Patent 573907 (Photo credit: Michael Neubert)
The “world spinning out of control” category swells by the day and often gets good stories from the arena of intellectual property. Several years ago, my favorite was the Green Bay Packers, who became targets of software patent litigation merely because their website used a graphic called a JPEG. Before that was the case of the “patented” graphic known as the online shopping cart. Today, app makers and podcasters are being sued for making apps and podcasting.
The important concept of intellectual property is being undermined by some of its most aggressive practitioners. In 2012, “patent trolls” -- firms that don’t make anything but own IP -- brought 61% of all patent lawsuits. And companies like
The knowledge economy is built on ideas, only some of which are formalized as patents and copyrights. Not all ideas are property, yet property, or ownership, remains an underpinning of all successful capitalism. Today, however, property is under attack -- and not just by those long skeptical of it. The intellectual property ecosystem has become so convoluted and disconnected from reality -- 40,000 new software patents granted each year -- that even some defenders of enterprise and liberty are throwing up their hands and asking if we shouldn’t abandon patents altogether.
This would be a mistake. If we want an IP system that rewards innovation and comports with common sense, we don’t need to abandon property. We do, however, desperately need to weed out abusive actors.
Frustration with our IP system is exemplified by the case of MPEG-LA, a sort of co-op set up in the 1990s to manage digital video patents. MPEG-2 is a technical standard for digital video used in DVDs and streaming media. MPEG-2 codecs (coders and decoders) are used in cable set-top boxes, computers, and across the digital media world. The many patents that initially went into the MPEG-2 standard, however, were owned by many different companies -- 27 firms in all. So in 1996 the firms agreed to pool the necessary IP in one entity so users could more easily license it. In 1997, the Department of Justice blessed the MPEG-LA pool with an antitrust exemption, provided it continued to operate under its original charter as an MPEG-2 one-stop-shop.
MPEG-LA, however, is now imposing terms on licensees as if it were an innovator with a unique product, rather than a passive holding company or co-op. Despite the fact that most of the original MPEG-2 patents have expired, or soon will, MPEG-LA is still charging $2 for each unit sold. MPEG-LA began as a caretaker but has become an aggressive exploiter of its special government-granted status.
Highly complex systems like computer chips or smartphones contain thousands of ideas, building on untold ideas from previous generations. Cooperation is often needed to avoid never ending litigation wars that could grind firms -- or even industries -- to a halt.
The semiconductor industry is a good example. Every year we pack more components, circuits, and algorithms onto each tiny chip. Integration has been the watchword of the industry for half a century. From the manufacture of the physical transistors and gates to the design of the analog and logic circuits, we integrate ever more ideas into single products. These many ideas, however, may have originated in distinct minds at different firms in disparate nations. How do we sort out “whose” property makes up that little slice of silicon?
The semiconductor industry long ago adopted a widespread practice of cross-licensing. Firms would agree to license each other’s IP and refrain from litigation. It was a pragmatic solution that has served the industry well.
The MPEG-2 patent pool was another pragmatic solution meant to simplify a complex web of IP claims by a large number of firms. Around 1,400 companies have licensed the MPEG-2 pool to produce the products that unleashed an exaflood of digital media over the past two decades. When the manager of the passive IP pool becomes an aggressor in the marketplace, however, the system fails. It can slow innovation across the digital ecosystem. It sets a bad precedent for future cooperative arrangements. It can lead to suspicion of intellectual property itself.
Of the 818 MPEG-2 patents, some 400 expired in 2012. Half of the remaining patents expire by 2014, and 90% will expire by 2015. All of
There is an analogy with our financial system. Finance is a foundation of our economy -- little would happen without it. But it is not the whole economy. In recent years, some financial engineers abstracted markets to such a degree that many securities and trades were severed from the real world. Much of finance turned into a self-contained, zero-sum game of paper shuffling and digital gotcha rather than a means to allocate capital and help fund innovation. Along the way, it helped ferment a deep distrust of a crucial industry.
So too have some intellectual property practitioners abstracted IP into a zero-sum game of litigation and extortion, far removed from the real world. If the foundation of intellectual property and enterprise is undermined by such behaviors, however, it becomes worse than zero-sum, worse than a transfer from one party to another. If our system of entrepreneurship and ownership is perverted, the whole economy can lose.
