Crowding Out Innovation

Isn’t the iPad just an oversized iPod Touch?  (Isn’t the iPod Touch just an iPad Nano?)  Has the personal computer changed much over the last forty years?  (Check out an embryonic personal computer from Xerox PARC, known as the Alto, from 1973—see the resemblance?)  More to the point, weren’t we supposed to be traveling in flying cars by now?  How innovative are we?

Perhaps we are somewhat innovative, but it is safe to say that we are not as innovative as we could be—and it’s the patent system’s fault.  The problem isn’t that the patent system is doing too little, though; the problem is that the patent system is doing too muchFor as long as the U.S. patent regime treats “carrot” as king, the engine of innovation will run on the fuel of self-interest, and technological progress will lag as a result.

In “Crowding Out Morality,” Professor Schwartz argues that our societal structures operate under the assumption that human nature is self-interested.  In turn, we often exhibit self-interested behavior—not because such behavior is an inevitable consequence of our nature, but because we have created a society where self-interest is the only relevant motive.  One incentive-based societal structure is the U.S. patent regime.

We stimulate technological innovation and spark scientific creativity through the incentive of a patent.  To encourage the would-be inventor, the Federal Government lures her with a patent, which affords her monopoly power over her invention for about twenty years.  The patent regime is entirely incentive-driven; it operates under the assumption that the would-be inventor is self-interested.  Indeed, the assumption of self-interest was written into our founding document: Article I, Section 8, Clause 8 of the Constitution empowers Congress “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”  In light of the so-called Progress Clause, it should be no surprise that our patent system is structured to cater to self-interest.

The problem with a patent system governed by the ideology of self-interest, however, is that the system crowds out altruistic motives to innovate.  An inventor might wish to create an invention out of a desire to advance science and technology, to solve a community issue, to improve society, to better the world, to uplift humanity.  Yet, with the carrot of a patent hanging before her, the inventor focuses on the monetary payoffs that accrue from monopoly power.

To illustrate the “crowding out” effect, consider the history of Silicon Valley.  In the mid-20th century, the patent system had yet to catch up with the high-tech sector; the prototypical patentable invention was still closer to a mousetrap than to computer code.  Operating under the radar of the patent system, research institutions such as AT&T’s Bell Labs, IBM, and Xerox PARC churned out ground-breaking gadgets at an astronomical pace.  These research centers were not chasing intellectual property; in fact, the centers resembled “industrial campuses,” as scientists across the Valley collaborated on projects, shared ideas, and built on each others’ designs.  For example, although Bell Labs invented the transistor, AT&T elected not to hoard the invention as intellectual property.  Other companies explored and probed the transistor; their collaborative enterprise culminated in the computer chip.  In Steal This Idea (2002), author Daniel Perelman argues that AT&T’s decision to abstain from patent protection for the transistor was a “seminal event in promoting modern technological advance.”

Soon, however, the U.S. patent system caught up with the high-tech sector.  In its 1998 decision of State Street Bank v. Signature Financial Group, the Federal Circuit upheld the patentability of the computerized “business method patent” (BMP)—software code that automates a method of business.  As the U.S. Patent and Trademark Office (USPTO) liberally granted BMPs, self-interested motives began to crowd out the academic, bookish motives that had previously animated Silicon Valley.  Pereleman notes that even the industrial campuses of old grew “more focused on the immediate commercialization of technology rather than the basic science to which they [had] contributed so enormously in the past.”  Worse yet, many BMPs appeared to fail the requirement of non-obviousness, for they merely automated routine business processes. patented its “Name Your Own Price” system, which resembles a computerized implementation of the reverse Dutch auction.  Yet, does routine haggling deserve patent protection just because it is computerized?  Similarly, enforced its patent for one-click purchasing against (resulting in a licensing agreement and ongoing jousting with the USPTO to determine the patent’s scope).  But is one-click purchasing non-obvious?

Innovation was the casualty of the “crowding out” effect of excessive patenting.  As Red Hat urges as amicus in Bilski v. Kappos, a case on the Supreme Court’s docket:

Far from encouraging innovation, this proliferation of patents has seriously encumbered innovation in the software industry. . . . Software products are often highly complex, created by combining hundreds or thousands of discrete (and potentially novel) elements in a cumulative process. Because the boundaries of software patents are exceedingly vague and the numbers of issued software patents is now enormous, it is virtually impossible to rule out the possibility that a new software product may arguably infringe some patent.  Thus, under the Federal Circuit’s previous erroneous approach, the risk of going forward with a new software product now always entails an unavoidable risk of a lawsuit that may cost many millions of dollars . . . Only those with an unusually high tolerance for risk will participate in such a market.

However, perhaps the judicial branch can counter the self-fulfilling ideology of self-interest that has infected our patent system.  In 2008, the Federal Circuit issued its opinion in Bilski, upholding the USPTO’s denial of a patent for a typical BMP: a computerized method for hedging financial risk in energy trading to help utilities, such as schools or factories, predict energy costs.  In so holding, moreover, the court imposed a new requirement for patentability which precludes the mere computerization of an everyday business practice: the claimed invention must be “tied to a particular machine or apparatus” or “ transform[] a particular article into a different state or thing.”  Although the Supreme Court has yet to issue a decision on appeal, the Court demonstrated marked hostility toward the BMP at oral argument.  Concerned about excessive patenting, Justice Scalia asked whether, under the Federal Circuit’s previous standard, the USPTO could grant a patent for the automatization of a “book on how to win friends and influence people”; Justice Breyer asked whether a “great, wonderful, really original method of teaching antitrust law”—which could keep “80 percent” of the class awake—could be patented; and Justice Sotomayor asked about patenting a “method of speed dating.”

Will the Court liberate our patent system from the ideology of self-interest?  We’ll soon find out.

2 Responses to Crowding Out Innovation

  1. […] As you might recall, a few weeks ago we discussed the possibility that excessive patenting was crowding out innovation.  On cue, Farhad Manjoo (a technology columnist) discusses the very same topic — and invokes […]

  2. […] As you might recall, a few weeks ago we discussed the possibility that excessive patenting was crowding out innovation.  On cue, Farhad Manjoo (a technology columnist) discusses the very same topic — and invokes […]

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