Patent trolls (continued)

It took a little while but others are getting in on the patent troll discussion. A few weeks back, in the light of the Blackberry/NTP settlement, I speculated whether patent trolls were receiving a bad rap. The argument likened them to middlemen who saved legitimate innovators time in securing intellectual property rights.

Now the New York Times and Wall Street Journal have gotten in on the act. The WSJ points to the general flaws in the patent system including the process of patent examination. Specifically, it points out that, in many respects, most universities are like patent trolls — securing patents but not commercialising innovations. Indeed, in that respect, Universities are exactly like trolls in that they have fortunately gone and secured IP protection. In the past, their innovations might not have even been brought to that stage. And without that commercialisers would have no chance in securing IP before launching products (as the ideas would already have been deemed to have been invented).

Patent does not equal market power (for tying)

The US Supreme Court delivered its judgment in Illinois Tool Works, Inc v. Independent Ink, Inc. That case was over a tying matter in industrial ink printers but ended up in the Supreme Court over the presumption that having a patent equated to a finding of market power (in this case, for Illinois Tool Works).

The Supreme Court decided that for tying cases, this presumption no longer holds and the plaintiff will have to prove market power. Shouldn’t be too difficult in this one where the plaintiff has a 90% market share with lots of entry barriers.

Defending the troll

Today brings news that the ‘Blackberry’ case has been settled. This appears to be the end for the long running dispute between Blackberry’s owners, RIM, and the owners, NTP, of key patents that RIM appear to infringe. The case brought interest in the idea that a valuable service may have been shut down in the interests of ‘protecting the intellectual property system.’ But it was also of interest in that to outsiders, NTP appeared to do very little innovation — they patented an idea early — while RIM sorted out all of the technical issues while themselves coming up with the idea. Their only crime: they came up with it late.

NTP is described as a ‘patent troll.’ Wikipedia define a patent troll as: “an individual or company with a patent portfolio containing important, fundamental software patents that it never intended to commercialize. ” In order to become a troll, therefore, you do have to come up with various ideas and form them sufficiently to receive a patent (including incurring reasonable costs in that process). Then essentially you speculate on someone who has more technical skills coming up with a similar idea, working out the technical kinks, and then being forced to license the patent from you. Alternatively, innovators might realise a patent exists and pre-license it. Either way, the troll makes money from license fees.

In this light, patent trolls appear to be the worst kind of intermediary. They control key assets and hijack an otherwise working innovation process; denying profits to those who really do the work.

But this description should at least give us pause for a moment: this is the usual attack on any intermediary. Intermediaries have had a bad name historically precisely because they profit where people perceive they create no value. But, in reality, it is often the case that they are providing value. Usually, they are collectors of information, they are firms that match buyers and sellers more efficiently and they face competition which would eliminate their profits should they really provide no value.

So what of the patent troll. I am going to speculate here on where their value might be. (But let me emphasise this is speculation and there may be reasons they deserve our scorn as artifacts of broken property rights system).

Here is the argument. Getting a patent is costly. For many smaller firms they face real issues as to whether they should proceed with an innovation and develop it given that they might not be able to secure a patent. To do so would mean they would have to wait up to five years to find out. This might be sad when they have competencies to technically develop a product that is based on an idea that is more obvious.

Here is where the patent troll may provide a valuable function. Without regard to technical details, it speculates and applies for many patents. Most of these are not valuable but some are ones that others may wish to develop. Even with competitive pressure, when it licenses those patents, it must generate a fee that covers the costs of the non-valuable ones as well. So it may seem like their fee demands are high for a given patent but not so given that they have saved the would-be developer five years of waiting and permit development without the fear of potential weak property rights.

In summary, patent trolls are speculators. They buy IP and may speed up the development process overall by reducing innovator risk. Of course, if the wait to resolve patent application uncertainty doesn’t really constrain the innovation process, then patent trolls are just that, opportunistic trolls.

Freedom to the Regions!

The House of Representatives Standing Committee on Legal and Constitutional Affairs today released its report on the Review of Technological Protection Measures Exceptions. This was a review of the access controls some copyright owners place on copyrighted materials in light of the Australia-USA Free Trade Agreement.

The significant finding was that region coding be not supported. From the press release:

“The Committee was not persuaded that region coding is essential for piracy prevention or that it is a genuine copyright protection,” Mr Slipper said. “Nor is the Committee interested in further inhibiting the ability of people to enjoy lawfully acquired copyright material.” “The Committee has therefore concluded that the unauthorised circumvention of region coding TPMs should not attract liability under the new scheme.”

This is great news. I have always thought that region-coding of DVDs and computer games was taking copyright too far and allowing forms of price discrimination unrelated to efficiencies and competition. Here is a link to a paper by Emily Dunt, Stephen King and I on DVDs. Here also is a link to my submission to the review.

Oh Honestly!

Today’s Australian Financial Review (“Trouble brews for rival brands”) reports that Honest Tea (Australia) has been portrayed by the NSW Small Business Minister, David Campbell, as a “big American corporation” threatening “the little guy.” The remark has to do with Honest Tea’s concern about an Australian rival’s (Springleaf Tea) use of the domain name honesttea.com.au to promote their own product.

Now I don’t know any more about the dispute than is contained in the press but I do know that Honest Tea is not only not a big corporation but is, in fact, the very epitomy of small, entrepreneurial firm competing with big corporations — American and otherwise. The fact that they are in a position to export to Australia is a testament to what smaller businesses can do. They do not deserve the scorn of Ministers there to protect small business interests.

[Interest Disclaimer: Professor Barry Nalebuff, Honest Tea’s founder and Chair, has visited Melbourne Business School on several occasions and his book Coopetition is required reading for MBAs. We both serve as advisors to Rismark International. Steve Hibbard works at Melbourne Business School. All views here are my own.]

Rembrandts in the playroom

Last year, in a piece for The Age, I wrote about what appeared to be a change at the Lego company as to how they received user innovations.

That article talked about the Lego Factory concept that had users design new lego sets for a share of the royalties. This was a good example of user-based innovation as described by MIT’s Eric von Hippel in his book Democratizing Innovation.

It turns out that that was just the tip of the iceberg according to February’s Wired. User-based innovation has appeared to have infiltrated the whole innovation process at Lego.

That wasn’t a US invention!

Thanks to www.westwingtranscripts.com I was able to read the following exchange in the live (but fictional) debate episode between Republican Vinick and Democrat Santos in The West Wing. I love the show but this gaff regarding who invented ulcer treatments really irked me.

Here is the relevant bit:

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SAWYER Senator, let me ask you about a related issue which is prescription drug prices and those prices have been going up at a rate more than double the inflation rate. So, would you favor re-importing American drugs from Canada where they are much cheaper?

VINICK You know why drugs are cheaper in Canada; because the government controls the price. Do you know how many life-saving drugs are invented in Canada? None, because the government controls the price.

SANTOS Well, Canadian laboratories have helped to create some very important drugs.

VINICK No, nothing like the miraculous drugs that the American pharmaceutical industry has given to the world.

SANTOS Given to the world? I guess you haven’t seen the price list lately, sir.

VINICK Not long ago, if you were HIV positive in this country you were marked for death. Not anymore. And that’s thanks to our pharmaceutical companies. You know, in the 1970s, the most common cause for surgery was ulcers. Now, you get an ulcer, you take a pill. Is it an expensive pill? Yes. A dollar does seem like a lot to pay for one pill. But how does a dollar a day sound compared to a $30,000 surgery bill? So, are prescription drugs expensive? Yes. Do they save us from getting hit with much more expensive hospital bills? Yes. Do they save lives? Yes. American pharmaceutical companies save us money and they save lives and the Democrats can not stop attacking them.

SANTOS Why should the pharmaceutical companies get protection that no other American industry gets? We can buy anything else from Canada; why not prescription drugs?

VINICK Because the Canadian price controls are unfair to American companies.
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Now there is alot to think about here but the bit I didn’t like was the ulcer example (highlighted).

The Republican candidate was batting for protection of pharmaceutical company interests (the usual, the US people have to pay more than Canada so the companies will have an incentive to develop drugs). But he then cited as a prime example of this: the development of ulcer treatment which is now cured by a simple anti-biotic saving thousands in on-going treatment.

The problem with this example is that this treatment was discovered and developed in Australia using publicly funded research. To make matters worse, just two weeks before the live debate was aired (!), the Australians who discovered this won the Nobel prize (that is Marshall and Warren for “for their discovery of the bacterium Helicobacter pylori and its role in gastritis and peptic ulcer disease”) I am not even sure the treatment is IP protected. So this is hardly a good example of the need to protect US pharmaceutical companies against Canadian imports.

Actually, the Australian PBS system does it all — low prices and protection of innovative returns but that is a discussion for another time.

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