Patent protection: The “glue” between innovation and capital

Professor Jonathan Barnett makes argument for robust patent system in new book

When patent protection is weakened, large companies gain protection against the competitive threats posed by smaller firms that are rich in innovation but poor in the capital required to convert ideas into new technologies. That’s the central argument made by Jonathan Barnett, Torrey H. Webb Professor of Law, in his new book, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford University Press). With the current spotlight on big tech, the book is especially timely. 

“The book can play a role in the policy conversation right now about the role of big tech in the economy in general and the innovation economy in particular,” says Barnett, who is also director of USC Gould’s Media, Entertainment and Technology (MET) program. 

Published in mid-January, the book is the culmination of more than a decade’s worth of research on the underappreciated transactional structures used to commercialize innovations in technology markets. Ranging over 120 years of U.S. economic history, Barnett examines the role of patents in supporting entrepreneurial innovation ecosystems in which outside capital supports the emergence of small-firm innovators who can challenge larger firms dominating the market.  

The role of weakened patent protections in creating “innovation drought”

Barnett’s book studies the symbiotic interaction between entrepreneurial innovation and venture capital that has been most prominent during the late 19th and early 20th centuries and the late 20th and early 21st centuries.  In both periods, argues Barnett, strong patent protection provided the “glue” that sustained these relationships.  In contrast, an overlooked four-decade period from the late 1930s through the 1970s exhibited weak patent protection and extensive use of compulsory licensing by antitrust regulators.  Innovation as measured by R&D dollars remained robust during this period, but the small innovator-entrepreneur receded from view as technological research concentrated in large companies like AT&T, GE and RCA.  

While important innovations were developed during this period, the “big tech” firms of the time were often slow in translating basic research into new technologies for consumers. “By the 70s, people were talking about an innovation drought,” Barnett says.

Barnett’s argument runs counter to a widely shared view of patents as a tax that stifles innovation, slows technology adoption, and raises consumer prices.  Barnett argues that secure IP rights are critical to an innovation economy that is hospitable to small-firm innovators that have supplied some of the most dramatic innovations in U.S. technology history.  Barnett studied closely the early years of the wireless telegraph and radio industry, the precursors to today’s ubiquitous smartphone and other wireless communications devices.  He found that independent inventors were responsible for most major innovations in the industry and relied on patents to structure licensing relationships with larger corporations who were best at bringing a new technology to market as fast and as cheaply as possible. 

“Striking” difference in how business, researchers view patents

Prof. Jonathan Barnett researched lobbying activities of firms and research institutions to better understand the values they placed on patents.

To test his hypothesis further, Barnett studied the lobbying activities of different firms and research institutions to understand the value these entities placed on patents, and why weakening patents might benefit some entities while harming others.  

In particular, Barnett reviewed and gathered evidence on the railroad industry in the late 19th century, the software industry in the 1960s-1970s and amicus briefs filed since the early 1980s at the Supreme Court.

“I found that large businesses outside the life sciences mostly file briefs asking SCOTUS to weaken patents,” Barnett says. “I also found that venture capital firms, tech transfer divisions within universities and biopharma firms usually favor strong patents. The contrast was striking and is closely tied to a firm’s business model or position in the technology supply chain.” 

The restoration of patent strength started with the Bayh-Dole Act of 1980, which allowed recipients of federal research and development funding, such as universities, to license patents without sharing their profits with the federal government, creating the foundation of the tech transfer industry and, in particular, the biotech industry, he says. The creation of the Court of Appeals for the Federal Circuit in 1982, which exclusively hears appeals of patent cases, also reinforced patents.

Barnett uses the example of Qualcomm to illustrate the resulting explosion of both technological and transactional innovation in the 1980s and 1990s. Qualcomm’s R&D efforts mostly rely on licensing its patented innovations in 3G, 4G and now 5G wireless communications, in the process lowering entry barriers and leveling the playing field for new device makers that might otherwise be foreclosed from the market, he says.

The “patent tax” analogy role in weakening patent protections

Since 2006, the “patent tax” analogy has driven a sequence of decisions from SCOTUS, weakening patent protections, Barnett says.  Congress’ enactment of the America Invents Act in 2011, and the ability for any party to challenge patents at the Patent Trial & Appeals Board, has weakened patent protections further.  He hopes the book will lead policymakers to rethink whether U.S. innovation policy is heading in the right direction.  

“Today, we’re on a weak patent trajectory,” he says. “One reason for this book is to convey to policymakers why this is probably not a good idea, because it's likely to push innovation inside large incumbents and make it more difficult for smaller firms to innovate. U.S. technology history shows that smaller firms are often the engines of an innovation economy that disrupts existing technologies, rather than just refining them.”