IP insider: Strong patents doctrine: how intellectual property fuels competition

In the midst of the current US patent reform debate, the hackneyed notion that patents are incompatible with a competitive marketplace rears its head again

Recently, an anti-patent movement premised on the misguided notion that fewer IP protections necessarily increase access to inventions is turning its attention to another body of law: antitrust. The emerging argument is a novel packaging of a tired premise, a short-sighted play that discounts long-term growth in favour of cheaper access in the near term. Ironically, against the backdrop of the most fiercely competitive industries worldwide, competition law is now being promulgated as a weapon of choice for attacking intellectual property.

Patents serve as an easy foil for antitrust-based rhetoric, as they are indeed a monopoly of sorts. While the narrative is saleable, closer scrutiny of the facts reveals that the patent monopoly is hardly the enemy of competition. In fact, the opposite is true.

A patent is a singular kind of monopoly. First, patents have term limits. Even were the monopoly embodied by a patent to imperil competition (which, as will be illustrated, is not the case), the threat is temporary, by definition. Second, a patent grants a monopoly over something that would not exist but for the patent – to the extent that something is made unavailable to competitors for free, it is something they did not have access to in the first place, at any price.

Compare this to the principal alternative to a strong patent system, trade secrecy, which erects barriers to innovation of an infinite duration. Trade secrecy frustrates collaboration, obstructing the efficient allocation of resources. Anti-patent rhetoric ignores the fact that elimination of patents would leave a void filled by trade secrets – diverting resources away from the exploitation of technology towards concealment.

Further lost in this rhetoric is that without patent protection’s promise of exclusivity, tomorrow’s inventions have much less chance of attracting the investment required to bring them to fruition. Cheaper access to today’s technology would engender a fleeting pleasure, especially considering the pace at which consumers worldwide have grown accustomed to the introduction of newer, better technology.

One field in which consumers’ voracious appetite for technological improvement is particularly pronounced illustrates the point: mobile technology. A recent study by the Boston Consulting Group (BCG) of the worldwide impact of mobile technology paints a picture that stands in stark contrast to the notion that patents play an inhibitive role. Between 2005 and 2013, the average mobile subscriber cost per megabyte fell by a whopping 99%. Further, the consumer surplus (the value that consumers report receiving over and above what they pay for access) in the mobile industry in six countries analysed by BCG was $6.4 trillion – greater than the gross domestic product of every country in the world except China and the United States.

At the same time as consumers are enjoying this surplus, they are craving further advances: 90% of 3G and 4G consumers report that they want faster data speeds, greater coverage and longer battery life, among other improvements. In order to accommodate skyrocketing data demand – which is projected to be 1,000 times greater than today’s levels within a decade – investment in new technologies will be crucial. Companies focused on core technologies in this sector are already investing an enormous 21% of revenue in R&D. And patent holders are hardly hoarding profits: studies reveal that implementers and carriers (not mobile technology developers) enjoy the overwhelming majority of profits generated from products subject to IP licences.

Data reveals that, as it pertains to intellectual property, antitrust offers a solution to a problem that simply does not exist. This does not mean that there can be no role whatsoever for competition law in IP-reliant industries. But antitrust authorities would be most effective operating on the fringes of intellectual property. The proper role for competition law is to make examples of those few egregious behaviours that demonstrate truly anti-competitive impact. In the vast majority of cases, antitrust intervention will not be necessary and will only serve to deter the very investment in innovation that the patent system is carefully engineered to encourage.

Antitrust is largely irrelevant in the IP space, precisely due to the vigorous market forces in play to address concentration of power. Patents may be a species of monopoly, but they are far from a guarantor of market position. In reality, patent law (far more so than antitrust) is best suited to thwart market dominance in fields that rely on technological advancement. Patents provide the most powerful incentive there is for new entrants to invest in creating new technologies – technologies that routinely disrupt dominant firms and have historically played a key role in dislodging longstanding market positions. Were the new, more nimble entrants’ technological contributions freely and immediately exploitable by the monolithic standard bearers in the field, such disruption would be extremely rare.

The best policy move that can be made to advance the pro-competitive purposes of the antitrust regime is actually to strengthen the IP system. This counterintuitive but durable and fact-based concept underpins the strong patents doctrine: the stronger the patent system, the less risk of harmful market concentration. Only the promise of a return will assure investment in innovation. Patents are a vital component of the innovation infrastructure, providing a level playing field for innovators of all sizes and encouraging efficient allocation of resources across industries. Ultimately, patents support a marketplace of ideas, whose commercialisation inevitably benefits companies and consumers alike.

David J Kappos, former director of the US Patent and Trademark Office, is a partner at Cravath, Swaine & Moore, New York, United States

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