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American Law Is Patent Nonsense

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
August 29, 2012
Financial Times

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The season of US election conventions is upon us. Politicians will issue sentimental proclamations about their faith in America. Meanwhile, from California, we have an object lesson in why that faith has been eroding. A supposed pillar of the nation's capitalist vigour has been revealed in all its decadence.

That pillar is the US patent system, which has allowed Apple to extract $1bn from Samsung in compensation for alleged theft of intellectual property. According to nine randomly selected laymen – which is to say, a jury – Samsung might as well be known as Samesung, since features of its smart phone suspiciously resemble the iPhone. Someone called Godzilla on the AppleInsider web forum summed up the verdict cheerfully: "Samsung proven to be the thieving snivelling wannabes that they are."

If you surveyed convention delegates, you would find a majority in the Godzilla camp. Americans reasonably worship property rights and unreasonably extend this attitude to intellectual property rights, conflating "rival" goods like homes and hamburgers, which cannot be shared costlessly, with "non-rival" intellectual products that can be enjoyed simultaneously by all. Likewise, Americans worship innovation and presume that intellectual property rights always promote it. But this presumption is wrong.

The poster child for patents is the pharmaceuticals industry. But, as Richard Posner, a federal appeals court judge, has argued, what works in this sector is not necessarily appropriate in communications, software or elsewhere. Bringing a new drug to market is inordinately expensive, mainly because of the need for large clinical trials. Monopoly rights over new drugs provide a needed spur to invention. And because trials take as long as a decade, the 20-year exclusivity typically granted can mean only 10 years of monopoly profits.

The technology industry is different. No clinical trials are needed, so costs of development are lower and the case for monopoly weaker. Certainly, 20-year exclusivity cannot be justified. But as Michele Boldrin and David Levine observe in a new paper, the right policy for Silicon Valley might be to grant no patents whatsoever. Technology innovators are amply rewarded by the first-mover advantage. In the 16 months between the launch of the iPhone and the appearance of its first Android competitor, Apple shipped more than 5m units. Its share price outperformed the S&P 500 index by 20 percentage points.

If the need for monopoly incentives in the tech industry is doubtful, the cost of granting them is clear. Whereas a drug patent covers one independent product, a technology patent typically covers a building block of a product, such as the look of the icons on a touch screen, to cite one of Apple's complaints against Samsung. By patenting such building blocks, tech groups prevent rivals from using yesterday's inventions to create tomorrow's improved ones. Rather than spurring progress, patents can trip it up.

This problem has reached epidemic proportions in the tech industry. By one count, in 2005, 41 companies claimed 8,000 patents associated with 3G communications technology. Other standards, such as MP3 music, are similarly surrounded by thickets of competing claims. Even a manufacturer that does its best to license the patents it uses may be accused of infringement. Microsoft scrupulously paid royalties on MP3 patents but was sued by holders of similar patents and ordered to fork out $1.5bn in damages, though the verdict was later overturned.

When not patenting building blocks, tech groups patent chunks of territory, like cats marking out their land. Last month Apple secured a patent for a swath of products using touch screens with "four and five dimensional capability", whatever that may mean. Some patents are kept deliberately low-profile in hopes that deep-pocketed companies will violate them unknowingly, at which point patent holders pounce. Last year US companies spent about $29bn fending off raids from "non-practising entities", also known as patent trolls, litigators who own bundles of patents with no intention of using them to build products.

Outside the tech industry, more madness reigns. As Keith Maskus notes in a forthcoming book, Private rights and public problems, Smucker's, a food company, used to wield a patent covering a "method of making crustless peanut butter sandwiches". The National Football League has attempted to assert ownership over the phrase "Who Dat?", while a celebrated basketball coach once registered trademarks on the phrase "three-peat" in anticipation of winning a third consecutive championship. (He did not, which served him right.) In a better world, the US Patent and Trademark Office would take care not to approve frivolous and overlapping applications. But its examiners are swamped.

The US has made modest efforts to rein in this excess. A law due to take effect next year will improve the funding of the patent office and reduce inconsistencies between the US approach and that of the rest of the world. But the US has a long way to go before attaining sanity. Its rules encourage vastly more patent applications than are filed in any other country; and whereas other mature economies such as Japan and Britain have seen a decline recently, the US volume keeps heading up. The Apple-Samsung verdict will doubtless be followed by a fresh burst of costly litigation as Apple presses its advantage and Samsung counter-attacks.

Some observers believe that the patent system should be abolished outright. But you don't have to go that far to see that there are grounds for worry. Americans labour under an illusion that their lawyers' paradise is good for innovation. They could hardly be more wrong.

The writer is a senior fellow at the Council on Foreign Relations and an FT contributing editor

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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