Patent Thickets: Law and Economics in Action

About the Author
Samantha Love read Law at Merton College, Oxford, and is currently following the BCL course. 

There are few areas in which it is as obvious that the law can shape a whole area of economic activity as in technological innovation. 

Patents give a monopoly over an invention for 20 years, in exchange for which the details of the invention become available to all and usable by all once the monopoly expires. In a fast-moving area of invention, however, this 20 year period can seem unreasonably long and a build-up of patented inventions necessary to create a single product can cause ‘patent thickets’ and prevent further innovation. Is this a reason to change patent law, or to use another area of law (such as competition law) to intervene? An examination of the economic situation, including past examples, is necessary to answer such a complex question that has worldwide implications.

Patents – a primer

A patent is a legal right to the sole use of an invention for 20 years after its creation. This includes a right to license it to others, to prevent others from using the product and to sell the patent to another. In the UK these rights are enshrined in the Patents Act 1977.
An invention, in order to be patentable, must among other things be novel (s2) and involve an inventive step (s3). That is to say, the invention must not have been made by anyone in the world at the time of the patent being filed, and it must not be something which a reasonably skilled person would have been able to invent based on existing inventions. This second element is to make sure that only sufficiently important steps forward are granted a patent, rather than minor modifications – if small changes to an invention meant it could be patented for another 20 years then the next development (without paying a licensing fee) would take another 20 years, which keeps costs up. It would also be possible for a company to keep its patents in constant patent protection by making minor improvements and patenting them every 20 years- a practice known as ‘evergreening’.
In exchange for this sole right to the production of an invention, the details of the invention must be disclosed to the world. As s14(3) of the Patents Act states, “The specification of an application shall disclose the invention in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the art”. Though there are disputes as to the precise nature of intellectual property, with some saying it is property like any other, it is arguable that the law is more setting an incentive mechanism for creation and innovation than recognising a person’s right to property in the traditional sense. The strange element of inventions (and artistic creations, when thinking about copyright) is that any number of people can use an idea at once and without damaging its quality. However, if anyone can use your idea without your permission or without paying you money for the right to use it, then why would you spend time, money or effort on the invention? Hence a period in which you have sole control over the use of the invention, after which you must accept that the benefits to society of being able to develop it are higher than the benefits of you continuing to make money from it. The law creates a market by turning ideas into something that can be bought and sold.

So if we take this view that patent law creates a market in inventions so as to encourage development, then we have a few things to think about when considering how well the law works. Perhaps most importantly, is the monopoly length set at the right time period so that there’s enough of a reason to invent something, but not such a long gap before everyone else can develop the patented product that further improvements take a long time? It must be remembered that scientific and technological work is incremental, quite differently to creative work. Obviously we are influenced creatively by other works we have seen, but much science develops from previous discoveries or inventions, so there is a real danger that by granting a monopoly to somebody who will not license their invention, or will not do so for a reasonable price, you are preventing or delaying further discoveries.

Patent thickets

This delicate balance can be seen clearly with the problem of patent thickets. Where a new product is being developed relatively quickly and in a piecemeal way – i.e. lots of different people are inventing different parts – there become so many different patented inventions making up one product that simply getting the rights to produce it is a nightmare. Shapiro describes a patent thicket as:
“a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology”.

This is not just a problem for a small business or a company which wants to begin producing these products – the larger companies may well find themselves involved in long-running and expensive disputes with competitors as to the rights to sell certain products because of the patents involved in them being owned by the competitor. It cannot get much more bitter than Steve Jobs’ comments about the Android system:
“I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product.”

The smartphone market is the obvious place to start this discussion; the legal battles taking place across the whole have become a relatively common topic of news as each jurisdiction decides whether N ‘stole’ an idea from A, or G from N, or S from G… the list goes on and huge sums of money change hands. Most alarming for the companies on the losing end are the cases where an injunction to prevent sale within a country is put into place, or threatened – such as the threatened injunction against UK HTC sales in December 2013 if an appeal was not lodged in time. The stakes can obviously be huge so there is an incentive to fight every battle in every legal territory, but it must be questioned whether this money can be most profitably spent on legal disputes when it would seem that most of the larger companies are suing each other as much as they are being sued. Mike Masnik’s diagram of smartphone patent lawsuits is not only complex, it is over two years old; this is not even the full picture. We do not here have a simple case of one breakthrough being mimicked by other companies, but a set of apparently key inventions being held by various main players – if they weren’t significant, it would be worth avoiding the lawsuits to use a simpler alternative (goes the very simplistic argument).
This web of patents also creates a problem for Small and Medium size Enterprises (SMEs), as highlighted by the Hargreaves Review in May 2011. Not only does the task of licensing become extraordinarily complex, there is always the risk of being threatened with patent litigation which a start-up or small company cannot afford to defend, even if the claim itself is fairly dubious. It acts as a reason for companies not to enter a market, and therefore strengthens the power of existing companies to reduce quality or raise prices without any competition from alternative suppliers that customers can go to instead of paying higher prices. At this point, competition lawyers become concerned (more on that later).
Part of this problem may be that some patents are owned not by the company exploiting the invention but by companies that exist to hold and protect such rights – sometimes referred to as ‘patent trolls‘. Whereas competitors might focus on their production rather than protecting patents if they are being exploited by a non-dangerous competitor, the patent troll’s only incentive is to make as much money as possible from the patent right itself. There is perhaps a danger here in allowing patents to be owned by companies which do not actually act on the market in question and so have no reason to get involved in a give-and-take style agreement, though of course the importance of patent rights is that they can be sold and licensed by the original inventor in order to recoup his or her investment costs.
So there are various problems here – the number of patents involved in making the product, the fact that these patents are held by so many different actors on the market, some of whom only exist to protect the patent rights, the high stakes involved in the disputes and the costs of defending a lawsuit (especially as a percentage of turnover for SMEs), and the speed at which this area of technology is developing. Whilst the latter has only been mentioned in passing, it is clear that part of the problem is that the patent thicket only gets denser because we are not at the point of any of these patents running out. Smartphones are relatively new, and they are developing at breakneck speed, but without any earlier limitations from early patents running out yet. All these particular circumstances of the smartphone market are making it a focus for patent lawyers and politicians worldwide.

Learning from history – sewing machines

Strange as it is to say though, this is not the first example of such a thicket arising. Adam Mosoff has done research into what was known as the Sewing Machine War of the 1850s, where (again) a number of researchers had developed separate but integral parts of the sewing machine and began litigation between themselves when they all believed the others were unjustly using their patents. The article demonstrates that this issue is neither new nor inevitably requiring legal intervention. Although the market may well be experiencing problems, a solution may well emerge without a change in patent protection. The Sewing Machine War was ended when the parties agreed to ‘pool’ their licenses; that is, they would allow each other to use the patents and license the rights to others for a certain fee. This way, competition for creation of the product moved onto the ‘usual’ factors of cost, quality and new features rather than squabbling over the rights to the building blocks of the product.
A patent pool is thus one option for the smartphone industry; but of course half of the dispute is that the features currently the subject of litigation are said by the patent-owners to be more than essential nuts and bolts. Is Apple’s slide-to-unlock feature a necessary element of a smartphone with a touch screen and so should be part of a patent pool, or is it a unique invention which Apple ought to be able to keep to itself if it likes? The other concern would be that such a sharing of information and licensing might have to be open to all comers – if the larger firms got together and pooled these licenses they may be found guilty of anti-competitive conduct by using their dominant position on the market to prevent smaller firms having access to key technological know-how. Competition investigations would add transaction costs for businesses here, as Shapiro notes (1). Competition law and patent law need to sing from the same hymn-sheet here, which may be difficult when both competition and patent law are still largely organised at national or regional level but the implications of both are worldwide.

Another potential solution is shorter patent protection. Would this be for all patents, or just smartphones, or software, or electronic technology? And would we include other areas as patent thickets develop? Pharmaceuticals are also subject to patent wars; Novartis’s loss of a case because it was attempting to ‘evergreen’ one of its drugs was certainly not the first case of its kind. And in that case, non-patentability meant access to important drugs at an affordable rate; if anything this should be the priority for reducing patent protection! As said above though, there is a delicate balance to consider in terms of recouping investment costs and incentivising research and development – would pharmaceutical companies exist if patent protection was for, say, 10 years? The twin lines of the area which would have a shorter protection and how long protection would be are incredibly difficult to draw.
Alternatively, either new statutory law or competition law might demand compulsory licensing of core inventions for a product. The ‘essential facilities’ doctrine in competition law states that companies in a dominant position who hold the only means of entry into a market must deal with smaller companies, and at a reasonable rate. Needless to say this is a controversial area and more commonly applies to things like use of shipping ports where there really is an ‘essential facility’, but the concept could be developed to form the basis for a statutory scheme. Most of the disputed patents aren’t utterly essential for entry to the smartphone market so development of the competition law doctrine would be very novel and controversial. Again though, what to include on the list (or what test to use), and would any individual country take the plunge first?
All in all, it seems that the legal problems present as much of a thicket as the patents themselves. Without sound economic analysis and justified reasoning as to how and where to introduce changes into the patent system, it does seem that the simplest option is to wait until the phone companies either develop their own licensing agreements or patent pool, and then enforce it for the benefit of smaller businesses, or leave them to develop their software in ways which don’t use the other companies’ patents. The law has created a market which is on the verge of failure in one specific area, but we have seen this before. And it is worth remembering that sometimes too much law is as bad as too little.
References
(1) Shapiro, ‘Navigating the Patent Thicket: Cross Licences, Patent Pools, and Standard Setting’ 1 Innovation Policy and the Economy 119.

Image credits: banner; WD-40; HTC; sewing machine; Novartis.