By Ted Sabety
The fashionable view that intellectual property (IP) rights impede economic growth in the U.S. is on its way to becoming a self-fulfilling prophecy. The negative view of patents, copyrights and other IP is so prevalent that they may in fact come to threaten the creation of new, high quality jobs, if not destroy thousands of existing ones.
The question of who benefits from weaker IP rights takes on a new sense of urgency when viewed through the filter of the recession. National unemployment is reported at 10%. Without intellectual property protection, the promise of quality employment in a knowledge-based U.S. economy will be threatened despite promises made by policy makers to promote a knowledge workforce in lieu of erecting barriers to international trade. Weakening of the copyright and patent laws not only runs counter to the interests of the U.S., it is a breach of the social contract made in the past between Congress and the American worker. .
Under the rubric of trade globalization the Federal Government acquiesced to the export of manufacturing jobs to places like Mexico and China while promising that these job losses would be offset by the creation of new U.S. jobs and wealth in a knowledge-based economy. The best known example of this policy is the passage of the North American Free Trade Act (NAFTA) in 1995. The U.S. was not alone in this regard. According to an OECD report from 1996, “OECD countries continue to evidence a shift from industrial to post-industrial knowledge-based economies.” (The Knowledge-Based Economy, OECD, Paris, 1996.) But this implicit agreement between the U.S. government and the American worker is under threat of being breached.
Viewing IP rights as an impediment to growth threatens to jeopardize this implicit agreement. Google says that “Once a driver of creativity, our patent system now poses a hurdle for innovation.” (Michelle Lee, Head of Patents and Patent Strategy, Google). But it is important not to confuse the notion of product “acquisition” or “imitation” with actual “technological innovation.”
Big, established companies typically build on their investment in distribution and brand while innovation often arrives as a result of imitation or acquisition. Because new product attributes, often protected by IP law, have to be acquired—whether by purchase or imitation (e.g. YouTube, in the case of Google) — these larger corporations prefer that it be cheap. Imitation and acquisition is cheaper if there are no effective IP rights to be concerned about. As a result, larger companies will typically call for reform that pushes too far against effective IP protection.
What is overlooked in the debate is that the policy goal should be economic growth through quality jobs, i.e. employment for the “knowledge worker” and investment in new businesses. This brings into focus the effect of weakening IP protection on smaller companies.
Small businesses have been proven to be the most innovative. The anecdotal evidence of world-changing technology companies that started in a “garage” is borne out by statistics. The U.S. Small Business Administration, in March, 2009, reported that “[s]mall patenting firms produce 13 times more patents per employee than large firms do, and these patents are twice as likely as those from large firms to be among the one percent most cited [by] others in their patent applications.”
The latter statistic means these are quality patents or at the root of a larger technological wave of innovation. Therefore, it is the smaller companies that seek to file and obtain patents that are later judged pioneering. But weakening of IP protection under the rubric of “patent reform” threatens to limit investment in these smaller, innovative companies and their likelihood of success in the face of well-healed competitors who wish to free-ride on their achievements.
There are several proposed changes to U.S. patent law that will likely render IP law weak protection for small businesses. These changes include a “race to the patent office” system for priority between competing inventors, increasing fee costs to small companies building an IP portfolio, increasing the existing hurdles to prove infringement while giving imitators several opportunities to force small businesses to prove the validity of their inventions (see Sec. 5 of the Patent Reform Act of 2009). These procedural changes will be readily exploited by imitators of technological innovation because of the sheer cost to defend against them: costs most small businesses are incapable of sustaining.
It is dangerous to put smaller, innovative companies in such a precarious position. Smaller firms like those that produce quality patents represent a large fraction of high-tech jobs in the U.S. For example, in the U.S., 32 percent of jobs in computer-related services are in a firm with less than 100 employees. (An International Comparison of Small Business Employment, Schmitt and Lane, Center for Economic Policy Research, August 2009). To weaken IP rights for these smaller companies represents a threat to their existence because larger foreign companies will have more of an opportunity to exploit the inventions of these companies by imitation without payment. This threatens the job growth that these smaller companies provide in this country. And it should not be overlooked that the loss of engineering jobs goes hand in hand with the loss of other service jobs. If an innovative company is lost, not only do the engineering jobs go, but the support jobs as well. Adopting policies that let these high-quality jobs go overseas is a breach of the contract between the Federal Government and the American worker made in the early 1990’s.
Ted Sabety is a principal at Sabety+Associates, an intellectual property law firm. He is a former Hewlett-Packard integrated circuit design engineer and has taught at Columbia Business School. www.sabety.net