Undercover Economist

Patently a stitch-up

Are smartphone patents helping innovation – or strangling it?

I’ve been thinking about a remarkable industrial designer, a man who built on previous innovations to produce an indispensable product and a corporate titan. Not Steve Jobs, of course, but Isaac Singer, the developer of the first commercially successful sewing machine.

Singer and Jobs have something else in common: their products both became embroiled in bitter legal wrangling over patents. Jobs told his biographer, Walter Isaacson, that “I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.” Singer threatened to kick Elias Howe down the stairs when Howe demanded cash from him for infringing Howe’s patent.

The courts eventually backed Howe, but many other patents existed and soon the entire US sewing machine industry seemed more interested in suing rivals than selling sewing machines. That will surprise nobody who pays attention to the legal battles over smartphone patents – and many observers have come to the conclusion that patents are not helping innovation, but strangling it.

Is that true? Patents give a temporary monopoly to inventors. This will raise prices and constrict supply, which is bad. But in the long run the patent should promote innovation by encouraging inventors to develop new ideas. This is a balancing act, not a matter of moral or practical absolutes.

But the sewing machine patent wars, and the modern smartphone litigation, show us that the balancing act is more complex when a technology may embody many different patents. According to one well-publicised estimate, there are 250,000 patents relevant to a modern smartphone. Even if the number is one-tenth of that, it suggests an impossible thicket of intellectual property through which a company must hack to bring a cool new product to market.

A key issue is something called the hold-up problem. If a $1bn product depends on 1,000 patents, it is clearly impossible to pay the typical patent holder more than $1m. But any patent-holder could try to extort many times that amount by threatening to block the whole project.

Large firms have responded to this problem by buying or developing large collections of patents. This gives them the ability to launch countersuits, and that threat should make rivals reasonable. But although defensive patenting looks like a pragmatic solution, it has costs and limits. The wave of defensive applications swamps patent offices, which means more poor-quality patents and longer delays.

“Patent trolls” – a derisive name for companies that make money purely from their patents – have less to lose in a patent war but although some are legitimate, others are extortionists. And while established players may reach cosy understandings, a young company with a new idea may find it impossible to break into a market that is thick with defensive patents. If only the big boys can play the patent game, innovation will suffer.

It’s clear that some industries are plagued by nuisance lawsuits. According to a survey by economists Bronwyn Hall and Dietmar Harhoff, firms complaining of infringement win more than half of court cases involving non-software patents, but only 13 per cent involving software patents. That suggests software suffers from weak patents and aggressive litigation, perhaps in the hope of extorting a settlement. It is not a good sign.

Yet we should not lose hope. The sewing machine companies eventually pooled their patents and competed on the high street rather than in the High Court. And despite apparently endless litigation, there seems to be plenty of innovation in the smartphone industry. The patent system is not a total failure – but on present evidence it is hardly a total success.

Also published at ft.com.