How Patents Enable Mavericks and Challenge Incumbents

By Jonathan Barnett
January 24, 2021

“Contrary to conventional wisdom, over a century’s worth of economic history suggests that patents tend to lower entry barriers and enhance competition by facilitating entry by entrepreneurs who would otherwise have difficulty attracting the outside investments and business partnerships that accelerate progress on the commercialization pathway.”

https://depositphotos.com/69798509/stock-photo-woman-holding-microphone.htmlAdvocates for “patent reform” have long argued that reducing patent protection will open up markets and accelerate innovation by lowering entry barriers and expanding access to existing technologies. Yet, over 15 years of patent reform since the landmark 2006 decision in eBay, Inc. v. MercExchange LLC, followed by enactment of the America Invents Act in 2011, we have witnessed the rise of a technology ecosystem led by a handful of dominant platforms. In my recently published book, Innovators, Firms and Markets: The Organizational Logic of Intellectual Property, I show that this outcome should not be surprising. Almost 120 years of U.S. patent and antitrust history (1890-2006) indicate that reducing patent protection can often shield incumbents against the entry threats posed by smaller firms that have strong capacities to innovate but insufficient resources to transform innovations into commercially viable products and services.

Patents and the Inventor-Entrepreneur

A secure patent portfolio enables a startup to monetize its innovation through relationships with investors, producers and distributors, rather than having to set up an independent technology supply chain to reach the target market. Edwin Armstrong, the inventor of FM radio technology, earned returns on his patented invention through licenses to equipment manufacturers. The same strategy was pursued by Ray Dolby, the inventor of the ubiquitous audio system technology in theatrical exhibition and consumer electronics markets. The same is true of the founders of Qualcomm, who elected to focus on chip design and monetize their innovations in 3G and 4G communications through licensing relationships with device producers. When patent protection is weak (as it was from the late 1930s through the 1970s), these contractual monetization strategies are foreclosed and innovation retreats to the research labs of industry leaders that can earn returns on R&D within an integrated corporate infrastructure (think GE, RCA or AT&T’s Bell Labs).

Of course, Bell Labs and other corporate labs were responsible (although often assisted by abundant federal funding) for fundamental technological innovations during the postwar decades. However, new product launches at AT&T were infrequent, product diversity was limited, and the firm enjoyed a near-monopoly over the telephone equipment and service markets. That might explain why Bell Labs’ scientists invented some of the fundamentals of cellular telephone communications, but AT&T management failed to bring a successful product to market. The explosion of new communications products and services and the proliferation of new firms following AT&T’s breakup, which coincided with the restoration of a robust patent regime in the early 1980s, contrasts with the delayed commercialization and slow turnover in market leadership under the weak patent policies of the postwar decades.

Contrary to conventional wisdom, over a century’s worth of economic history suggests that patents tend to lower entry barriers and enhance competition by facilitating entry by entrepreneurs who would otherwise have difficulty attracting the outside investments and business partnerships that accelerate progress on the commercialization pathway.

When patent protection has been strongest (the late 19th and early 20th centuries and then the late 20th and early 21st centuries), robust innovation ecosystems have emerged in which outside risk capital funds small-firm innovators, who then often partner with larger firms to complete the commercialization process. Consistent with this historical tendency, the percentage of small firms in the U.S. innovation economy increased significantly after patent protection was reinvigorated with passage of the Bayh-Dole Act in 1980 and the establishment of the Federal Circuit in 1982. Consider the following data point: in 1966, when patent protection was weak, small firms were responsible for about 5% of private R&D expenditures; in 2006, when patent protection was strong, that figure had risen to almost 25%.

Patents and the Innovation Division of Labor

Promoting innovation by smaller firms, and other entities that excel in R&D and product development but not in production and distribution (for example, the technology transfer division at a research university), operates to the benefit of the economy as a whole.

A vivid illustration is provided by the famous Cohen-Boyer patent for recombinant DNA technology. The technology was developed by scientists at the University of California and Stanford, patented and then initially commercialized through license agreements involving Genentech, then a startup, and Eli Lilly, its production and distribution partner. The result was the first synthetic form of human insulin, released in 1982. Hundreds of additional licensing relationships between Stanford and other firms have yielded a myriad of medical products that have improved human well-being. The simple combination of IP rights plus contract enabled the market to extract the social value from a technological breakthrough.

These symbiotic relationships among academia, startups, and large pharmaceutical firms are now a familiar feature of the biopharmaceutical landscape (see, for example, the partnership between Pfizer and BioNTech to develop a Covid-19 vaccine) and reflect the efficient division of labor between small-firm innovators and large-firm implementers. These same types of relationships run throughout the semiconductor industry, in which R&D-intensive chip design firms partner with capital-intensive chip foundries. In both life sciences and IT environments, IP rights structure cooperative relationships that bring together innovators with sources of capital and commercialization expertise. Without a secure patent system in the background, these firms would have difficulty securely exchanging information and entering into partnerships that can significantly accelerate the timeline from lab to market.

Taking A ‘First-Best’ View of the Patent System

Much of the judiciary and academic and policymaking communities have long characterized patents as a necessary evil that may sometimes encourage innovation but at the price of a “patent tax” that increases entry costs and inflates prices. If that were correct, it would be sound public policy always to minimize the scope of patents. With some exceptions, that is the path that has been advocated by many large technology firms and pursued by the Supreme Court, Congress and antitrust regulators since the mid-2000s. Over a century’s worth of U.S. patent history challenges this “second-best” view of the patent system. Far from depleting value, patents create value by enabling mavericks to capture returns on innovation and disrupt markets that might otherwise remain dominated by incumbents.

 

Image Source: Deposit Photos
Author: ginasanders
Image ID: 69798509

The Author

Jonathan Barnett

Jonathan Barnett is the Torrey H. Webb Professor of Law at the Gould School of Law at the University of Southern California. He is the director of the law school’s Media, Entertainment and Technology Law Program and specializes in antitrust, intellectual property and corporate law and policy. He has published widely in academic journals, regularly comments on IP and antitrust policy, and is the author of Innovators, Firms and Markets: The Organizational Logic of Intellectual Property (Oxford University Press 2021).

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 13 Comments comments.

  1. Pro Say January 24, 2021 5:30 pm

    “Far from depleting value, patents create value by enabling mavericks to capture returns on innovation and disrupt markets that might otherwise remain dominated by incumbents.”

    Pssst . . . Big Tech (especially Facebook, Google, Apple, Amazon, Netflix and a handful of others) know this only too well; and hate — absolutely hate — that such is the case.

    But what they love — absolutely love — is their ability to pull the wool over the eyes of the majority of the members of Congress.

    Members who — to date — have declined to restore American innovation leadership . . . by restoring patent eligibility to all areas of innovation (without adding Big-Tech-loving new innovation-crippling patent hurdles).

    Congress: You say you’ve had it with these Big Tech companies.

    When are you going to do something about it besides fine them . . . by reclaiming your Constitutional rights which the Supreme Court and Federal Circuit have usurped.

    When?

  2. Pro Say January 24, 2021 8:56 pm

    “The Chinese economy brought in more foreign direct investment than any other country last year, knocking the United States from its perch atop the list.”

    — CNBC

    https://www.cnbc.com/2021/01/24/china-received-more-foreign-investment-last-year-than-us-un-says.html

    Congress, Biden administration, SCOTUS, Federal Circuit:

    As America continues to slide . . . China continues its ascension.

    One big reason why?

    Unlike in the U.S., China provides full patent protection for all areas of innovation.

    Full protection. All innovations.

  3. MaxDrei January 25, 2021 4:02 am

    Good article from a law professor. But I’m disappointed that he does not address the “hard question” of where to draw the line on eligibility. Or, to put it another way, what subject matter that patent attorneys these days invent and then claim is in fact outside the ambit of the “useful arts”.

    Simply to assert that “all innovation” is worthy of “full patent protection” over-simplifies the matter. It is certainly not the answer to the question how is it that China is racing ahead, attracting ever more foreign investment.

  4. Marco January 25, 2021 7:02 am

    As a 30 year veteran patent lawyer, I know the fundamental truths that underlay Professor Barnett’s observations. Our wonderfully conceived patent system has been and is being distorted by a strange mix of uninformed influencers who lack understanding or are blind to the effects of their actions.
    Complacency of the rank and file patent practitioners, who know the truth of this, is almost as damaging as the “perhaps” well-intended but ill-conceived tinkering of our patent generation and enforcement systems. The AIA has hurt us, and it will continue to do so until its more pernicious effects are reversed. Post-grant review of patents by the PTAB in IPRs is an especially noteworthy and misguided aspect of the AIA. It has enabled the dirty work of USPTO-beholden, weaponized patent “death squads” and the influence of its so-called “stakeholders” that have been carefully armed with a skewed version of patent law and procedures to vanquish, at an alarmingly high rate, patents that threaten the market dominance and self-interest of these puppet masters.
    The present chaotic state of patent litigation stems largely from this and the pitifully uninformed media hype that so many of these players use to their advantage with great and terrible effect.
    From the presently distorted state of patent infringement venue, injunctive remedies, asymmetric application of the presumption of validity and patentability standards in these nonsensical parallel district court/PTAB proceedings, to the ridiculousness of regularly invoking Section 101 as a ground for patent claim invalidity, we who cherish the intended original balance and genius of our system of patent generation and enforcement must rise up and make our views known!
    The long term adverse effects of what is happening can be averted and this course reversed if we will but make our views broadly known in the media and in the halls of Congress with well-articulated discourse.
    This is a critical time. I applaud Professor Barnett, Gene Quinn, and others who are shining a light on these actions that prey on widespread ignorance about how our patent system is supposed to work and which threaten severe and lasting damage to a patent system that still holds the promise of leading the world to a better tomorrow out of the environment of a truly fair and balanced democratic republic built on law, not individual caprice and corporate self-interest, and not in the direction likely to arise out of autocratic and oppressive regimes that now seek world dominance in all aspects of life.
    We must act now!

  5. Model 101 January 25, 2021 8:59 am

    Analysis:

    The crooks have taken over the American patent system.

    China realizes their patent system will improve with the integrity of the new people in it.

    Sad ….

  6. Pro Say January 25, 2021 11:04 am

    Big +1 Marco — you know of what you speak.

  7. Perkins January 25, 2021 1:04 pm

    The only thing that can stop a big guy with a monopoly is a little guy with an enforceable patent.

  8. Ted January 25, 2021 7:36 pm

    Will Biden/Kamala, Senates, and Congress read this article and listen to the voice people are speaking here?

  9. Anon January 26, 2021 1:24 pm

    Ted,

    Chances are super high (reflective of Biden’s days as VP), that they will have other voi€e$ in their ears (and in their pocketbook).

  10. Pro Say January 27, 2021 11:23 am

    Perkins: “The only thing that can stop a big guy with a monopoly is a little guy with an enforceable patent.”

    Powerful. Powerful indeed.

  11. MaxDrei January 27, 2021 2:28 pm

    Begs the question though, #7 and 10, doesn’t it. Is a patent held by a “Little Guy” ever “enforceable” by that Little Guy? Something of an oxymoron, perhaps?

    Is that not the biggest mischief?

  12. Marco January 27, 2021 3:59 pm

    Patents are supposed to help level the playing field. In theory, they should.
    But the system has been rigged of late, so the big guys get to be sued for patent infringement pretty much only in Delaware (or some other state where they incorporate and keep a mailbox, as if they really “reside” there), they can hijack any patent on which they are sued into the high dollar sausage grinder kangaroo court in the DC bureaucratic jungle and then suck the life out of it, use the § 101 frenzy to attack the claims in district court as allegedly trying to patent a law of nature alleged, and/or use the eBay decision to leverage a low dollar settlement by pushing the courts to keep ignoring 150 years of jurisprudence under § 283.
    So, once again, the corrupting influence of big money has tilted the playing field for its short-term self-interest and for the long-term detriment of our country.

  13. Anon January 27, 2021 4:04 pm

    MaxDrei,

    Your point is not clear.

    There is NO ‘oxymoron’ if patent rights were fully respected by our courts.

    ANYONE may have their day in court, and as such, the ability to enforce (separating cost of being in court from the separate patent rights itself) makes it seem like you want to obfuscate the point at hand.

    Quite in fact, your own past protests against the US Sovereign choice of presence and level of presumption of validity indicate that your post here is more than a bit disingenuous.