Thanks this website
Thanks this website

Last week, Apple was ordered to pay a lot of money (although not really a lot of money by Apple standards) to a company called Smartflash, by a jury in Tyler, Texas, for copyright infringement.

Here’s Apple:

Smartflash makes no products, has no employees, creates no jobs, has no U.S. presence, and is exploiting our patent system to seek royalties for technology Apple invented. We refused to pay off this company for the ideas our employees spent years innovating and unfortunately we have been left with no choice but to take this fight up through the court system.

Here’s Smartflash LLC’s lawyer:

Smartflash is very happy with the jury’s verdict, which recognizes Apple’s longstanding willful infringement.

Well of course they’re happy. They just had half a billion dollars handed to them for doing nothing other than litigating. Pending an appeal, of course.

And then there was that whole drama recently about Robin Thicke and co stealing “Blurred Lines” from Marvin Gaye…

So I thought that it would be fun to talk about the patent system.

The Idea(s) Behind The Patent System

Conservatives are a curious breed. On the one hand, they dislike any kind of government interference or regulation. On the other hand, they are deeply offended by the idea that the patent system is clearly both government interference and government regulation.

But I don’t think that’s as oxymoronic as it immediately sounds. It’s a question of property rights:

  • When it comes to physical property, no one should get to expropriate it (through taxes) or tell you how to use it (through regulation);
  • And when it comes to intellectual property, no one should get expropriate it either (through plagiarising).

It’s a deeply individualistic view of one’s place in the world. As I see it, intellectual property is rarely owned: it’s usually rented, and sometimes, you elect to improve it. Unfortunately, that doesn’t really make it yours – because that’s not how lease agreements work.

And what I mean by that is: for the most part, my thoughts and knowledge are almost entirely a product of communal education. I can add to the pool of knowledge a bit – but I can’t really claim credit for it, because even that is a product of thought patterns and training that I received communally.

That said, there are people that add a lot to the pool of knowledge. They’re builders, not rental-improvers. They invest time in creating new things and testing them. Like the pharmaceutical companies that do research into drugs.

Taking that last as an example: in essence, every new drug is simply an idea. It’s a recipe, a way of combining things, one that someone worked really hard to discover/invent. And because that’s a good thing, and we want people to spend their time and money expanding our pool of knowledge, we reward them by giving them temporary monopolies over their discoveries.

Enter: the patent system. Where you can develop an idea, patent it, and then no one has the right to use that patent without your consent (and without paying you) until your patent expires.

The trouble is that you want the patent to be in place before you spend all the money doing the research and development.

The consequence is that the patent system will allow you to patent almost any random idea.

Monopolies for free

What the system says is:

  1. Take any idea;
  2. If you can make it sound vaguely unique;
  3. Then we’ll give you a monopoly over it for 30/40/75 years.

And almost immediately, you get people saying:

  1. Well, I could patent an idea and hire people to develop it.
  2. Or
  3. I could hire people to come up with plenty of ideas, patent all of them, and then sue any companies that have large cash balances and might possibly be using something like the ideas that I’ve patented.


Risk everything on one idea; or collect many ideas until you can find someone that risked everything on one of your ideas, did well, and now has cash available for settling?

Especially when you can sue in a court in a small town in Texas where the big cash-rich companies are already the enemy, allowing you to swing a giant award with a small dose of folksy charm and a tidy selection of theft analogies…

The big issue here seems to be that the current system rewards bad behaviour.

The Litigation Solution to that

Patent Trolling was a topic in the most recent Slate Money podcast. The argument that I liked best:

  • The system isn’t really broken.
  • It’s the way that patents are litigated that’s an issue.
  • And that’s because there is no real downside risk for patent trolls.
  • If the patent trolls bring a lawsuit and lose, then they just have to pay their lawyers (and the lawyers are already part of their business model – so they’re likely already on the permanent payroll).
  • But if they win, they win big. Especially when they win in Texas, because that’s where everything is, you know, bigger.
  • Therefore, if we want to limit the frivolity of lawsuits, then we need to punish that frivolity by making them pay penalties.
  • And I like the idea of patent trolls being forced to sell off patent portfolios in order to pay said penalties.

But still

I think that this is more than just a litigation issue.

There needs to be a better distinction between:

  • Ideas; and
  • Hard-won discoveries

If you have an idea, that’s not good enough.

Develop or discover something new, and you can have some protection.

The general response to that is: “But what’s the point of developing something without protection?”

The answer is: people will almost certainly develop new things anyway. Because there’s a demand for new things.

Just look at wikipedia. Look at this blog. Or look at all the free content that is floating out there in the virtual ether.

Discovery and innovation don’t generally need returns in order for them to happen. They exist anyway.

So instead, why not just patent by exception? We can start by limiting patents to the medical industry – and then take it from there.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at