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Patent Wars Restrain Growth

June 14, 2013 by Ike Brannon

Patent laws in the United States have always been grounded in a utilitarian appeal to encourage innovation. This principle is illustrated by Article I, Section 8, of the U.S. Constitution, which lists as one of the enumerated powers of the Congress the following: “To 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.”

But while patents were originally intended to promote economic growth and foster the development of new ideas, today’s patent laws have greatly deviated from their original purpose and actually achieve the very opposite of what the framers of the Constitution intended.

A few years ago the Patent and Trademark Office awarded Apple a patent for the innovation of rounding the edges on its iPad, one that they are now vigorously enforcing against Samsung’s tablets, which also have rounded edges. Apple’s claim of ownership over what is, when stripped of the technical complications, nothing more than a common geometric shape is a perfect example of the profound depths to which the nation’s patent wars have sunk. The shape of corners of the iPad is not the reason people buy it, and allowing other companies to utilize the same shape will not harm Apple in any way other than via the ordinary rigors of competition, which is kind of the point of capitalism.  

On the other hand, if this patent is upheld, it will result in the blockage of Samsung tablets from entering U.S. markets, an outcome that would be indisputably detrimental to American consumers. Faced with a lower quantity of phones and fewer brands to choose from, consumers will have fewer options and likely pay higher prices for tablets.

In any case, the patent under consideration is one that violates not only the laws of common sense, but one that should never have been permitted under current patent laws, given that the thing being patented does not possess the quality of non-obviousness required as a condition of patentability. Books, paper, magazines, and other print media have always used the rectangle shape, and it makes sense that newer devices that serve a similar purpose would follow the same model, while the rounded corners are an obvious adaptation to the shape of the hand and to avoid the potential for injury from sharp corners. Before the iPad, other devices already employed a similar, albeit not identical, shape. It is hard to see how Apple’s design can be considered a true innovation.

Furthermore, there is a considerable cost to the economy resulting from the frequency and duration of patent lawsuits of this nature, whose sole purpose is to capture economic rents from potential and actual competitors. The amount of due diligence required for a new business to ensure that it will not be the target of a financially devastating patent suit has become excessive to the point of deterring entry in many markets. A 2011 study by the Boston University School of Law found an annual cost to society of dubious patent fights amounting to $80 billion and rising. Most of these costs can be attributed to so-called “Patent Trolls,” agencies whose sole purpose is to amass thousands of random patents from a variety of sources and prosecute lawsuits alleging patent infringement solely for the financial gain  — that is, separate from any allegation of a competitive disadvantage, since these companies do nothing but buy patents and prosecute patent infringement lawsuits.

Besides the cost of defending against patent lawsuits, the practice of awarding patents for minor or negligible innovations means that companies spend resources trying to devise and then patent as many of these innovations as possible, solely for use in any future patent battles.  When Research In Motion, maker of the ailing Blackberry, was considered ripe for a takeover in 2012, analysts attributed most of its value to the usefulness of its patents in future patent wars.

The two companies in the dispute over rounded tablet corners, Apple and Samsung, have clashed a total of 50 times over similar charges of patent infringement, with these lawsuits spanning the globe, lasting years, and racking up hundreds of millions of dollars in legal fees. These costs are ultimately passed on to the consumer, not to mention the opportunity cost of these companies not using their scarce capital in productive ways, such as in the area of research and development.

If Apple prevails before the International Trade Commission, the entity adjudicating this dispute, the U.S. economy will suffer not only in the short term, by reducing consumer choice and competition in the tablet market, but also in the future. The precedent set by this case will hasten the filing of even more absurd patents with the sole intention of prosecuting others and attempting to collect economic rents when no significant innovation has in fact been made.

The long-term solution to this problem is to reform patent laws to ensure that the Patent and Trademark Office only awards patents for genuine innovations. But in the short run, disallowing frivolous patents, such as the one granted for a rounded rectangle, is the best path for economic growth.  


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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