MAGAZINE

Intellectual Property, Creativity, and Innovation
// Pete Dyson / Oct 5, 2011

Introduction

In his last State of the Union Speech, President Barack Obama used the terms “innovation” and “innovate” over eleven times.  One of the few areas of political consensus is that the West needs to increase its innovation and creativity in order to avoid terminal economic and cultural decline.   Where do innovation and creativity come from in the sectors most of us work in?  Differences in relation to the question of the extent to which intellectual property rights support or hinder innovation and creativity are often the backdrop to how we conceptualise the approaches of East and West.  Assumptions are often made that the East has looser intellectual property law systems and that these must be tightened to reward original creators, reduce piracy, and create safe conditions for technology transfer. It is perhaps a timely moment however to consider our own Western intellectual property systems, systems that an increasing number of commentators are arguing are so broken and dysfunctional that they now damage rather than support innovation and creativity.

A Broken System?

There has always existed radical critiques of intellectual property laws and in particular their creation of state sponsored monopoly rights.  These have always been minority voices, often centered on the work of libertarian economists; what’s different now is that mainstream voices are becoming increasingly critical of both copyright and patent systems.  In August this year, the influential Economist magazine declared in a leader article that “the patent system has been stifling innovation rather than encouraging it”, and around the same time, the UK’s Guardian newspaper asserted in an editorial “Patents are now a multibillion-dollar industry in which companies find it more attractive to make money suing each other for infringement than actually making things”.   Against this background, it may be useful to explore these criticisms before continuing to pressure countries such as China to further harmonise their intellectual property systems with those of the West.  

What are Intellectual Property Rights For?

The traditional argument has always been that a society provides legal property rights in inventions and creative works in order to reward, and create incentives for, innovators and creators.  This system of law is said to benefit the owners of intellectual property but also the society as a whole.  The wider society benefits not just from the steady stream of inventions and creations but also from the dissemination of ideas, knowledge, and information that would, in the absence of legal protection, tend towards secrecy or limited dissemination.  In the light of the public dissemination of ideas, knowledge and information, any follow-on innovation can avoid unnecessary repetition and instead focus on pushing forward the cutting edge of progress.     In addition, intellectual property law systems are designed to embody checks and balances that further ensure the balancing of rights holders’ interests with those of the wider society, through the limited duration of the rights granted and the allowance of “fair use” and other permitted acts.

All of this sounds reasonable enough, so what has led to the increasingly fractious debate about the functionality of Western intellectual property systems?

Two Competing Themes

Two competing themes in western strategic thinking have been developing during the last two decades.  The first theme has been the increasing realisation that the manufacturing base of most western economies has been seriously eroded in the face of competition from the east, that this erosion is probably permanent, that the value of western economies now lies in its past and future production of intellectual property, and that intellectual property laws and their application must be tightened up in various ways to enhance the protection and value of these assets and ensure their safe and profitable exploitation in domestic and global markets.    The second theme is that enhanced protections in intellectual property law may actually be undermining innovation and future economic growth because innovation and creativity become unduly obstructed by the overly oppressive recognition, scope, duration, and enforcement of intellectual property rights.  The patent system can be explored to better understand the premise of the second theme.

Patents

There has been massive growth in levels of patenting, with over 6 million patents operative worldwide, and nearly 200,000 new patents granted in the US alone every year.   A large part of this growth is coming from the computer software and information and communication technology (ICT) sectors.   It is in these highly incremental, collaborative, complex sectors that the scope and validity of patents is often inherently uncertain compared with technological sectors where innovation tends to work in a less sequential, more stand-alone manner such as in the pharmaceuticals sector.  In a strongly sequential environment it can be difficult to ascertain where the boundaries of protection claimed by one patent lie in comparison with another patent. The proliferation of patents of uncertain scope and validity leads to an environment where litigation or the threat of it is commonplace.   Smartphones are perhaps the most obvious market where there is a “thicket” of overlapping and uncertain patents leading to both aggressive and defensive strategies on the part of those working with these technologies. 

Aggressive Patent Strategies

Aggressive patent strategies are perhaps most apparent in the rise of companies and organisations (Non Practising Entities – N.P.E.s – or “trolls”) that are not themselves involved in the patent activity but that accrue patents as a resource with which to profitably license or litigate.  In such an uncertain patent environment, NPE’s can disrupt even the largest companies, as was seen in the patent infringement case brought by NTP Inc. against Research in Motion (RIM) who came under pressure to settle the case in order to avoid an injunction that may have forced closure of their BlackBerry service. In a complicated settlement, they ended up paying NTP Inc. over $600 million.   In another case pending, an N.P.E called Lodsys, is suing many companies involved in Iphone app development on the basis of a controversial patent they own that purports to cover buying things from within a smartphone app.   A series of very widely drafted patents have had a profoundly disruptive effect within these sectors, as most ongoing innovation cannot but infringe them.  The limited range of materials that that the Patent Office will examine in determining “prior art” appears to have enabled the grant of some uncertain patents of ambitiously drafted scope.

Defensive Patent Strategies

Defensive strategies are perhaps best illustrated by large technology companies amassing software patents (usually by purchase or by expensive membership of patent portfolio companies) not for their fundamental innovative value, which may be highly suspect, but for their potential in defending legal actions brought by those exercising the aggressive strategies referred to above   Earlier this year, 6,000 patents of the tech company Nortel were put up for auction as part of the company’s liquidation.  Silicon Valley’s biggest companies entered into a bidding war for this patent portfolio, and it eventually sold for $4.5 billion to Apple and a consortium of other tech companies including Ericsson and Microsoft, the largest patent auction ever. Google’s bid for the Nortel patents was unsuccessful, but this summer it successfully purchased Motorola’s mobile phone activities for $12.5 billion. Google spent this vast sum in part because they acquire over 17,000 software patents under the purchase.   Amassing these arsenals of patents is rarely about pursuing actual lines of innovation but using them as a shield against litigation (often by arguing the litigant has itself infringed the defendant’s patents) or as a bargaining chip in cross licensing negotiations (we will license you our patents if you license us yours and drop all threats, or we will reach an agreement to pool them).   Cross licensing arrangements of course are rarely available to innovative small and medium size enterprises (SMEs), on the basis that they can’t usually afford to hold these arsenals, and, in any event, the offer to cross license will rarely be of interest to an NPE pursuing an aggressive patent action because they do not require the licensed use of the defendant’s patents.

Higher Transaction Costs, Reduced Innovation

In short, in fast moving sectors, the burden of patent searches, clearance and licensing, together with the risk of litigation has created an environment of high transaction costs, barriers to entry and, most likely, reduced innovation.   The situation in the US is worse than in Europe where there are certain restrictions operating on the types of computer program that may be afforded patent protection and also restrictions on the patentability of business methods.  The US Congress will shortly be considering certain reforms to the patent system but few commentators believe that the problems referred to above will be adequately addressed.  

Prior Innovative Leaps not Associated with Intellectual Property Rights

It is interesting to consider the profound innovation that characterised these sectors at an earlier time before they were characterised by intellectual property rights.  Bill Gates has spoken almost nostalgically of these times noting that “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today”.   Prior to 1981 it was not possible to patent software at all in the US (see Diamond v Dier 1981 and also 1994 re Alapat).  Graphical user interfaces, widgets such as buttons and icons, search algorithms, font displays, databases, compilers, assemblers, linked lists, word processing, computer languages and numerous other innovations that have generated inestimable growth and a flowering of follow-on innovation all occurred outside of patent protection because they occurred prior to 1981.  Had these innovations been locked down under the patent burdens described above for the full 20-year patent duration it seems probable that our computer and ICT sectors would be nowhere near where they are today, and yet we risk creating exactly such a stifling scenario for the next 20 years.   Fortunately, some important software innovations made even since 1981 have escaped the patent stranglehold by virtue of the fact that their developers didn’t have the resources or inclination to attempt to patent them; perhaps one of the most significant examples being the web browser, first developed not by Microsoft but by NCSA, who put the NCSA Mosaic browser on the market in 1993.  Similarly, the open-source software movement has ensured a continued environment free of intellectual property monopolies, an environment where competition determines the allocation of resources and revenues and innovation is maximised.  What is interesting about the open source movement is how despite the lack of monopoly controls over reselling it commercially, powerful profitable companies still emerge within the movement.   (Boldrine and Levine 2005). 

Old Myths Examined

The recent dissatisfaction with the operation of Western intellectual property systems in relation to enhancing innovation, has led some commentators to review the history of intellectual property and innovation.  Old myths have been re-examined in the light of new understandings.  For example, the heroic inventor of the stream engine, James Watt, has been subjected to the scrutiny of two economists, Michele Boldrin and David Levine (“Against Intellectual Monopoly, 2005).  They conclude that the patents granted to Watt actually served to slow down innovation and the development of industrial society.  Watt was shown to be aggressively using his patents to delay and inhibit rival development of the engine.  By his refusal to enter into licensing agreements, innovations that were superior to the patented steam engine technology were held back from market until the expiry of Watt’s patents despite having been developed very soon after Watt’s innovations (and in some cases prior to them, but frustrated by Watt’s superior use of the legal system).   Boldrine and Levine examine many other examples of IPRs holding back innovation, for example in the agriculture sector.   Before 1930 patents were not granted in this sector, and yet the advances in agriculture enabled most agricultural workers to move from the land to industrial sectors, such was the increased agricultural innovation and productivity in this pre-patent period.  After 1930, patents could be granted for only a narrow range of plants, and it wasn’t until the 1970s that patents were extended to a wide range of plants, and then in the 1980s extended to biotechnology.  The authors studied total factor productivity in the sector throughout this period and found no increase after the granting of enhanced patent protections, and note that the astounding increases in corn yields actually levelled off.

After examining many sectors the authors find an almost unlimited number of cases that leads them to question the relationship between patents and innovation.  Added to the already existing substantial body of research that questions the relationship between international patent enforcement and economic development, and this work raises serious questions about our reliance on intellectual property law systems that may actually be damaging our long term abilities to innovate and grow.

Innovation Reconsidered

When Isaac Singer invented the sewing machine he innovated in ways that didn’t just provide us with the sewing machine, but a whole new interface for consumption of his product.  By understanding the cultural context of his invention, he effectively invented the instalment plan and the “trade-in”, both novel methods of selling to women.  It seems likely that the most valuing-adding forms of innovation will increasingly embody this aspect of inventive technology being harnessed to a greater understanding of the cultural context of the technology. “Code is culture” may be the refrain we need to align ourselves with, rather than traditional notions of backroom, top down invention, and restrictive IP regulations.    

 

Pete Dyson

Barrister

Senior Lecturer London Metropolitan University

Founder of The Future Music Business Research Unit

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