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Are Patents Evil?

There are many groups advocating that patents should be banned, or that the rights of patent holders should be curtailed as they lead to an abuse of power, less competition, and make it impossible for start-ups to flourish. However, every one of these points has either been disproved or discredited by deep-reaching studies that investigated these claims.

Ronald Mann of Columbia University Law School published an interesting article in which he provided the results of research that showed that patents were beneficial to firms in the software industry seeking financing and, interestingly, were more beneficial to smaller firms than to larger firms.

The Article then turns to address claims that the proliferation and assertion of software patents has held back innovation in the software industry by creating impenetrable patent ‘thickets’. Mann’s research clearly rejects those claims for two broad reasons: First, direct evidence of high R&D spending in the software industry undermines claims that software patents cause firms to reduce R&D spending. Second, the structure and practices of the software industry belie any claim of a patent thicket. Relying on interviews that he conducted and publicly available information, Mann show that the development of young firms in the software industry is not significantly constrained by the existence of large patent portfolios in the hands of incumbent firms.

Mann’s research also contextualizes the role of patents by examining the (relatively) weaker protection that copyright and trade secret can afford. Neither of those systems can provide a useful mechanism that would allow small firms to maximize and protect the values of their inventions. If such protection is a significant positive benefit of the patent system, it is equally true that neither copyrights nor trade secrets contribute significantly in that respect, however useful they might be in other roles, such as preventing piracy. Also, many of the advocates in the software industry calling for the abolishment of patent rights or curtailing the rights of ‘patent trolls’ (companies who hoard patents but don’t produce any products) have been unmasked as either being serious patent filers themselves, or are themselves parts of, and contributors to, consortiums which act much like patent trolls themselves.

In a 2008 article by Stuart Graham of the University of California, Berkeley, and colleagues, it was discovered that holding patents is much more widespread among technology startups than has been previously reported. However, the patterns and drivers of holding patents are industry and context specific. Their analysis showed that the drivers of startup patenting are often associated with capturing competitive advantage, and the associated goals of preventing technology copying, securing financing, and enhancing reputation.

They also found marked differences between the levels of patent between companies that have received VC backing and those that haven’t. Other studies have reached similar conclusions: patent applications – as signals from ventures to funders – are positively related to VC-financing. Yet other studies suggest that VCs pay attention to anticipated patent quality and finance ventures with high quality patents faster.

There’s also the added benefit that patent applications trigger institutionalized processes at the patent office, which can generate valuable technological and commercial information via search reports, citations and opposition procedures and thus affect VC-financing.

Think of the exclusionary rights afforded by IP in this way: I own my house. This means that I am allowed to stop people from coming into my house or trespassing on my property. If I want them to cohabitate with me, I can charge them money or I don’t have to charge them money, but I can get most likely some other benefit such as having them helping me with the dishes or laundry. However, I can’t stop anyone from entering my street, or prevent them from staying in my neighborhood. In much the same way, patents only provide me with protection for the technology that I invented – I can’t preclude anyone from entering a whole field of endeavor with my patent.

If they want to use my particular patent, they either have to pay me to use it, or they can buy it from me, or I can let them use it for free or for some other benefit that they can provide to me.

So no, patents and other forms of IP aren’t evil, but constitute a valuable business tool in just about any industry you can think of.

Making sure your start-up follows principles of IP-centricity can help ensure that it actually, well, starts up.

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