When the Coca-Cola Company decided to release New Coke in 1985, it failed to heed the classic adage, “if it ain’t broke, don’t fix it.” Coke abandoned a product that had produced exceptional results for it, and much happiness for consumers, only to revert back after the mistake was made and millions of dollars were needlessly wasted. The venerable patent system in the United States is in danger of succumbing to the same fate.
Our patent system has long ensured that inventors are rewarded for their productive labors, and that investors and firms are rewarded for their labors in taking inventions from the laboratory or garage and converting them into innovative products and services used by consumers. The patent system has thus provided the basic framework for a culture of scientific advancement and commercial innovation that cuts across all industries, making our “invention economy” the most formidable in the world. We led the world in the industrial revolution in the nineteenth century, and we lead the world again in computer and biotech revolutions. Today, we all use patented products and services imagined as only science fiction just twenty years ago.
Yet some people are calling for substantial changes to the U.S. patent system. That would be a grave mistake.
Although the public hears the mantra almost daily that “the patent system is broken,” what we really need is a thorough evaluation of the historic impact the patent system has had on innovation without the negative hype and misinformation that is perpetuated in news headlines or blogs. On December 10, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) will host a workshop that will dive into the workings of what some are calling “patent assertion entities” (PAE), which are firms that acquire and license patents. The FTC and DOJ, as well as most of the invited participants at the workshop, have adopted the “PAE” label as the subject of their critical scrutiny.
The truth is that these firms maximize value in patented innovation, proving again Adam Smith’s classic economic insight that the division of labor is key to the success of a commercial economy. The firms that acquire patents from inventors and license these patents in the market reflect the exact same value-maximizing specialization and aggregation that other firms have long employed in our successful invention economy, such as when firms like 3M or Thomas Edison’s Menlo Park Laboratory aggregated inventors for research and development itself. Patent licensing firms, by better enabling inventors to sell and exchange their ideas, bring the same efficiencies to innovation as the division of labor has done in all areas of a flourishing free market.
Of course, identifying these firms by their business model of patent licensing denies the patent system naysayers the pejorative rhetorical force of their “PAE” label. In fact, patent licensing firms have come under attack in newspaper reports, in blogs, and in academic commentary, prompting the FTC and DOJ to consider whether these patent licensing firms are allegedly undermining the innovation made possible by the patent system. If anything, this reveals the power of rhetoric.
It is important not to rush to judgment based on emotionally-charged headlines about patent lawsuits or misleading articles and blog postings that get wrong even basic facts about the patent system. The prudent approach is to research the issues fully. For instance, few people realize that “patent wars” have been occurring since the invention and patenting of the sewing machine in early nineteenth century, and occurred again with the invention of the telephone, the automobile, the radio, the airplane, medical stents, and even disposable diapers. Many of these patent wars were accompanied by the same end-of-days proclamations that we now hear about the “smart phone wars.” Yet, through it all, the patent system has produced innovation, and we all live incredible lives as a result of today’s patented high-tech and medical marvels.
Weakening intellectual property laws due to negative policy rhetoric, hyperbolic internet commentary, and even extensive lobbying by firms who choose to infringe patents because they don’t want to pay the licenses offered to them by patent licensing firms is irresponsible. The FTC/DOJ workshop on December 10 should be an opportunity to reflect on and evaluate the patent system in better understanding how it produces dynamic innovation, not just in products and services, but also in the many innovative business models that arise from patented innovation itself.
Made available by Truth on the Market.