Patent Law

Sauce For The Goose

By Gary Odom and Jordan Kuhn

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, state sanction, support, regulation and mollycoddling, like a huge bigoted leech, favoring the big taxpayers, i.e., the corporations,  at the expense of the small fry. That is what is going on in this country and across much of the world, plain and simple.

You can argue until you are blue in the face about economic justifications. But Congress is on the take, the President knows who has buttered his bread, the courts play along to support the status quo, and nothing is going to change in this country adverse to corporate interests.

Full post as published by The Patent Prospector on June 21, 2008 (boomark / email).