Do Patents Encourage or Stifle Innovation?

At our recent Union Square Sessions event, we discussed three primary topics relating to public policy and innovation; net neutrality, copyrights, and patents. In this post, I’ll try to summarize the patent discussion and highlight some of the most interesting points that were made. If you’d like to read the transcript of the entire patent discussion, it’s available on our wiki for download here.

I started out the conversation referencing recent blog posts made by Brad Feld and me where we both asked the question – are patents helping or hurting innovation?

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Irwin Gross stepped up to the plate and argued forcefully that patents aren’t the problem. He believes that problem is that there isn’t a liquid marketplace for patents to be easily valued and licensed. He said:

There’s an awful lot of industry innovation and traditional IT innovation going on and being financed today, and it’s a shame that we don’t have a mechanism for enabling the trades of rights of — the notion that because s are complex, we should abolish the property, right, which is sort of the argument against patents, has always seemed to me to be both rational and wrong. Really the answer in a very substantial way is to come up with and innovate, as the Creative Commons folks have, come up with ways to lower the information costs. Come up with valuation models that make sense. They need to be based on first principle. Byron Scholls once told me that the Black Scholls Model isn’t widely used because it’s right. It’s right because it’s widely used. And very similar arguments can be made about the way the copyrights — intellectual property rights generally, to the extent they’re transacted in, are valued. So the argument here or discussion that we were having centers on the question of whether it’s a policy matter or matter of private innovation, we ought to be working to create a market — a market impact rights that enables transparency in , that enables meaningful evaluation so people don’t feel like they’re being held hostage, but that as a result, creates a wide range of s in patents.

Irwin actually made this argument to me in a conversation late one night at the D conference and I’ve been fascinated by it since. However, most of the participants at Sessions weren’t buying it.

Albert Wenger and Peter Semmelhack both blamed it on the patent process. Albert said:

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But I don’t think that’s why the system falls down today. It’s that the process of patenting takes too freaking long and is too broad by a patent office that gets only a quarter of the patent fee and the rest is diverted to other government activities, completely overloaded examiners that get rail roaded, and you know this from your practice, because they get some extra bonus fees if they close out a patent, or if they deny the patent. So they’ll deny the patent so they can then issue them. It’s a ridiculous system. So I think the problem is not with patents, it’s with the process by which they’re getting issued. And you wind up with these things that take 60 months to issue.

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Peter followed several minutes later with this:

Copyrights are sort of easy, because I can write a book and I can put a copyright on it and I got a copyright. Patents, I have to go through the gauntlet of saying here’s some arbitrary third party telling me that this is unique or not. Half the time they don’t know what they’re talking about, and I’m being generous.

Peter and Albert are both entrepreneurs who face the issue of what to do about patents and are incredibly frustrated by the choices they have. Dave Morgan is another entrepreneur who is frustrated by the patent system. Dave argued that the lack of clarity, transparency, and good faith in the system is equally problematic:

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It’s lack of clarity. I mean, in copyright protect and copy, and in most cases you know that someone owns something, and you can tell that a piece of that got over here, but the problem in the patent world is that you don’t know necessarily — like particularly in business methods and around technology, you don’t know actually what something — whether something actually infringes or doesn’t infringe, and I think that the challenge for an entrepreneur, for start-up companies is you have companies out there that are taking patents and reusing them very destructively or very offensively. So someone will get some arcane — someone will buy or find some arcane little patent, and then will combine with a law firm, and then you’ll see 100 letters go out and they’ll find five companies that they’ll sue strategically and work there way up. Right now, I just ran into one where a company, Nielsen Netratings, basically claimed the use of all Java Script, and they’ve also gotten $20,000,000 in several settlements, and what they did was attack a company in the S1 process. Well, with what injunctive relief could do to a company that’s in an S1 process, writing a check for $15,000,000 over several years was worth it to get the 80 million dollar check out of the S1.

Habib Kairouz reminded everyone that while patents may be problematic in the information technology business (Brad Feld’s point in his post), they are critical to the funding environment in the biotechnology business:

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But the real question is whether patents are actually helping innovation or helping the lawyers, and I would argue that in the pharmaceutical industry, biotechnology industry, is absolutely helping innovation, and we wouldn’t even have the biotech industry ….. It’s not just a FDA problem. It’s actually you have to take the drug through pre-clinicals. You have to put them in a limited number of people. You have to make sure it’s safe before you disseminate it. It’s $100,000,000 with a 10 percent chance of approval at the end of the day. No one in their right mind would ever fund something like this, unless it had a pot of gold at the end that if I do it for 10 companies, nine of them would go bankrupt, but that one company out there would make the return. So the bottom line is that there wouldn’t be investment in the industry if it wasn’t for the patent office.

My takeaway is that the patent system has value, particularly in industries where there are lengthy development cycles and high capital costs, but in the information technology industry, I see very little value to the patent process and system. Maybe we can get to a liquid market in patents, but only if there were some forcing mechanism. As I said at one point in the discussion:

But the problem with all of that — and I thought a lot about this since you sort of posed this to me a couple weeks ago — I think we would all welcome liquid marketplace in intellectual property around patents, but the reality is whether somebody — whether it’s IBM or Nielsen or an operating business as opposed to a financial entity owns a patent, they don’t actually care that much about extracting the financial value of that patent. They care about the operating advantages that it gives them in the marketplace to operate a monopoly. So there’s no incentive for them to license that patent. They frankly would rather not license that patent. They would rather make it such that everybody not compete with them.

It was a great conversation. Again, if you’d like to read the entire patent conversation (it’s only 16 pages), you can download the patent discussion transcript here.