Innovation-Based Technology Standards Are Under Threat

Continued innovation demands sustainable investment, but changing U.S. public policies on technology standards and patents may shut it down.

Our world faces challenges more intricate and abstract today than at any previous point in history. As these challenges grow ever more tangled and complex, governments and businesses strive to create innovative technological solutions.

Unfortunately, creativity is not a matter of will. And the need for solutions is not itself sufficient to bring them about. Innovation demands the proper conditions — a balanced mix of flexibility and stability, spontaneity and forethought, risk and return. Increasingly, these conditions are under threat from the very institutions that have come to rely most heavily on the technologies they produce. The patent system and the standards system — two vital contributors to U.S. economic growth and consumer prosperity, that have together kindled a generation of unparalleled technological advancement — are being wrongly targeted by regulators, academics, and special interests as impediments to future progress.

A movement has taken hold in the United States and elsewhere to reduce the benefits of patent protection and to limit royalties available to technology inventors who contribute their innovations to industry standards.1 This movement has gained traction in courts, universities and boardrooms based on the mistaken belief that inventor protections increase the cost of standards-based consumer technologies. In fact, the opposite is true,2 and public policies aimed at weakening the patent and standards systems risk stalling the pace of technological advancement.

It is far from granted that technological progress will continue at recent rates. The social, regulatory, and financial headwinds faced by inventors intensify every year. Absent the legal and economic conditions required to continually foster innovation, there is no reason to believe technological progress will continue at any particular pace, and serious cause for concern that the promises of the fourth industrial revolution will go unfulfilled.

Take the extraordinary potential of 5G wireless systems — steadily moving from the abstract promise of “next-generation” technology to concrete and widespread use — to connect drivers with roads and other vehicles around them, to connect patients with medical practitioners, and to digitize industries across a vast spectrum of commercial endeavors. Shared industry standards are necessary to make these communications instantaneous, reliable and secure, but their future is threatened by an economic and regulatory system that increasingly favors technology implementers to the detriment of technology creators.

References

1.See generally, M.K. Ohlhausen, “Patent rights in a climate of intellectual property rights skepticism,” Harvard Journal of Law & Technology 30, no. 1 (Fall 2016), 1-51; A.F. Abbott, “Key patent reforms needed to spur U.S. Innovation,” Heritage Foundation (2017), www.heritage.org; A.F. Abbott, “US government antitrust intervention in standard-setting activities and the competitive process,” Vanderbilt Journal of Entertainment & Technology Law 18, no. 2 (Winter 2016), 225-246, www.jetlaw.org; J. Farrell, J. Hayes, C. Shapiro, and T. Sullivan, “Standard setting, patents and hold-up”, Antitrust Law Journal 74, no. 3 (2007), 603-670; and A. Armstrong, J. Mueller, and T. Syrett,” The smartphone royalty stack: surveying royalty demands for the components within modern smartphones” [Working Paper] (2014), https://ssrn.com/abstract=2443848.

2.See, e.g., E. Elhauge, “Do patent holdup and royalty stacking lead to systematically excessive royalties?,” Journal of Competition Law & Economics 4, no. 3 (September 2008), 535-570; D. F. Spulber, “Standard setting organizations and standard essential patents: Voting and markets,” Northwestern Law & Economics Research Paper No. 16-21 (2016); J.M. Barnett, “Has the academy led patent law astray?,” University of Southern California Legal Studies Research Papers Series No. 17-4 (2017); A. Galetovic, S.H. Haber, and L. Zaretzki, “Is there an anti-commons tragedy in the smartphone industry?,” Hoover Institute Working Paper Series No. 17005 (2017); K. Mallinson, “Don’t fix what isn’t broken: The extraordinary record of innovation and success in the cellular industry under existing licensing practices,” George Mason Law Review 23 no. 4 (2016), 967-1006.

3.See, e.g., U.S. Chamber of Commerce, “International Competition Policy Expert Group report and recommendations 31,” ICPEG Report (2017), www.uschamber.com; and M.K. Ohlhausen, “Remarks before the American Bar Association’s 32nd Annual Intellectual Property Law Conference, Arlington, Virginia (2017),” available at www.ftc.gov.

4.Identification of specific company examples throughout is not meant as criticism of the companies identified, or of their business strategies, nor is it meant to suggest any absolutes.

5.See J. Ellis, “Top licensors Ericsson, Microsoft, and Nokia all see drop in year-on-year patent revenues,” Feb. 9, 2017, www.iam-market.com; “Fourth Quarter and Full-Year Report 2016,” Jan. 26, 2017, www.ericsson.com; and “Nokia Corp. Report for Q4 2016 and Full Year 2016,” Feb. 2, 2017, https://www.nokia.com.

6.A. Galetovic, S.H. Haber, and L. Zaretzki, “A New Dataset on Mobile Phone Patent License Royalties,” Hoover Institute Working Paper Series No. 16011 (2016); and J.G. Sidak, “What Aggregate Royalty Do Manufacturers of Mobile Phones Pay to License Standard-Essential Patents?” 1 Criterion Journal on Innovation 701 (2016).