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HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data
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HBS seminar 3/26/14: Dark Markets, Bad Patents, No Data

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This presentation for the Digital Initiative at Harvard Business School looks at how digitization interacts with the patent system and the systemic dysfunction that results. This version is annotated …

This presentation for the Digital Initiative at Harvard Business School looks at how digitization interacts with the patent system and the systemic dysfunction that results. This version is annotated for the benefit of the reader.

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  • 1. Dark Markets, Bad Patents, No Data Institutional and Information Failure in the Digital Economy Brian Kahin Fellow, MIT Sloan School Center for Digital Business Senior Fellow, Computer & Communications Industry Association Digital Initiative Harvard Business School March 26, 2014 This version enhanced for those not present at the event.
  • 2. digital technology effects • in most economic policy domains: financial regulation, tax arbitrage, regulation of services, telecom regulation, competition policy, intellectual property…. – an enabler (usually taken for granted) – and source of disruption, opportunity, arbitrage, disequilibriuum…. • effects mediated/amplified/extended by firms – but institutions and policies typically slow to change
  • 3. • examples: financial system, patent system, US healthcare • mix of public agencies, institutions, markets, instruments, and relationships – less “system” and more “ecosystem” : – many points for private ordering and state intervention • mix of different languages, different logic – especially in patents – technical explanation directed at “person having ordinary skill in the art” – claims: legally operative terms that require interpretation (“claims construction”) – algorithmic language of code – globalization complex public-private systems
  • 4. need for multidisciplinary approach to public-private systems • law and economics • political economy • applied transaction cost analysis • institutional/policy design • complex systems place in the curriculum?
  • 5. digital economy fundamentals • exponential – increasing processing power, bandwidth, storage – rapid but unpredictable change • digital – content, communications, algorithms/logic • combinatorial – layers, modules, systems, platforms, functional integration, things Brynjolfsson and McAfee, The Second Machine Age 2014
  • 6. combinatorial (can be viewed from two directions) • bottoms-up functional aggregation and integration • top-down (architectural) – platforms • degrees of openness • DoD, IBM, Microsoft – modules and interfaces – standards • compatibility vs substitute • function vs implementation • public vs private
  • 7. digital economy fundamentals • exponential – increasing processing power, bandwidth, storage – in general, rapid change over many years • digital – content, communications, algorithms/logic • combinatorial – layers, modules, systems, platforms, functional integration, things • connected (a critical 4th fundamental) – global reach, addressing, search; boundary- spanning, complements
  • 8. primary/secondary/tertiary effects (a quick sense of the complex interplay) • boundary spanning >> category blurring • perfect sharing and global scaling • competition for the market • cheap transacting >> open innovation – efficient markets – new business models, transformed markets • modularity and complementarity – relations across boundaries • algorithm-based management of data, information, knowledge • documenting, monitoring, measuring, and modeling • asset sharing/partitioning
  • 9. first-order policy implications • exponential -- schizophrenic response to rapid change – rapid reaction: copyright, obscenity – inertia: patent law, taxation, antitrust • digital – radical change for content and communications (confronts copyright, free expression, telecom) • combinatorial – too complex for intervention • connected – discourages local intervention, promotes harmonization, creates transborder tensions/arbitrage
  • 10. • copyright – radical enablement of intermediaries and end users (owner-enabler-user); reuse and piracy – policy response: “notice and takedown” • trademark – conflict with domain names (network admin) • domain names: global, generic, unlimited… • Internet governance • trade secret – rapid dissemination by insiders, third parties… (similar to primary copyright problem) – hacking, industrial espionage, cyberconflict – tool for discouraging executive mobility impact on intellectual property regimes
  • 11. implications for patent system • exponential – unlimited capacity for software functionality – accelerated time-to-market and product cycles • digital – algorithms as “basic tools” (at what point do “basic tools” become applied and patentable?) – enables content, process, and communications covergence • limited by patent portfolios (smartphone wars) • combinatorial (complex products/systems) – vast functionality at multiple overlapping levels drives patent proliferation – content, communication, GPS, sensors, other technology….
  • 12. Colleen Chien, Functional Claiming, Presentation to the 2/12/13 USPTO Software Roundtable Colleen Chien, Functional Claiming, Presentation to the 2/12/13 USPTO Software Roundtable problem of structured complexity in “combinatorial”
  • 13. implications for patent system • exponential – unlimited capacity for software functionality – accelerated time-to-market and product cycles • digital – Benson: algorithms as “basic tools” (at what point do “basic tools” become applied and patentable?) – enables content, process, and communications covergence • limited by patent portfolios (smartphone wars) • combinatorial (complex products/systems) – vast functionality at multiple overlapping levels drives patent proliferation – content, communication, GPS, sensors, other technology…. • connected – extreme vulnerability of networks ($612M Blackberry settlement) – global markets, global “patent warming”, global prior art
  • 14. up 66% in last 4 years
  • 15. updated from Bessen, A Generation of Software patents (2011) up 100% in last four years!
  • 16. rapidly rising litigation for software-related patents
  • 17. first presidential initiative on patents in 47 years – and only two years after the America Invents Act
  • 18. White House report: • PAE suits are concentrated in the IT sphere; according to one estimate, 82% of PAE defendants were sued on the basis of a software patent (in contrast to only 30% of those sued by non-PAEs) (Chien and Karkhanis, 2013). • Software patents are nearly five times as likely to be in a lawsuit as chemical patents; business method patents are nearly fourteen times as likely (Bessen 2011). Risch 2011: • Average PAE suit is filed 8.3 years after patent issues
  • 19. percent of patents allowed.JPG Cotropia, Quillen, and Webster 2013 difficult to get at it because of lag and continuations (in the U.S. an application cannot be conclusively rejected); authors had to get underlying data via FOIA request
  • 20. “Best places to work in federal government” PTO moves from 105th to 1st place from 2009 to 2013 as allowance rate rose, patent office became a more pleasant place to work
  • 21. “The U.S. has had a 230-plus year love affair with innovation. It started with our Constitution, in which our Founding Fathers made patents an affirmative right the government is required to grant to anyone who meets the legal requirements.” former Under Secretary of Commerce for Intellectual Property David Kappos, Stanford Technology Law Review, May 2013 But the patents clause is in Article I (enumerated powers), not the Bill of Rights; Congress is empowered but not required to grant patents. And patents are a negative right, not an affirmative right. They do not give owner the right to practice invention – only the right to exclude others from doing so.
  • 22. … [T]he defense establishment insisted on an intellectual property rights regime that was scandalously – and productively – loose relative to what has evolved over the three decades since then. William Janeway, Doing Capitalism in the Innovation Economy, 2012 The landscape was once very different, especially in semiconductors and software. DoD’s insistence on second sourcing and technology sharing was a major force behind the culture of Silicon Valley.
  • 23. • 1952 Patent Act, written “by patent lawyers drawn from the Patent Office, from industry, from private practice, and from some government departments.” • (1966 President’s Commission – no patents on computer programs) • (1972 Benson – patent on algorithm denied by SC) • 1982 Federal Circuit, created to hear all patent appeals and make patent law more uniform – made patents easier to get, easier to assert, more powerful, harder to invalidate, and more abstract…. • 1990 USPTO becomes fee-funded – 1996-2002 mission: “To help customers get patents.” – subsidy for examination creates incentive to grant patents • 1998 State Street decision – business methods patentable, as well as software – activist opinion by judge who drafted 1952 Act institutional background
  • 24. market developments in IT • defensive portfolios, cross-licensing • portfolio monetization • secondary markets • assertion/monetization specialists • aggregators – catch and release, sale (and buy back) • privateering (surrogates raise rivals’ costs) • sovereign/state-supported patent funds • transaction costs as weapons
  • 25. historical average cost of processing, search, and examination for USPTO late 2000s: $3713 subsidized fee: $1600; $400 for micro-entities Frakes and Wasserman, 2013: Grant rate responds to fiscal constraints BUT compare to costs facing accused infringer before suit (AIPLA 2013) • validity opinion: $12759 • infringement opinion $11626 knowledge about patents wants to appear cheap
  • 26. average costs of full litigation (AIPLA 2013) amount in controversy legal costs per side x2 (total) minimum legal costs relative to amount in controversy >$25M $5.9M $11.8M n/a $10-25M $3.2M $6.3M >25% $1-10M $2.1M $4.2 >42% <$1M $.97M $1.9 >194% and ultimately The patent system does not scale down efficiently!
  • 27. reaction to expansion • 1999-2004 NAS study and report • 2002: 30 days of FTC/DOJ hearings followed by FTC report (2003) • 2005: Intensive Supreme Court review of Federal Circuit begins • 2005-2011 legislation introduced, eventually passed as America Invents Act – new forms of administrative review: post-grant, covered business method • 2011 FTC report on evolving IP marketplace – competition agency focus on standard-essential patents (private ordering): ambush, licensing commitments, injunctive relief, damages • new round of legislation aimed at trolls • White House initiative • FTC launches study of patent assertion entities
  • 28. private ordering (standards) • informal – FRAND commitments (“fair, reasonable and nondiscriminatory” – but no guidance on interpretation) • royalty-free (RF) alternative, esp for software – background arrangements: cross-licenses, nonassertion agreements, comity, MAD – licensing overlooked for small players • formal – patent pools: precise and costly to set up – ex ante licensing (disclosure of maximum terms in advance – legal but rarely done) • useful point of insight into patent markets
  • 29. “TI has something like 8000 patents in the United States that are active patents, and for us to know what's in that portfolio, we think, is just a mind-boggling, budget- busting exercise to try to figure that out with any degree of accuracy at all.” Frederick J. Telecky, Jr., Senior Vice President and General Patent Counsel, Texas Instruments, FTC/DOJ hearings Feb 2002 widely cited comment made in the context of patent disclosures in SSOs but reveals much about the costs of patent-related knowledge [What about the hundreds of thousands of patents that belong to somebody else?]
  • 30. IT patents routinely ignored “[B]oth researchers and companies in component industries simply ignore patents. Virtually everyone does it. They do it at all stages of endeavor. From the perspective of an outsider to the patent system, this is a remarkable fact. And yet it may be what prevents the patent system from crushing innovation in component industries like IT.” Mark Lemley, Ignoring Patents (2008) … costs leading to this widely cited comment by the dean of patent scholarship
  • 31. Fontana et al, Reassessing Patent Propensity, 2013 Out of 2802 winners of R&D 100 awards, less than 10% were patented. Is patent rhetoric wildly overblown?
  • 32. “IP is fast becoming the world’s currency of innovation.” NBER, Innovation Policy and the Economy, April 20, 2010 “IP rights are the global currency for creating value for products and services, for all innovators, in all markets.” Center for American Progress, Nov 20, 2012 while Under Secretary Kappos championed the “financialization” of the patent system…
  • 33. multiple patent markets • markets for technology [commonly assumed model] – patents as marketable products (pharma) – patents as complements? – ex ante (“carrot”) licensing • markets for enforcement [actually dominates in IT] – based on evidence of use (ex post “stick” licensing); patent = option to litigate • markets for freedom of action – mitigation of risk/liability • profit-shifting among international affiliates – tax benefits
  • 34. “[T]here has been increasing value in capturing patents that have demonstrated value, that is, there are issued claims that you can show actually are infringed by folks.” “Yes, unpredictability is a bad thing. But unpredictability is the only thing that’s allowing these patent owners to get the access to capital which allows them to actually try and get a return on the patents.” -- Ron Epstein, CEO of IPotential, FTC hearing at Berkeley, May 2009 IP intermediary explains that secondary market is based “evidence of use” [opportunity for holdup] and speculation:
  • 35. After Mansfield, then Levin (Yale survey), no large-scale survey since Carnegie-Mellon survey in 1994 (Cohen et al.) Golden Era of Survey Data surveys do not review well at NSF: expensive and they’ve been done before
  • 36. NSF CSES Business R&D and Innovation Survey (BRDIS) asked in 2009 about patents and 5 other IPRs • single question: "very important," "somewhat important," or "not important." [3-point Likert scale!] • “important” – why? volume, value of individual patents, defense, exclusivity, salvage value • according to whom? – radical differences between lawyers and software designers [two surveys in the 1990s]
  • 37. • “order of magnitude estimate” for industrial process licensing (Robbins 2009) – $50B/year revenue from domestic sources in 2002 pieced together from BEA, Census, IRS data – compare $7.8B worldwide receipts by U.S. patent licensing establishments (Census 2002) includes trolls, spinoffs, etc. • problems in data – patents vs trade secrets – assignment vs licensing (and exclusive vs. non-exclusive) – cross-licensing: net vs gross (barter reporting) • non-assertion agreements – expenditure data needed to balance receipts – copyright and patent overlap for software – in-house vs spinoff vs specialists – primary vs “secondary” markets – ex ante vs ex post (“carrot” vs “stick”) • value creation vs rent seeking data on licensing is dated, inconsistent, and problematic
  • 38. validity • PTO study (Graham, Journal of Economic Perspectives, Jan 2013): Of 21 smartphone software patents evaluated by district court 17 held valid or likely valid. • Compare Shawn Miller study (2013): – 210 cases with holdings on innovation-related validity: 49% of software patents invalidated in whole or in part, compared to only 33% of non-software patents • Strong presumption of validity can only be overcome by “clear and convincing evidence” so court decision does not correspond to PTO grant • Selection bias? (not discussed in Graham article) – discovery of prior art leads to dropping assertions
  • 39. “In the last 5 years, Nokia has defended against over 150 patents in Europe. Many were dropped at an early stage. 71 were pursued to judgment. Of those 71, the courts have determined that only one was valid and even that was‐ later revoked by the EPO.” -- Tim Frain, Nokia, April 2013 public comments by Nokia in context of industry concerns about Europe’s pending unified patent system (which promises to enhance the market for enforcement) and these are European patents, which are reputedly of higher quality
  • 40. competing definitions of quality • legal – whether the patent is upheld in court • technological (inventiveness) • market value • indicators (patent text – “where the light is”) – “Wacky patents” meet economic indicators (Czarnitzki et al, 2011) • bureaucratic – “Patent quality isn’t broken at all. In fact, our decisions on both allowances and rejections correctly comply with all laws and regulations over 96 percent of the time.” [Under Secretary Kappos] contingent on liquidity, evidence of use (at what level?)
  • 41. anomalous characteristics • right to block, tax, regulate…. • one size fits all • legal system to produce economic result • territorial rights in global commerce – tax arbitrage from profit shifting
  • 42. • uncertainty, not just risk – uncertainty is socialized, weaponized – fee-earning professionals/ intermediaries/ agents bearing no risk • positive feedback loops – portfolio racing – profession, agency, and court • widespread information asymmetries • contingent and context-dependent value – goes up with “evidence of use” – goes down with discovery of prior art • widely distributed risk/liability – app developers, Main Street Coalition • asymmetries of cost, risk, and liability – start-ups vs contingency-fee lawyers • aggregation for predictability – cf RMBS (failure of quality and information) • multiple marginalization (patents in standards), anti-commons • legal process misaligned with speed of technological advance and business practice • “highest and best” use is holdup systemic problems in the patent system
  • 43. • original “patent paradox” -- most patents where least valuable. (Hall and Ziedonis 2001) • public grants premised on disclosure – but not of legal and market behaviors – failure of disclosure function • value diluted by complexity • strategic withholding • legal constraints on reading patents • entrusting governance of innovation to legal system >> cannot adapt to out-of-the-box insights; precedent oriented – innovation and governance (patent institutions very conservative, not innovative) • despite lowering of transaction costs (thanks to digital technology), institutional arrangements bury information/ avoid transaction costs (cross-licensing, non-assertion covenants, MAD, FRAND) • territorial vs global; the more widespread innovation, the greater the patent costs, uncertainty, opacity, asymmetries….and temptation to intervention . – harmonization (TRIPS) addresses minimum standards – not excesses – IP mercantilism vs cash mercantilism? paradoxes
  • 44. Do nanotechnologists read patents? 0 10 20 30 40 50 60 70 80 90 100 had read a patent looked for TECHNICAL information found information useful believed technology reproducible Lisa Larrimore Ouellette, “Do Patents Disclose Useful Information?”, 2011 % failure of disclosure even in a physical technology
  • 45. • original “patent paradox” -- most patents where least valuable. (Hall and Ziedonis 2001) • public grants premised on disclosure – but not of legal and market behaviors – failure of disclosure function • value diluted by complexity • strategic withholding • legal constraints on reading patents • entrusting governance of innovation to legal system >> cannot adapt to out-of-the-box insights; precedent oriented – innovation and governance (patent institutions very conservative, not innovative) • despite lowering of transaction costs (thanks to digital technology), institutional arrangements bury information/ avoid transaction costs (cross-licensing, non-assertion covenants, MAD, FRAND) • territorial vs global; the more widespread innovation, the greater the patent costs, uncertainty, opacity, asymmetries….and temptation to intervention . – harmonization (TRIPS) addresses minimum standards – not maximums or excesses – IP mercantilism vs cash mercantilism? paradoxes
  • 46. motives for sovereign/state-supported funds • commercialize technology – assemble and exploit “sleeping” patents • defense against foreign aggression – in high-value markets (US, EU soon, China) • return on investment – no different from SWFs – private aggregators (Intellectual Ventures, Acacia Research, etc.) directly or via hedge funds and private equity >>relationship to SOEs/SSEs and industrial policy Once patents are acquired by governments, they can be used for any purpose – or sold to those who will do so.
  • 47. “The land of Intellectual Property Rights is manipulative, predatory and vicious. And here is the best part: it’s managed at the national level.” Jim Basillie, ex-RIM (Blackberry) a public-private system
  • 48. long-term recommendations • raise standard of invention – peer review standard • economic oversight – international dialog needed • explicitly address diversity (Burk & Lemley, 2009) – tailor administrative processes to technology and business environment • develop administrative alternatives to litigation – tie presumption of validity to level of administrative review • eliminate or tailor subsidies – ad valorem service fees/taxes (in lieu of property tax) • explore independent invention defense at least for software • open to experimentation – government should not have to buy back (via eminent domain) what it grants

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