Academic

This commentary was first published on the Globe and Mail website on September 22, 2009.

After years of effort, a Toronto startup company called i4i invented an important piece of technology to dramatically enhance software programs, such as Microsoft Word. Recognizing its potential, i4i obtained a U.S. patent to protect, and hopefully prosper from, the invention. The company also began marketing the technology as a separate product that worked with Word. A Texas court ruled last month that in 2003, Microsoft began to bundle i4i's patented technology in its dominant software without i4i's knowledge or consent. The smaller company was successful in establishing willful patent infringement, winning damages for the past and an injunction to protect i4i in the future. Microsoft strongly objects to these remedies, arguing at trial that i4i is analogous to a banker seeking a bailout. This analogy is entirely inapposite, and the remedy the court awarded is entirely appropriate in light of its finding of infringement.

Patents are essential to the modern system of innovation. Once produced, information can be transmitted at zero cost. In the absence of patent protection, would-be inventors become vulnerable to competition that would drive the value of their discovery to zero, leaving them with no compensation for the costs of producing that information in the first place. Patent protection allows inventors the benefit of limited competition for a limited time period, giving them an incentive to invest without concern about their innovation's appropriation by others.

The trial judge found that Microsoft used i4i's technology in Word without i4i's consent. This is a matter of serious social concern for two reasons. First, infringement undermines the socially desirable incentives provided by the patent system. Second, Microsoft's decision to bundle i4i's technology with Word tends to lessen competition: Once Microsoft includes its technology in its dominant word-processing package, i4i loses its market. The i4i technology could have provided a rival software package an edge that might have enhanced market competition. That edge was dulled enormously when Microsoft simply appropriated the technology and included it in Word.

Microsoft objects that the injunction ordered by the trial judge goes too far. (It has been put on hold until after the appeal, which is to begin Wednesday.) But injunctions are almost always ordered to prevent continuing infringement, and for good reason. To simply order money damages for future infringement would be to force i4i to license out its technology at a court-imposed price.

Just as there are good reasons not to compel citizens to sell or rent out their homes at prices set by judges, there are very good reasons in general to avoid compulsory licensing of intellectual property. Court determinations of the value of intellectual property are necessarily somewhat conjectural, yet damages awards require courts to act, in effect, as price regulators. By contrast, injunctions do not prevent a licensing deal from being done, but rather cede to the owner of the property the authority to set a price. Just as giving homeowners the right to decide whether to sell or rent out their houses does not destroy the housing market, in terrorem arguments about the death of Word under this injunction are without merit.

Meanwhile, Microsoft has vociferously argued that despite the trial judge's careful vetting of the evidence, i4i did not establish at trial a firm basis for its damages claim for past infringement. This claim about the speculative nature of past damages sits uncomfortably with Microsoft's opposition to injunctions. Given the complexity of measuring supply and demand for a unique product, it must be true that there is some empirical uncertainty about the precise level of past damages. But if patents are to have value, this uncertainty is unavoidable: A damages award is the only available remedy for infringement that has already taken place. Injunctions going forward, in contrast, allow courts to remove themselves from the price-setting process. Microsoft appears to want to avoid both damages as too speculative and injunctions as going too far.

Protecting i4i's patent protects incentives to invent and the competitive process. In this case, the trial judge wisely offered such protection, while recognizing the court's own institutional limitations, by ordering damages for past infringement and injunctions going forward. While the decision was not a good one for Microsoft, it was clearly in the best interests of society.