June 4, 2021
There is bipartisan support for the view that the United States should invest in preserving its competitive advantage as a global innovation leader. There is bipartisan support for the view that the United States should take action to address the risks to competition posed by technology platforms. Yet there is virtual bipartisan silence on doing anything to bolster the United States’ intellectual property (IP) system after almost two decades of judicial, legislative, and regulatory actions to weaken it. Some are even advocating to weaken it further.
These three views stand in logical contradiction. If the United States wants to preserve its global advantage as an innovation leader and maintain competitive conditions in the digital economy, then it is necessary to restore a robust foundation of IP rights in content and technology markets.
Secure IP Rights Support U.S. Innovation Leadership
If it is agreed that U.S. firms that invest in innovation should have effective means to deter imitators abroad, then it follows that IP rights should be preserved at home.
Yet U.S. courts are now one of the least hospitable venues for patent owners. Since the enactment of the America Invents Act (AIA) in 2011, patent owners must commonly litigate in federal district court and defend against validity challenges at the Patent Trial & Appeals Board (PTAB), where large tech firms that lobbied for the AIA are among the PTAB’s most frequent users. Firms that seek to enforce patents on software-enabled innovations often have no remedy as courts increasingly deem those innovations to be patent-ineligible “abstract ideas.” In American Axle & Manufacturing v. Neapco Holdings LLC, a case with a writ of certiorari pending before the Supreme Court, the Court of Appeals for the Federal Circuit even denied patent eligibility to an industrial manufacturing process that falls well within the historical scope of the patent system.
The decline in patent enforceability has resulted in the increasing and alarming normalization of infringement as a matter of business practice.
Consider the consequences that follow from courts’ tendency to deny injunctive relief to expanding categories of patent owners since the Supreme Court’s 2006 decision in eBay Inc. v. MercExchange LLC. Without any serious risk of an injunction that would require withdrawing a product from the market, a well-resourced infringer is free to profit from an innovator’s technology during a protracted litigation process that can take years and consume millions of dollars in legal fees. Even if the infringer loses, it may simply pay a reasonable royalty award that approximates the fee it had been offered originally. Alternatively, a resource-constrained patent owner may agree to settle on below-market terms to avoid the costs and delay of litigation.
In content markets, U.S. courts have devalued original creative works by developing a generous understanding of the fair use doctrine. In April 2021, the Supreme Court endorsed this expansive understanding of fair use in Google LLC v. Oracle America, relieving Google from liability for having copied over 11,000 lines of code developed by a direct competitor, even though a license had been offered. Under courts’ broad interpretation of the tailored safe harbors that the Digital Millennium Copyright Act provides to shield platforms against indirect infringement liability, content owners must engage in a cat-and-mouse game in a futile attempt to deter mass infringement. While content owners earn revenues from licensed streaming platforms, the terms of those licenses are inherently distorted by the shadow zero price at which content is typically available through unlicensed sites.
Secure IP Rights Promote Competitive Markets
If it is agreed that the rise of “Big Tech” raises significant competitive concerns, then it follows that IP rights should be strengthened to level the playing field between, on the one hand, leading platforms and device manufacturers and, on the other hand, the entities that originate the content and technology inputs without which platforms and smartphones would have little value for consumers.
The notion that strengthening IP rights can increase competitive intensity runs counter to the traditional dichotomy between IP and antitrust law. Yet this assertion is perfectly consistent with the fact that large tech firms have mostly (and successfully) advocated for weakening both patent and copyright protections since the inception of digital markets.
This preference for weak IP rights reflects the underappreciated fact that platforms, device makers, and other entities located at intermediate segments of the digital ecosystem mostly use, rather than originate, content or tech assets. In the search engine market, “free IP” eliminates the input costs borne by search providers, which make available others’ content to attract users, who in turn attract advertising dollars. In the smartphone market, antitrust policies that seek to limit the royalty rates or other terms that can be sought by patent owners on “standard-essential” wireless technologies both lower input costs for device makers and facilitate platforms’ ability to extract value through the search, app stores, and other online services where they have a competitive advantage.
Weakening IP rights in digital markets effectively transfers wealth from the originators of content and tech assets to the platforms and device makers that assemble those assets in delivering a product or service to consumers. When IP rights are difficult to enforce and the effective “price” of infringement falls, firms that specialize in innovation have reduced ability to secure terms that appropriately reflect their contribution to the digital ecosystem, which in turn reduces their ability to attract investment capital. This runs counter to the public’s long-term interest in preserving both incentives to innovate and incentives to invest in innovators. Enhancing the enforceability of IP rights would mitigate these counterproductive effects and, at the same time, provide a more surgical means to facilitate entry and enhance competitive conditions in digital markets, as compared to the blunt and error-prone structural interventions under antitrust law that have been widely proposed.
Evidence from U.S. Technology History
This policy analysis does not rest on mere theory. Over a century’s worth of U.S. economic and legal history strongly supports the counterintuitive view that weakening IP rights can raise entry barriers and entrench incumbents in technology markets.
From the late 1930s through the 1970s, courts were reluctant to enforce patents, and antitrust agencies widely issued compulsory licensing orders against some of the largest tech firms. Contrary to expectations, these policies neither promoted entry nor challenged incumbents such as AT&T, IBM, and RCA. Private research and development (R&D) activity principally took place in the research labs of large corporations throughout this period. Moreover, even R&D activity at the large corporate labs relied on exceptionally and unsustainably high amounts of government funding and declined once that funding was inevitably reduced. As suggested by the widely observed decline in U.S. innovation performance during the 1970s, a weak-patent regime does not appear to provide the model for a self-sustaining knowledge economy over the long term.
Critically, this large-firm skew in the U.S. innovation landscape and dependence on public funding were corrected once patent protections were reinvigorated in the 1980s with the passage of the Bayh-Dole Act and the establishment of the federal circuit. These steps were followed by the robust entry of venture capital (VC)–backed firms into high-tech markets such as biopharmaceuticals and semiconductors. Far from “closing down” markets and protecting incumbents, as is commonly assumed, patents “opened up” these markets by enabling entry by smaller R&D-focused firms. With a strong IP foundation in place, private capital entered to supply the monetary fuel for startups that either challenged or entered into cooperative relationships with large, integrated incumbents.
Remarkably, the same conjunction of secure IP protection, private capital, and tech startups characterized the late nineteenth and early twentieth centuries, a period during which investor-innovator partnerships, often followed by licensing and other relationships with larger firms, similarly supported the development and commercialization of breakthrough technologies. This was especially the case in radio communications, which relied on the innovative genius of individual inventors, who in turn relied on the patent system to monetize their inventions on a commercially feasible basis by entering into transactions with industry leaders such as AT&T, GE, and Westinghouse. Both periods support the counterintuitive proposition that robust IP rights can offer a “win-win” policy tool that promotes innovation investment and competitive markets.
Reconsidering the IP-Skeptical Policy Consensus
Today U.S. innovation policy stands at a critical juncture.
Over the past two decades, virtually every branch of the federal government has devalued the knowledge assets that lie at the heart of content and technology markets. The result is an increasingly distorted innovation ecosystem that favors platforms and other firms that operate integrated product-and-services bundles, while disfavoring R&D-focused entities that rely on IP rights to structure cooperative relationships with firms that excel in the production and distribution functions without which a product cannot reach market.
While certain firms and industries can adapt to a weak-IP regime, this often requires adopting secrecy-based strategies, which restrict technology dissemination, or favoring lower-cost, lower-risk, and shorter-term innovation projects that can be monetized rapidly. In the biopharmaceutical industry, there is no known business model that can support rational investment of private capital without confidence in the patent system to protect clinically and commercially successful innovations. Consistent with these concerns, a 2020 report (by the Alliance of U.S. Startups and Inventors for Jobs) on investment trends among venture capitalists found that the decline of patent enforceability has adversely impacted VC firms’ investment choices. Specifically, VC investment has shifted dramatically away from patent-intensive fields such as medical devices and biopharmaceuticals and toward less patent-intensive fields such as social networking and consumer finance.
This devaluation of IP rights is a curious policy choice since the United States’ innovation capacities are among its crown jewel assets. Current legislative proposals to expand R&D activity rely mostly on a top-down approach that deploys exceptional amounts of taxpayer dollars through grant-making and other administrative processes. While this mechanism is appropriate for certain types of basic research that private firms are unlikely to undertake, it is far more costly and prone to misallocation and political influence as compared to bolstering IP rights, which would deliver the property-rights foundation that is necessary to induce private capital to invest in the high-stakes, high-cost innovation projects that often deliver the highest social return. If the United States wishes to preserve its position as an innovation leader and facilitate the ability of entrepreneurial innovators both to challenge and partner with incumbents, then adopting a renewed commitment to IP rights would be a sensible place to start.
Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law. This contribution is based in part on his recent book, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford University Press, 2021).
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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