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Time to eliminate patents altogether? Fed paper urges more open innovation

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The patent system, intended to legally protect innovation and intellectual property, is essentially useless, rife with abuse and trolls, and should be disbanded. In spite of the enormous increase in the number of patents and in the strength of their legal protection, they have not accelerated R&D investments or technological progress.

That's the view taken in a new working paper from Michele Boldrin and David K. Levine, researchers at the US Federal Reserve Bank of St. Louis. (As noted in the document: The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors.)

Rapid and massive innovation usually springs out of cooperative environments in which technologies and discoveries are shared, not when industries batten down the hatches and call out the lawyers.  As they bluntly put it:

"There is strong evidence, instead, that patents have many negative consequences.... The initial eruption of small and large innovations leading to the creation of a new industry – from chemicals to cars, from radio and TV to personal computers and investment banking – is seldom, if ever, born out of patent protection and is, instead, the fruits of highly competitive-cooperative environments. It is only after the initial stages of explosive innovation and rampant growth end that mature industries turn toward the legal protection of patents, usually because their internal grow potential diminishes and the industry structure become concentrated."

The Fed researchers make the point that "strong patent systems retard innovation with many negative side-effects." More often than not, demands for strong patent support are politically driven  by "old and stagnant industries and firms, not from new and innovative ones."

Patenting has exploded over the last few decades, the researchers observe. "In 1983 in the U.S. 59,715 patents were issued against 105,704 applications; by 2003, 189,597 patents were issued against 355,418 applications and, even in a slow growth year like 2010, 244,341 new patents were approved. In less than thirty years, the flow of patents roughly quadrupled. By contrast, neither innovation nor R&D expenditure have exhibited any particular upwards trend, not to speak of factor productivity."

In addition, they add, "while patent litigation has increased, few patents are actively used. Patent litigation typically involves dying firms, that have accumulated huge stockpile of patents but are no longer able to produce marketable products, suing new and innovative firms."

Or, as the Atlantic's Jordan Weissmann, who first surfaced this report, so aptly put it: "We can see that cost today as tech companies like Google spend billions on "defensive patents," which are essentially useless other than as a protection against lawsuits. We see it whenever a cool startup firm is forced to license a bogus patent from a litigious troll. And we see it in the untold dollars spent on legal fees and unnecessary patent filings for ludicrously broad or impractical ideas."

The solution?  Boldrin and Levine advocate abolition of the patent system as it stands, and allow for open innovation regulated by markets. The only role of any legal system, they say, is to "foster innovation whenever there is clear evidence that laissez-faire under-supplies it."

While riddled with patent lawyers, trolls and epic vendor battles, the software industry actually has led the way in demonstrating how cooperative innovation can be far more profitable in the long run. "The modern and highly successful open source software movement is a more contemporary example of how collaboration and exchange of ideas thrives absent intellectual property," the authors point out.

Not mentioned, but just as potent as the open source software movement, are the standards bodies which promote inter-vendor cooperation. For example, standards bodies such as the World Wide Web Consortium (W3C) helped deliver the functioning Internet that we know today, offering common formats and coding that created today's interfaces to services across the globe. There probably wouldn't be an Internet -- but rather a large assortment of competing proprietary networks, a la America Online and CompuServe  in the early days -- if vendors were wrapped up in patent litigation.

Weaning the business world off the patent system could take a track similar to weaning the world into an open trade system, the researchers point out. "Economists fought for decades – and ultimately with great success – to abolish trade restrictions," say Boldrin and Levine. "Patents are very much akin to trade restrictions as they prevent the free entry of competitors in national markets, thereby reducing the growth of productive capacity and slowing down economic growth."

(Illustration: US Department of Commerce.)

— By on September 29, 2012, 2:07 AM PST

Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure