As some querulous (you know who you are) H&R readers know, I have argued granting patents to inventors has helped speed up technological progress and economic growth. I reiterate that patents were devised chiefly as a way to exit the economically stagnant world of trade secrets. How? By acting as a disclosure mechanism that bribes inventors into telling the rest of us how what they did works which in turn provides insights to help other inventors to develop more beneficial technologies faster. OK, that's the way it's supposed to work, but does it still do so today?
This week, a truly excellent NPR Planet Money report, When Patents Attack, suggests strongly that patents are far more of a hindrance in software development than a help. The story focuses on Nathan Myhrvold's Intellectual Ventures which has amassed some 35,000 software patents.
As the NPR story explains the patent problem arose in the 1990s when Federal courts overturned Patent Office rulings against granting software patents. The result was a flood of software patents which are now stoking patent warfare. The NPR report outlines how this warfare is being executed now:
All the big tech companies have started amassing troves of software patents — not to build anything, but to defend themselves. If a company's patent horde is big enough, it can essentially say to the world, "If you try to sue me with your patents, I'll sue you with mine."
It's mutually assured destruction. But instead of arsenals of nuclear weapons, it's arsenals of patents. And this was a problem Intellectual Ventures founder Nathan Myhrvold said he was trying to solve when he first started the company. A problem that he and others from his company talked about at investor meetings around Silicon Valley. [Venture capital investor] Chris Sacca attended one of those meetings a few years back.
The pitch he heard was, basically, Intellectual Ventures helps defend against lawsuits. Intellectual Ventures has this horde of 35,000 patents — patents that, for a price, companies can use to defend themselves.
Technology companies pay Intellectual Ventures fees ranging "from tens of thousands to the millions and millions of dollars … to buy themselves insurance that protects them from being sued by any harmful, malevolent outsiders," Sacca says.
There's an implication in IV's pitch, Sacca says: If you don't join us, who knows what'll happen?
He says it reminds him of "a mafia-style shakedown, where someone comes in the front door of your building and says, 'It would be a shame if this place burnt down. I know the neighborhood really well and I can make sure that doesn't happen.' "
Here's what's funny: When I've seen Nathan speak publicly about this and when I've seen spokespeople from IV they constantly remind us that they themselves don't bring lawsuits, that they themselves aren't litigators, that they are a defensive player. But the truth is the threat of their patent arsenal can't actually be realized, it can't be taken seriously, unless they have that offensive posture, unless they're willing to assert those patents. And so it's this very delicate balancing act that is quite reminiscent of scenes you see in movies when the mafia comes and visits your butcher shop and they say, "Hey, It would be a real shame if they came and sued you. Tell you what: pay us an exorbitant membership fee into our collective and we'll keep you protected that way." A protection scheme isn't credible if some butcher shops don't burn down now and then.
In an email to us, Peter Detkin called the comparison to the mafia "ridiculous and offensive." Detkin wrote:
We're a disruptive company that's providing a way for patent-holders to recognize value that wasn't available before we came on the scene, and we are making a big impact on the market. That obviously makes people uncomfortable. But no amount of name-calling changes the fact that ideas have value. (See Detkin's full response here.)
True enough. But you can see why many people feel like lots of butcher shops have been burning.
Naturally, Intellectual Ventures has a different interpretation. The NPR story ends:
In early July, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out among Silicon Valley powerhouses. Google said it wanted the patents purely to defend against lawsuits and it was willing to spend over $3 billion to get them. That wasn't enough, though.
The portfolio eventually sold to Apple and a consortium of other tech companies including Microsoft and Ericsson. The price tag: $4.5 billion dollars. Five times the opening bid. More than double what most people involved were expecting. The largest patent auction in history.
That's $4.5 billion on patents that these companies almost certainly don't want for their technical secrets. That $4.5 billion won't build anything new, won't bring new products to the shelves, won't open up new factories that can hire people who need jobs. That's $4.5 billion dollars that adds to the price of every product these companies sell you. That's $4.5 billion dollars buying arms for an ongoing patent war.
The big companies — Google, Apple, Microsoft — will probably survive. The likely casualties are the companies out there now that no one's ever heard of that could one day take their place.
The whole NPR story is very worth your time to read or listen to.
Earlier this year, the Congressional Research Service (CRS) did a report, Patent Reform: Issues in the Biomedical and Software Industries, [PDF] made the same point about patents encouraging technological innovation that I have made:
Patents may also provide a more socially desirable outcome than its chief legal alternative, trade secret protection. Trade secrecy guards against the improper appropriation of valuable, commercially useful information that is the subject of reasonable measures to preserve its secrecy. Taking the steps necessary to maintain secrecy, such as implementing physical security and enforcement, imposes costs that may ultimately be unproductive for society. Also, while the patent law obliges inventors to disclose their inventions to the public, trade secret protection requires firms to conceal them. The disclosure obligations of the patent system may better serve the objective of encouraging the diffusion of advanced technological knowledge. Patents may also prevent unproductive expenditures of time and money associated with R&D that duplicates other work.
The patent system thus has dual policy goals—providing incentives for inventors to invent and encouraging inventors to disclose technical information. Disclosure requirements are factors in achieving a balance between current and future innovation through the patent process, as are limitations on scope, novelty mandates, and nonobviousness considerations. Patents often give rise to an environment of competitiveness with multiple sources of innovation, which is viewed by some experts as the basis for technological progress.
That being said again, the CRS report also noted:
Not everyone agrees that the patent system is a particularly effective means to stimulate innovation. Some observers believe that the patent system encourages industry concentration and presents a barrier to entry in some markets. They suggest that the patent system often converts pioneering inventors into technological suppressors, who use their patents to block subsequent improvements and thereby impede technological progress Others believe that the patent system too frequently attracts speculators who prefer to acquire and enforce patents rather than engage in socially productive activity such as bringing new products and processes to the marketplace.
It may be that different industries have differing experiences when it comes to the benefits and costs of patents. Ending an already too long post, the CRS reports that biomedical and information technology sectors have divergent views on the role of patents in encouraging innovation and investment:
Innovators in the biomedical sector tend to see patent protection as a critically important way to prohibit competitors from appropriating the results of a company's research and development efforts. Typically only a few, often one or two, patents cover a particular drug. In contrast, the nature of software development is such that inventions often are cumulative and new products generally embody numerous patentable inventions.
This is an issue I discussed in my column, The Tragedy of the Anti-Commons. Why not adopt patent reform that would take us back to the 1990s before the courts ordered the PTO to grant patents on software?
Again, I highly recommend reading or listening to the whole sobering NPR report, When Patents Attack.