Last year, Tesla CEO Elon Musk sent ripples across the business landscape when he announced that he was releasing all of his company’s patents to the public, effectively making Tesla an open source company. This was a huge deal for a number of reasons, but it was most notable because it was an unprecedented move for a large company in the modern era.
While most companies are prepared to defend their intellectual properties in order to secure more revenue, Musk cast that logic aside in favor of allowing others to copy his engineering team’s designs. Granted, Tesla had its reasons for making the move it did, but it still comes in stark contrast to how almost every other business handles patents in America today. That might be a very good thing, considering how patent issues can actually become an economic drag.
While it’s not uncommon to hear the term ‘patent troll’ thrown around in headlines, consumers typically only pay attention when it has a direct effect on some of the products they love. One patent battle that has been watched closely by many in the public is the ongoing battle between Samsung and Apple, which have gone back and forth over designs of mobile phones, tablet devices, and other products. Apple has famously defended its patent on devices with rounded edges, giving consumers an inside glimpse at how paltry and ridiculous the U.S. patent system can actually be.
A fairly recent study has shown that not only is the patent system inherently flawed, but it is also taking a huge toll on the economy. Put together by Catherine Tucker, a marketing professor at the Sloan School of Business at MIT, the study indicates that patent lawsuits are a huge threat to startups and have also played a large part in discouraging investments and economic growth over the past decade or so. Tucker found that between 2004 and 2012, patent lawsuits doubled from around 2,500 per year to 5,000, and that over the course of five years, venture capital investment in startups would have been more than $8 billion higher if not for patent trolls constantly seeking an avenue for litigation.
From Tucker’s study, it becomes obvious that the biggest victims of patent trolls are entrepreneurs and startup founders who face a high risk of being taken to court. This has had an overall negative effect on business dynamism and the amount of risk startup founders are willing to take, taking its toll in jobs and profit opportunities for those who otherwise would be willing to set their ideas in motion.
“We ﬁnd that litigation by frequent litigators is associated with a direct and negative effect on innovation. Therefore, improvements to the patent litigation system which address the potentially harmful eﬀects of such litigation should be considered. One potential remedy could be changing the current way that litigation costs are allocated; at present, there exist low barriers to bringing a lawsuit and currently defendants bear disproportionate risks and costs of being involved in patent litigation relative to plaintiffs,” the study says.
By shutting out would-be competitors and consuming young minds who would otherwise be inclined to take on the business world, patent trolls are able to spur the concentration of corporate power and be a catalyst behind declining business dynamism. The Brookings Institute has shown that after the 2008 financial crisis, fewer business have been formed and more have left the market than ever before. The trend has proven to hold true in all fifty states, and almost all of the 360 largest metropolitan areas in the country as well. The post-financial crisis recession undoubtedly played a huge roll in this, but the numbers do correspond as well with an increase in patent litigation, which has led to many startups and small businesses shuttering.
But how do startups and small business actually help the economy, and why would an increase in patent litigation keeping them out of the market be a burden to the economy overall? According to the Kauffman Foundation, startups and small businesses play an incredibly important role in job creation. In fact, their findings plainly show that businesses that are younger in age tend to create lots of jobs, while older, more established firms tend to offload them. In 2005, it was shown that the startup sector created 3.5 million jobs, while companies that had been founded 10 years prior, in 1995, created only 355,000. Those companies founded in 1995 also removed 422,000 jobs, showing a wide range of economic impact established firms and startups can have on the job market.
It was mentioned before how electric car maker Tesla has taken a very different approach to their intellectual property holdings than companies like Samsung and Apple, and it’s exciting to see what kind of effect that has on overall economic activity, particularly in the automotive industry, over coming years. One company that appears not to be share Tesla’s ideology when it comes to patents is Amazon, who also made waves when the company decided to file for a patent that gives them dominion over photographs of objects in front of a white background.
It’s hard to think of a more perfect example of the flimsiness of the U.S. system.
Amazon’s patent number 8,676, 045 may be the most recent and widely-publicized patent that has many people in a tizzy, but it’s hardly the only one. The fact is, the patent system as a whole will require a complete reboot if there is any real hope for change, and to give the economy a shot in the arm by removing worry for bright-eyed and bushy-tailed entrepreneurs. The fight for reform at the congressional level, however, has been met with tough resistance.
Patents and patent litigation has become an important area for many business and law firms. Lawyers have made billions from patent defenses, most of which would probably have gone into investments or research and development if not for the a flawed system that allows them to file lawsuit after lawsuit. A recent attempt at reform was stopped dead in its tracks by a combination of pharmaceutical lobbyists and trial lawyers, according to Ars Technica, who were able to persuade high-ranking Congress members to remove the bill from their agendas.
With a display of political clout and the power of big money fighting hard to make sure patent-holder’s interests remain intact, it’s hard to think any kind of real reform will ever make it to law.
Catherine Tucker’s study on the effects of patent litigation show an absolute relationship between an increase in lawsuits and disastrous economic effects. For a country that is in desperate need of jobs and positive growth indications for the lower and middle classes, patent reform would appear to have immediate and widespread effects for entrepreneurs and startups across the country. Facing off with the established interests and lobbying teams of the power that be, however, looks to be a battle that few are equipped to fight.
To reignite the entrepreneurial passion and see startups creating some real, quantifiable economic expansion, a congressional tackling of the patent problem would be a great place to start.