If we fail to protect intellectual property, we destroy innovation

Elon Musk recently unveiled the new Tesla Semi truck and Roadster car. The new iPhone X has just been launched and, according to Fortune magazine, the world’s top five most valuable companies include Apple, Google, Microsoft, Facebook and Amazon. What unites all these organisations and products is their ability to disrupt, innovate and change the status quo.

Tesla founder Elon Musk

Yet there is a worrying view that has gathered significant traction over the past few years, which broadly goes as follows: intellectual property is a barrier to innovation and those that seek to protect it and uphold licences are trolls who are hampering progress in the sharing economy. I believe that this viewpoint is dangerous, wrong and short-sighted, and that it needs to be called out.

Why? Because it fails to recognise that intellectual property is the best proxy for promoting and sharing innovation, not a barrier that prevents access to it. It also fails to recognise that intellectual property is a core part of a virtuous circle that links innovators, technology users and capital providers.

The sharing economy and the open access provided by the Internet have been a huge step forward in promoting collaboration and the exchange of ideas. The majority of the companies mentioned above have flourished because of the Internet and the amazing leverage offered by technology and wireless connectivity in particular.

We live in exciting times. Yet, despite all the successes that we have experienced over the past 20 years – including the rise of a fresh breed of new economy companies (Google, Amazon and Facebook to name the obvious ones) and the arrival of a host of disruptive companies and ideas – there remains a view that IP protection is a barrier to progress, something that runs contrary to the egalitarian promise of the sharing economy.

The time has come to reset this perception and to recognise the rights of technology innovators to protect and profit from their creativity and work. If we fail to do this, then we will further damage innovation and make it far less likely that new technological ideas will get the funding they need to become great products and services.

I should say upfront that I believe in balance. IP protection works only if it fairly reflects the needs of technology innovators and users. There is no point using intellectual property to protect innovation if it ultimately prevents access to the technology. Yet equally we cannot move to a mindset that sees innovation as a commodity that is free for all. It is not and in the long term it really cannot be.

Great ideas and technological breakthroughs need to be protected so that inventors and investors alike can profit from their creativity and capital, and can inspire new generations of inventors and investors to do the same.

Traditionally, intellectual property has been the route to achieving that balance, yet today this is under threat. The rise in prominence of a new breed of technology companies has seen huge advances in innovation and disruption. However, these advances are built on the shoulders of giants – they use existing intellectual property and technology and take them to the next level. There would be no Facebook, Google, Amazon or Apple (or indeed Uber, Tesla or Airbnb) if there had not first been Marconi, IBM, HP, Nokia, Ericsson, GEC and many more innovators, small and large.

While the process of creating new technological breakthroughs by building on the intellectual property and innovation of others is not new (and is the logical and critical pathway for innovation), the attitudes to original innovation and intellectual property are changing. Since first being introduced in Venice almost 600 years ago, the patent system has existed to generate wealth by fostering and protecting innovation. A patent system, like any ecosystem, must properly balance different interests and needs in order to succeed. However, today the patent system has been eroded to the point where it often fails to balance the needs of different interests and parties.

Venice – where patents were first granted over 600 years ago

United States no longer world’s patent policeman

This erosion of the IP system began about 10 years ago in the United States and the impact of this at a global level continues to be felt.

The United States achieved its pre-eminent position as a result of two key factors. First, in the last 200 years or so it has been a leader in innovation and has amply demonstrated the success of having intellectual property as a crucial pillar. Second, it remains the largest economy in the world. As a result, the United States has historically been the jurisdiction where all the most important patent battles are fought and where most innovators have sought protection for their patents.

To fully appreciate the significance of this erosion of the United States’ status as global patent leader, it is crucial to remember that changes take a long time to filter through in the patent system. As a rule, most patents that are asserted in litigation today are at least 10 years old, which means that they were originally filed based on an understanding of the patent system 10 years ago, at a point when the United States was still considered the primary jurisdiction in the world.

Conversely, patents filed today will probably be litigated only 10 years from now, hence any immediate changes in the patent structure and jurisdictions in which patents are protected may not be apparent for a decade or so.

While this transformation has been systematic over the last decade, only recently has the impact been appreciated outside a narrow circle of patent professionals, many of whom have been vocal about this issue for some time.

For example, it is telling that according to a study by the US Chamber of Commerce, the United States has moved from first to 10th place in terms of patent protection, tied with Hungary. A decade ago an innovator looking to file a patent to protect an invention would not for one minute have thought that 10 years on a US patent would be as likely to be protected as one filed in Hungary.

Figure 1. Innovation’s virtuous circle

Given this change in the pre-eminent position of the United States as the world’s patent policeman, the question is whether this has the potential to harm innovation. I believe that it does so in a significant way.

The United States’ weakening stance on intellectual property not only means less protection for innovators but also, given the country’s economic importance and leadership, that intellectual property is altogether less likely to drive the same levels of investment.

Virtuous circle between intellectual property and investment

There is a delicate balance between innovation and capital. Great ideas need capital to come to market and in order to attract this, innovators must tread a fine line between risk and reward. The best ideas often carry the greatest investment risk because they are the most groundbreaking and often rely on untested thinking. In such situations, IP protection can be vital for securing capital. Weakening IP rights makes investment less likely and destroys the virtuous circle that exists between innovation, finance and market success.

Figure 2. US Chamber of Commerce IP Index: ranking for patent protection

Patent protection (and the exclusivity that should arise from it) has been and continues to be the instrument to bring investors and technology innovators together and provide a foundation for much-needed capital to fuel new cycles of innovation. Often it is mistakenly assumed that this process of connecting investors to innovators by securing robust patents is something that applies only to small inventors (or at most universities) which need to secure funds to innovate and to prove the currency of their thinking.

While it is true that securing capital is a key ingredient for start-ups to survive and that those that can hold and defend their patents have a much higher chance of securing venture capital (53% more, according to a report issued by the National Bureau of Economic Research), this same process also holds true for any commercial investment in innovation. This includes within large corporations, where the chief technology officer and R&D department must secure corporate funds in competition with other departments, from marketing and sales to human resources.

Patents guarantee that a winning innovation has an intrinsic value which will grow as it is adopted, by allowing the investor and innovator to choose between excluding others from that technology or charging a fee for its use. This process also applies when innovators (usually large R&D-based organisations) invest their own capital to bring an idea to market – in such cases it just happens that the innovator and the investor are the same entity.

This process is intrinsically linked to the innovation virtuous circle, where innovation generates success, which in turn provides more resources, which in turn generate more innovation, and so on. Patents play a vital role in this cycle, as they are a crucial component in securing the funds to initiate it. In particular, patents’ ability to guarantee a certain level of exclusivity and to act as a safety net should in-house commercialisation be insufficient means that they give their owners a means to recover money from other parties able to use the intellectual property successfully, by charging a licensing fee.

The innovation virtuous cycle is successful in generating more resources to be invested in further innovation, regardless of whether patents result in products being developed for direct success in the market or whether the output is the intellectual property itself. In fact, even when the return on investment is not directly injected into the R&D circle, the simple fact that a return was guaranteed even in the absence of commercial success will prove that investing in innovation was worthwhile and will serve to motivate others to invest valuable funding in R&D.

The importance of this is apparent in the pharmaceutical sector when drugs that have been approved for the treatment of one condition continue to attract R&D funding, allowing new uses for them to be discovered. Without a robust IP system, this type of research and innovation would fail to secure the funding and attention necessary. The innovation would stall.

Here is where the balancing of the system becomes vital.

Return versus risk analysis

Any experienced investor will look at a return versus risk analysis when deciding whether to invest. As a rule, the higher the potential return, the higher the degree of risk that the investor is willing to accept. This analysis is not undertaken in a vacuum but requires investments in different areas to be compared in the search for the best ratio between risk and reward.

Today’s markets are global in nature and generally very open. This makes them highly efficient when it comes to pricing investments. Any investor will also, as a rule, look at the certainty of return and the multiples that each investment can potentially promise. Again, the higher the potential multiples, the more risk an investor is likely to accept. Today, there is sufficient liquidity and the markets are sufficiently global to guarantee that an investor can be found for almost any level of risk, provided that the risk-to-reward ratio is competitive.

Therefore, when looking to an investment, a smaller return is acceptable provided that the risk is low. Conversely, a significant risk will be accepted provided that the return is sufficiently appealing.

A critical part of this financial decision making, especially when looking to invest in new technology, is robust, global IP protection. For investors, it is largely irrelevant whether the return on investment is generated by a company which filed a patent but failed to create a business or by a professional third party which has purchased patents in order to monetise them. Therefore, the best proxy that we have for technical innovation is how successful a patent is at excluding others from using the protected technology or else in securing damages through litigation.

Investors will invest in technology provided that the balance between risk and reward is attractive. They will be drawn to high returns with little risk and will fly from situations where there is low return and high risks. Effective IP protection can create that difference.

Emotions and psychology play a significant role in the investment community and therefore having a significant number of big success stories goes a long way towards attracting resources. In this case, the bigger the potential reward, the more risk that investors are willing to assume – which is similar to the way that any lottery works. Who has not at least considered playing the lottery when the prize associated with the winning ticket skyrockets? In the same way, any big win is heavily advertised to reinforce and attract more players.

The process of investing in technology innovation is much more complex than the decision to buy a lottery ticket, but the key mechanism is the same. It is basic human nature to increase the predisposition of risks when the potential reward increases. In this sense, any story of great financial return for a technology investment will inspire additional investment, while every story of loss will make investors more wary. Stories of IP success – either in licensing or in litigation damages – are thus of paramount importance.

Sherry Knowles

Former chief patent counsel at GSK

“If companies can’t defend their intellectual property, they won’t invest. It’s that simple”

Sherry Knowles, former chief patent counsel at GlaxoSmithKline, clearly defined this concept in a recent interview with the Financial Times, observing that: “If companies can’t defend their intellectual property, they won’t invest. It’s that simple.”

The pharma world has recently started criticising changes to IP protection and the weakening of the US patent system, probably driven by some recent US Supreme Court decisions which have made it increasingly difficult to protect new drugs with patents.

Not-so-hidden gems

While often insufficiently appreciated, from a public policy point of view, patent systems have played a vital role in disseminating the results of private R&D and have acted as a global spur for the development of new technologies. Such sharing is a direct result of the duty of disclosure that is entailed by filing a patent. In short, having potential access to an exclusionary right is counterbalanced by the duty to share the results of the research which informed the development of that innovation with the entire world.

If not for this duty to publish, companies would keep innovation confidential for as long as possible. Everybody who has visited an R&D lab knows the lengths to which companies go to ensure that their secrecy is respected. However, patent publication details all of that research for the world to see. There is no doubt that the patent system disseminates valuable R&D. It is an agent for further innovation, not a barrier to it.

This extraordinary aspect of the patent system, combined with the power of the Internet to disseminate information, has made it possible for innovation to spread quickly and economically around the world. To be clear, the duty of disclosure is not only reflected in the ability of anybody to search patents to discover what is being developed in the R&D laboratories of virtually any company, it is also what has made it possible for inventors to freely publish papers and share ideas at conferences and with standards bodies. Without patents (and patent disclosure) there would be little freedom left to discuss innovation.

Many variables of this mechanism are possible and there are many fields and examples where patents have played a less important role in an idea’s success. However, even when patent protection is not sought, the patent system serves a significant purpose. It allows those rights holders that renounce the protection to which they are entitled to gain a significant advantage over their competitors by gaining traction in market adoption, thus allowing different business models to thrive.

Emergence of open source economy

There is a natural mechanism to balance these interests – patent law does not force exclusivity granted by the patent. Rather, it gives the rights holder the option of excluding others – this ensures that exclusivity will be used by the rights holder only when it wants and in a way that is economically advantageous to it.

Moreover, the patent system is naturally counterbalanced by the ability of an accused infringer to challenge the validity (and infringement) of a patent, creating the risk that the patent owner could lose its rights should the designated court find in favour of the challenger.

All of which makes the view that intellectual property is a barrier to technological development more worrying. Some argue that the world should adopt open source innovation and reduce the level of IP protection as a way of accelerating new thinking and encouraging the sharing of ideas for everyone’s profit.

However, if we are to continue to fuel innovation, we need to reinvigorate IP protection, which in turn will encourage invention and investment. The balance can be found only in a system that provides certainty and clarity, which in turn will reduce the functional cost of licensing and ultimately give greater access to intellectual property, while protecting the rights of innovators to be rewarded for their work.

This is absolutely vital in the age of the intangible economy, where rendering services is far more profitable than manufacturing hardware and where every Fortune 500 company has a plan in place to reinvent its business with a service angle.

As a matter of fact, one would assume that in such a society, patents (ie, the legal medium designated to protect intangibles in the innovation world) would be as valuable as they have ever been in the history of IP law. Yet it is no exaggeration to say that patents have never been as weak as they are today.

The combination of this downward trend in IP strength together with the evident commoditisation of hardware in the world of technology is significantly impairing the technology innovation cycle and eroding its value. The wider public might not yet realise this because we are still riding on innovation developed in the last 20 years, but with investments in technology slowing, the effect will become apparent relatively soon.

The core of Silicon Valley companies – which include companies that have benefited the most from the technological innovation in the last 20 years – appear happy with changes to the patent system; in fact most of them continue to argue that patents still hold too much sway and that their new economy innovation is what matters – everything else is mere protectionism.

The reality is that these new economy companies have, very brilliantly indeed, taken the best technical innovation and built on it, even found and enabled the true potential of that innovation to be realised. However, they have not innovated in a silo but rather built on the intellectual property and breakthroughs of others.

The innovations on which the new economy has been so consistently relying are only possible if the technology innovators are motivated by reward and by protection for their achievements. The cream of new economy companies have played a significant role in enabling technology but the intellectual property created by the original innovators who developed the hardware (and now, in many cases, find themselves second-tier technology firms – the innovators of yesterday) remains critical.

A glance at the balance sheets of new economy companies compared to those of the old economy technology innovators (at least those that have survived) is sufficient to demonstrate where the value has gone. Researching whether the demise of those large hardware innovators is due to their patents being insufficiently strong or whether they collapsed under their own weight and inability to change is missing the point. What is relevant is that if every company moves toward creating new services, rather than investing in innovating the technology that drives these services, there will soon be no technology innovation. The virtuous circle will grind to a halt. Intellectual property remains critical as a means of motivating technology innovation, but it also needs to adapt to the needs of today if it is to keep pace. That innovation in intellectual property has begun. Patent pools and joint licensing are growing trends which allow technology users to access blocks of intellectual property and ensure compliance at a lower price and with far simpler access than was previously possible. Yet even these new models may not be enough. Further innovation is necessary to take the spirit of open source sharing of intellectual property at reduced cost, while still ensuring that the innovator gets paid and rewarded for its work.

If IP compliance becomes too onerous, technology users will stop attempting to comply. Instead they will wait to be approached by the rights holder and asked to pay a licence. At this point intellectual property ceases to be a positive route for sharing innovation and ensuring an appropriate reward for the innovator; rather, it becomes a legal and administrative headache.

No one should want that situation. However, trying to prevent it from becoming a reality should not mean reducing levels of IP protection. It is not the intellectual property that is at fault; it is the system of policing it.

For a more egalitarian ecosystem governing IP use and protection to develop and prosper, the players who have benefited the most from a looser patent protection system (ie, the big new economy companies) need to realise that intellectual property and patents must be recognised and supported if they are to continue to thrive.

Stakeholders need to be willing to proactively engage with licensing and to reward technology innovation by supporting sensible licensing programmes and helping to spread a culture where intellectual property is truly respected and where everybody is made aware that the ultimate goal of the patent system is to increase the dissemination of innovation and to incentivise further innovation.

It is time to change course and advocate for stronger patent protection while providing access to intellectual property at a lower cost and in a more open way. If we fail to protect intellectual property and promote access to it we will harm future innovation, and the long-term viability and success of all organisations. It is time for the two sides to come together and make this possible.

The virtuous circle that links innovators, technology users and financiers is built on strong IP protection. Without intellectual property, we destroy innovation and everyone will lose.