©2018. Published in Landslide, Vol. 11, No. 1, September/October 2018, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
Feature
The End of Collaborative Innovation: Is the Erosion of Patent Rights Threatening Open Innovation?
Marc Ehrlich and Richard Ludwin
These are heady times for some intellectual property (IP) advocates in technology and academia. A coalition of like-minded parties has leveraged the misdeeds of certain nonpracticing entities (pejoratively referred to as patent trolls) to successfully bring about a significant erosion in the strength of U.S. patents. Many of the voices in this part of the IP community argue that a broken U.S. patent system threatens open intercompany collaborative innovation, the engine that has generated the dizzying panoply of technological innovations we have seen in the last few decades.1
Are they right? Does collaboration run counter to patent protection? The answer is an unequivocal no. In fact, they have it backwards. In the current environment of diminished patent strength where efficient infringement has become common and patents are often ignored, we face the most significant threat to the future of open innovation we have yet confronted.2 Unless policymakers heed the warning signs, we could see the United States cede innovation leadership to countries ready to learn from our past and avoid our current mistaken path. In fact, there are those who maintain that we are already too late.3
So why are patents critical to the intercompany collaboration that is at the heart of open collaborative innovation? The premise seems counterintuitive on its face: How do patents, which enable a company to exclude others from practicing its inventions, encourage two companies to work together? In fact, it is this deceptive facial incongruity that has fueled the narrative of those who have worked to reduce patent rights.4 But we should not be deceived. When it comes to property of any type, intellectual or real property, Robert Frost’s famous observation that good fences make good neighbors5 holds true. Anyone with IP experience in the IT field will tell you that strong patents go hand in hand with intercompany collaboration. Here’s why:
Open Innovation in the Era of Efficient Infringement
Broad patent portfolio cross-licenses have long been the bedrock on which intercompany collaborative innovations were built. Just as international trade agreements pave the way for intercountry trade by affirming each country’s respect for the sovereignty of the other, these broad patent portfolio licenses are a tangible manifestation of the collaborators’ mutual respect for one another’s intellectual property. In order to successfully collaborate on important innovations, members of each collaborating firm must often work shoulder to shoulder, and intellectual property key to each must be shared with the other. In the era of efficient licensing,6 collaborators could rely on the fact that they were sharing information with a partner who respected their intellectual property. In our current regime of weakened patent rights, efficient infringement has led to far less patent licensing. In fact, as patents matter less to infringers, companies are turning their attention to trade secret protection instead of patents.7 Without these patent licenses as a foundation, all types of intercompany collaborations stand on more tenuous footing. With an increased reliance on trade secret intellectual property, which is more vulnerable in multiparty collaborations, there is evidence that the open innovation model is suffering.
You can’t directly monitor the state of collaboration as you might assess the health of a company via its stock price, but there are some excellent proxies for the state of open collaboration. These include open standards and open source software. This is where we look first to see how open innovation has fared in the era of efficient infringement.
Open Standards
Open standards are a mainstay of collaborative innovation for IT firms, encouraging intercompany cooperation and the development of interoperable technologies.8 We are all familiar with the benefits of IT standards covering everything from computer peripheral protocols like USB,9 semiconductor memory device protocols like DDR SDRAM,10 and of course network communication protocols like those that power the Internet and World Wide Web. These standard protocols are developed by collections of interested companies and individuals under the leadership of standards development organizations (SDOs). For example, the World Wide Web Consortium (W3C)11 is the SDO responsible for the development of many of the standards at the heart of the World Wide Web. SDOs serve as governance bodies that set the rules of engagement around the development of these standards.
In order to function properly, SDOs must maintain a balance between their two constituencies: innovators (parties that contribute patent-protected innovations to the development of standard specifications) and implementers (users of standard specifications). This balance has traditionally been struck through IP policies adopted by SDO members that compel innovators to offer a license to their patents that are infringed by the implementation of standard specifications (standard-essential patents or SEPs) on RAND (reasonable and nondiscriminatory) terms to those implementing the standard specification. The innovators thus have a motivation to participate in standards development and make their patents available because they are assured a reasonable return from implementers, who in turn benefit from the innovators’ assurance that their implementation of the standard will not run afoul of these patents.12
In recent years, SDOs have seen a deterioration in the relationship between innovators and implementers. Emboldened by weakening patent rights, implementers have challenged royalty rates charged for licensing innovators’ SEPs as well as their ability to secure injunctions for infringement of such SEPs.13 Implementers claim innovators are perpetrating a “hold up,” using the broad adoption of the standard to exact greater than market rates for their patents. Innovators claim implementers are perpetrating a “hold out” by failing to take the proffered SEP licenses, using the RAND commitment to negate the possibility of injunction and using arguments like the number of patents included in the standard and allegations of “royalty stacking” to argue for license rates far below reasonable.14 These “hold out” and “hold up” arguments do not make for good business partners or collaborators. In fact, they seem to have only ensured more costly litigation.15 Obviously, a company is far less likely to want to pick as a collaboration partner another party challenging patents it has made available via open standards. Likewise, a company would not choose to partner with a party it perceives as improperly leveraging its SEPs to charge excessive licensing fees.
Recently, a U.S.-based SDO made major, unprecedented revisions to its IP policy highly favorable to the interests of implementers over innovators.16 These developments suggest that SDOs seeing the migration of U.S. policy toward weaker patent rights have sided with implementers. The policies are consonant with the idea of efficient infringement, and they threaten to disrupt the balance the SDO must strike between the interests of innovators and implementers. In contrast, during the efficient licensing regime, many of the major parties in SDOs had full portfolio cross-licenses largely mooting licensing issues regarding SEPs. In response to these recent developments, some innovators have threatened to leave this SDO and to form more innovator-friendly SDOs or to otherwise not comply with the new policies.17 At the same time, SDOs in other parts of the world have maintained better IP policy balance between innovators and implementers.18 Coupled with the decline in U.S. patent holder rights, this related bias shift in U.S. SDO governance threatens to create an environment where is it difficult for innovators to rely on the protections afforded by U.S. patents, and where engaging in collaboration such as standards development in the United States subjects these weakened patent rights to even further dilution relative to other countries. These developments further erode the attractiveness of the United States as the country of choice for investment for all forms of innovation, including collaborative innovation.
Open Source Software
Open source software is another proxy for collaborative innovation. Open source software emerged as a mainstream commercialization alternative for software in the 1990s.19 Prior to that time, software development generally took place within individual companies, and the resulting software code was distributed in object code format such that it could not be read and understood by other programmers. Since its emergence as a major mode of commercial software development, communities of open source software developers have collaborated to create some of the most important and robust code in use today.20
The Open Source Initiative (OSI) maintains the Open Source Definition (OSD), which is a framework that broadly defines the rules for open source licenses.21 The OSD provides that those who contribute their software to an open source project must provide a free license to those who use or distribute the software. It also requires that the contributor provide the source code to any software contributed. Thus, an open source contributor reveals the source code of its contribution and provides a free patent license to those who use and/or distribute the contributed software. Importantly, the license provided by the contributor only covers use and/or distribution of the contributed software. This is important because it means that anyone who reads the contributor’s source code seeking to use the inventions therein to create their own competing software does not receive the free patent license. This is the mechanism used by the open source community to ensure that contributions are freely available to those in the community while discouraging outsiders from free-riding off the inventions in the code. Weakened patent protection and efficient infringement undermine these protections and leave the community more susceptible to these misappropriation scenarios. This in turn discourages would-be contributors from contributing software to the community—lest they effectively give away their inventions in their source code to the public at large rather than to a specific open source project.
Weakened Patent Rights Impair Collaborative Innovation: Balance Is Key
If collaboration in SDOs and open source communities has suffered under weakened patent rights, it stands to reason that collaboration in general has been damaged. SDOs and open source communities are proxies for the general state of collaborative innovation. The infrastructure and rules provided by SDOs and open source and the fact that contributors voluntarily join these communities all make collaboration easier than it would be for independent collaborations between two or more private firms. Accordingly, an erosion of cooperation in the SDO and open source arenas under the influence of weakened patent rights and efficient infringement is a clear warning sign that all is not well in the United States for collaborative innovation.
The timing of these events could hardly be more unfortunate. Advances in computing technology are heralding an age of hyperconvergence—a time when industries like pharmaceuticals, medical devices, banking, and insurance, as well as the government, are being transformed by the emergence of technologies like Internet of Things, 5G, and cognitive computing. It is a time when technological advances are bringing the benefits of new powerful compute paradigms to bear on the biggest challenges facing society, and therefore it is a time when collaboration between these once very distinct industries is at a premium. The progress of technology is not confined to national borders. These technologies will advance, they will be applied to these most important challenges, and solutions will be found improving our quality and enjoyment of life. But whether and what role the United States plays in these advances is largely dependent on the innovation ecosystem we enable with our policies. As it now stands, our country presents a less appealing option for collaborative innovation than many other countries that understand the relationship between patent rights and collaboration.
If weakened patent rights have undermined collaborative innovation in the United States, it would be understandable to presume that an across-the-board shift to strong patent rights would correct the problem. But, while strengthening patent rights from their current weak state is important to improve all innovation including collaborative innovation, the real key to improved collaboration is balance. We find ourselves in this current state, with weakened patent rights impairing collaboration, due to an overreaction to the too-strong patent rights regime that prevailed in the United States over a decade ago. Commentators analogize the changes in U.S. patent rights to a pendulum that swings from weak to strong rights and back again; but whereas a pendulum eventually settles at a balance point, the U.S. system has operated more like a metronome, ever swinging from strong to weak rights and never settling in the middle.
Conclusion
A patent system that properly rewards innovators provides the incentives and security that allow them to confidently share their innovations with collaborators. But collaboration is a two-way street, so the patent system must also provide incentives and protections for those who receive patented innovations from their collaboration partners. They must feel free to use these innovations for their intended purpose and have confidence that the cost for access is rationally determined. Balance is therefore the key. Innovation works best when the patent system addresses the needs of all constituents in the innovation ecosystem, whether they provide innovations to others, receive innovations from others, or create innovations with others.
Endnotes
1. See, e.g., Mark A. Lemley, Ten Things to Do about Patent Holdup of Standards (and One Not To), 48 B.C. L. Rev. 149 (2007).
2. Manny Schecter, It’s Elementary: Efficient Patent Infringement Is Wrong, Corp. Couns. (Nov. 20, 2017), https://www.law.com/insidecounsel/sites/insidecounsel/2017/11/20/its-elementary-efficient-patent-infringement-is-wrong/?slreturn=20180218155255.
3. Devlin Hartline, U.S. Innovation Economy Falls Even Further in Latest GIPC Patent Rankings, Ctr. for Protection Intell. Prop. (Feb. 8, 2018), https://cpip.gmu.edu/2018/02/08/u-s-innovation-economy-falls-even-further-in-latest-gipc-patent-rankings/.
4. See, e.g., Michele Boldrin et al., Do Patents Encourage or Hinder Innovation? The Case of the Steam Engine, Found. for Econ. Educ. (Dec. 1, 2008), https://fee.org/articles/do-patents-encourage-or-hinder-innovation-the-case-of-the-steam-engine/ (“The astute reader will no doubt notice that the collaborative innovation occurring after the expiration of the Watt patents resembles nothing so much as modern open-source software development.”).
5. See Robert Frost, Mending Wall, Poetry Found., https://www.poetryfoundation.org/poems/44266/mending-wall (last visited Aug. 20, 2018).
6. David Kappos, Richard Ludwin & Marc Ehrlich, From Efficient Licensing to Efficient Infringement, N.Y. L.J. (Apr. 4, 2016), https://www.law.com/newyorklawjournal/almID/1202753754690/.
7. Paul Steadman & Ferlillia V. Roberson, Trade Secrets Are More Important, and Trade Secret Litigation Is More Common: 7 Questions to Ask Yourself about Protecting Your Company, DLA Piper (Sept. 29, 2017), https://www.dlapiper.com/en/us/insights/publications/2017/09/ipt-news-q3-2017/trade-secret-litigation-7-questions-to-ask/.
8. See Definition of Open Standards, W3C, https://www.w3.org/2005/09/dd-osd.html (last modified Sept. 29, 2007).
9. See USB Implementers F., http://www.usb.org/home (last visited Aug. 20, 2018).
10. See Double Data Rate (DDR) SDRAM Standard, JEDEC (Feb. 2008), https://www.jedec.org/standards-documents/docs/jesd-79f.
11. W3C, https://www.w3.org/ (last visited Aug. 20, 2018).
12. See Karl D. Belgum, The Next Battle over FRAND: The Definition of FRAND Terms and Multi-Level Licensing (June 13, 2014) (unpublished manuscript), https://www.law.berkeley.edu/files/Belgum_Karl__IPSC_paper_2014.pdf.
13. See, e.g., Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024 (9th Cir. 2015); Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014).
14. Colleen V. Chien, Holding Up and Holding Out, 21 Mich. Telecomm. & Tech. L. Rev. 1 (2014).
15. See, e.g., Microsoft, 795 F.3d 1024; Apple, 757 F.3d 1286.
16. See Bill Merritt, Why We Disagree with the IEEE’s Patent Policy, EE Times Blog (Mar. 27, 2015), https://www.eetimes.com/author.asp?section_id=36&doc_id=1326144.
17. See Ericsson and Nokia the Latest to Confirm That They Will Not License under the New IEEE Patent Policy, IAM Blog (Apr. 10, 2015), http://www.iam-media.com/Blog/Detail.aspx?g=d07d0bde-ebd6-495a-aa72-4eecb9dac67d.
18. Dugie Standeford, ETSI Officials Say IPR Policy a Foundation of Successful Telecoms Standards, Intell. Prop. Watch (Mar. 14, 2016), http://www.ip-watch.org/2016/03/14/etsi-officials-say-ipr-policy-a-foundation-of-successful-telecoms-standards/.
19. See History of the OSI, Open Source Initiative, https://opensource.org/history (last visited Aug. 20, 2018).
20. The 8 Most Successful Open Source Products Ever, Pingdom (May 29, 2009), https://royal.pingdom.com/2009/05/29/the-8-most-successful-open-source-products-ever/.
21. The Open Source Definition (Annotated), Open Source Initiative, https://opensource.org/osd-annotated (last visited Aug. 20, 2018).