance the body of practical knowledge, and to ensure that those secrets don't stay secret forever.

The voluntary publication of trade secrets being the goal of the patent system, the inducement to publish is the confiscation of the right of other inventors to practice the same invention is a taking without compensation justified in the general interest (in the USA without a specific clause patents and copyrights would be unconstitutional as takings without compensation of other people's rights).

I can understand however that shysters might want to spread misinformation about inventions being property regardless of legal establishment of such, extend casually that notion to "ideas", "information" and "knowledge" which are in fact unconstitutional to patent or copyright in the USA and illegal in most other jurisdictions, gloss over the taking without compensation issue, pretend to ignore the existence of many hundreds of years of trade secret law and cases, and argue that the benefit of patents is to smooth the wheels of commerce instead of publication.

Because of course it would be great if well funded patent litigation firms could get the Government to confiscate the public's right to "ideas", "knowledge", "information" and to their own inventions in their favour, without even having to publish them.

Because if the benefits of patents were the hand-waved advantages for commerce that the argument above claims, there would be no need for publication, because those advantages would happen whether those "ideas", "knowledge", "information" and inventions were published or not.

All this said about manifest shysterism, I do like the idea of separating upstream from downstream, research from production, as it is often the case the organizations that are good at research are bad at production and vicerversa, and to entangle the two sides by giving a monopoly is a bad idea.

But the solution is to switch from exclusive rights to practice a *published* *invention* to the exclusive right to have a royalty on the practice of that published invention; that is to have legally compulsory licensing by all practitioners so that inventors publishing an invention are ensured that they get a revenue stream from all those that benefit from it.

If anybody can practice a published invention, and all of them are compelled to pay for it, one simultaneously rewards publication and favours the specialization of companies in upstream and downstream companies, because then there is no particular advantage in doing research and production within the same organization.

Posted by: Blissex at June 22, 2008 7:08 AM

Blissex,

Great idea. There's only one problem. You have to get the police to start chasing the infringers who won't pay. Do you want the police to have another excuse for bothering people?

I don't. A stronger system of property rights to inventions seems like a much better way of encouraging people to pay inventors fair value for their work than criminalizing infringement.

And I have evidence by analogy! Copyright infringement has criminal penalties attached. Remember how the FBI was conscripted by music studios pre-9/11 to go after pirates? Lovely wasn't it?

Posted by: Michael F. Martin at June 23, 2008 6:12 PM