The Good, the Bad, the Patent System

Apple's Patent War, Bravo DesignWith the first of many lawsuits between Apple and Samsung over, resulting in a $1.05B verdict awarded to Apple pending a potential appeal and a million miles of red tape, this decision represents just one battle in a war being fought between the two companies in courts around the world, which will likely continue on for years to come. For those who haven’t kept up with the suing/countersuing fiasco, in as few words as possible, Apple and Samsung, referred to jokingly as “Samesung,” are currently embroiled in 50 some odd lawsuits in 10 different countries where each alleges that the other has willfully infringed on proprietary tech and design features. At the behest of Bravo Design, Inc.’s esteemed web developer, Matthew, we’ve decided it’s time we talk about patent law and consider the direction in which it’s headed.

To provide some background on the subject, the word patent comes from the Latin litterae patentes, meaning an open letter, and it refers to those used by medieval monarchs to confer rights and privileges (Reuters). And though patents have been used in various countries at various times, they’re generally attributed to having first been established in Italy with the Venetian Statute of 1474, which encouraged “men of great genius, apt to invent and discover ingenious devices” to enrich society by sharing their genius. It goes on to say, “if provisions were made for the works and the devices discovered by such persons, so that others may see them could not build them and take the inventor’s honor away, more men would then apply their genius, would discover, and would build devices of great utility and benefit to our Commonwealth.” In return, the government would grant a monopoly for a limited amount of time that excluded all others from making, importing or selling the newly patented invention. The idea is that during this exclusion period, a patent holder would be able to recoup exorbitant research and development (R&D) costs and, eventually, turn a profit. Today, in an industry like pharmaceuticals, though somewhat contentious, the full cost of bringing a new drug to market from discovery through clinical trials to approval is astronomical with estimates starting from hundreds of millions of dollars to well past the $1 billion mark. In regards to individual inventors, well-before Forbes appraised his net worth at around £1 billion, James Dyson designed 5,127 prototypes before he perfected the cyclone vacuum cleaner and completed the DC01, the fastest-selling vacuum cleaner ever made in the United Kingdom. How long did that take? 15 years.

So if patents protect and encourage innovation by providing incentives, which in turn benefits the population at large, what’s the problem?

Well, part of that answer goes back to fundamental economics, which states that monopolies are bad for society. Generally speaking, monopolies typically maximize their profits by producing fewer good and selling them at a higher price, which creates a deadweight loss (DWL) to society as output is well below its optimal level. In a Pareto efficient economic allocation, no one can be made better off without making at least one individual worse off. If we thought of this in terms of pizzas where the going price is $10, the demand is going to decrease from a high demand if they’re free to zero demand if they cost $100. In a perfectly competitive market with many pizzerias, they’re priced at $10, and everyone who receives more than $10 worth of utility (economics’ speak for satisfaction) will buy one. But if there’s only one pizzeria, they’re probably going to charge whatever nets them the greatest profit. If hypothetically that’s $50, that excludes every consumer who receives less than $50 worth of utility from a pizza, which would pretty much be everyone I know. The DWL is then the economic benefit foregone by these customers due to monopoly pricing.

Michael Heller dubbed the term the Tragedy of the Anti-Commons to describe the phenomenon in which useful and affordable products are prevented from entering the marketplace. In economics, the Tragedy of Commons refers to the exhaustion of shared resources (e.g., clean air, water, arable land, etc.) by individuals acting out of their own self-interest, despite their knowing and understanding that doing so is suboptimal in the long-run. In the Anti-Commons, the opposite occurs. When lots of property owners have to gain permission before a resource can be used, the result is that the resource tends to be chronically under utilized. This can happen when patent thickets, “dense webs of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology,” stifle innovation (Carl Shapiro).Patent System, Bravo DesignWith regards to technology, because the marketplace changes so quickly, developments depend on the ability to freely and quickly reuse and combine to build on. To programmers and developers, proprietary software patents are about as appealing as patents on part of the English language would be. It prevents not only innovation, it leads to lock-ins that few can use, and no one can innovate on without licensing fees that drive up the cost of creation. The Honorable Richard A. Posner, the judge who famously dismissed Apple’s suit against Motorola, warns that: “This prospect gives rise to two wasteful phenomena: defensive patenting and patent trolls. Defensive patenting means getting a patent not because you need it to prevent copycats from making inroads into your market, but because you want to make sure that you’re not accused of infringing when you bring your own product to market. The cost of patenting and the cost of resolving disputes that may arise when competitors have patents are a social waste. Patent trolls are companies that acquire patents not to protect their market for a product they want to produce — patent trolls are not producers — but to lay traps for producers, for a patentee can sue for infringement even if it doesn’t make the product that it holds a patent on.” Horace Dediu sums this up best when he describes “legal hit squads” as what “sustains incumbents rather than facilitate[s] entry.”

None of this is to say that the patent system should be abolished altogether. That probably wouldn’t be the right answer even if it were an option, but there are some questions that need answering like, how much incentive is required to induce creators into innovating? Are 20-year patent terms really appropriate given the rate at which technology evolves? And lastly, and maybe most importantly, does the problem lie in patent law itself or with what’s allowed to be patented? Despite our anxieties and our concerns about the economy, unemployment and competition elsewhere, we should be proud that our country is a leader because of its ability to create and innovate better than any other, and that has a lot to due with how we incentivize inventive activity because innovation lays the foundations for future growth. We just need to figure out how to best protect that for inventors and consumers alike.

Photo Credits:
Bloomberg Businessweek, Smartphone Data, IHS Isuppli Research, Bayraba.com, Techdirt and ThePatentBook.com

Bravo Design Inc.
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Article published: September 25, 2012

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