Incentivizing Innovation Reconciling Antitrust and IP

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1 Incentivizing Innovation Reconciling Antitrust and IP John D. Harkrider Axinn, LLC Studienvereinigung Kartellrecht International Forum EU Competition Law3 and 4 April 2014, The Hotel, Brussels Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

2 Goals of Antitrust and Intellectual Property Not in Conflict Both Seek to Improve Output and Consumer Welfare But Use Different Tools to Accomplish Goals Antitrust maximizes output by increasing competition IP maximizes output by limiting competition somewhat IP Policy More Difficult than Antitrust Too much and too little competition both reduce output Must know shape of curve and where you are on it

3 Relationship Between Competition and Output is Typically Straightforward Output More Competitive Less Competitive

4 Relationship Between Competition and Output is More Complex in Markets with Positive Externalities Output No Exclusion Rights Absolute Exclusion Rights

5 Reducing Exclusion Rights May Increase Output If Status Quo Offers Too Much Protection Output No Exclusion Rights T 1 T 0 Absolute Exclusion Rights

6 Changing Exclusion Rights May Decrease Output If Status Quo Offers Optimal Protection Output X No Exclusion Rights T 0 T 1 Absolute Exclusion Rights

7 Knowing Shape/Location on Curve is Essential for Public Policy Only Way to Know Appropriate Direction to Move Depending on location, decreasing IP protection can improve or reduce output/welfare Evidence of R&D Investment Gives Insight on Shape High investment shifts curve to right (exclusion) Low investment shifts curve to left (competition) Natural Experiments Give Insight on Location If increasing protection reduces output, likely over protecting, go no further, consider reversal If reducing protection reduces output, likely under protecting, go no further, consider reversal

8 Design Patents How Much Exclusion is Necessary to Incentivize Creation of Beauty? Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

9 Considering Shape of and Location on Curve Design has Low Research and Development Costs No functional component by definition Recognized in shorter patent life Beauty is rare but not a function of expenditures Natural Experiments Suggest Overprotection Innovation without IP protection Protection correlated with reduced R&D

10 Innovation has nothing to do with how many R&D dollars you have. Steven Jobs 0.1% Acer 1.1% Dell 2.8% 2.9% Apple HP 5.1% 5.5% 6.1% 6.7% HTC Amazon Sony RIM 8.3% Samsung 9.3% Nokia 12.2% 12.8% 12.9% 13.8% Sony Google Nokia Microsoft 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Five Year Average R&D/Sales in % Source:

11 Copying is Common in Art Pablo Picasso, Ma Jolie, 1911 Braque, Man with a Guitar, 1911 Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

12 And Fashion Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

13 And Industrial Design Apple CALC App (2007) Braun ET 44 (1977)

14 Braun T-3 Pocket Radio (1958) Apple Ipod (2001)

15 Braun LE1 Speaker (1959) Apple imac (2007)

16 We have always been shameless about stealing great ideas Steven Jobs Source: 1996 PBS television special Triumph of the Nerds: The Rise of Accidental Empires.

17 What is Relationship Between Size of Design Patent Portfolio and Investment? 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% R&D as a Percentage of Sales Apple Design Patent Portfolio Size 0.00% Source:

18 Software Patents Do we Need Patents to Incentivize Software Innovation? Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

19 Economics Literature For industries like software or computers, theory suggests that imitation may promote innovation and that strong patents (longlived patents of broad scope) might actually inhibit it. 1 Level of investment in the application is larger when the operating system is open source rather than proprietary. 2 [A]ll else equal, increases in software patent share were associated with decreases in research intensity Eric Maskin and James Bresson, RAND Journal of Economics (2009) 2. Nicholas Economides and Evangelos Katsamakas, The Economics of Open Source Development (2006) 3. Bessen and Hunt, The Software Patent Experiment (2004)

20 Test Case: Open Source Code Growth

21 Linux Powering 90%+ of Supercomputers

22 Air Interface SEPs Do We Need Patents to Incentivize Investment? Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

23 R&D Investment: 12 Largest Holders of ETSI SEPs* vs. Apple $60,000,000,000 $50,000,000,000 $40,000,000,000 $30,000,000,000 $20,000,000,000 Largest SEP Holders R&D Investment Apple R&D Investment $10,000,000,000 $- * Ericsson, Huawei, InterDigital, LG, Motorola, NEC, Nokia, NTT, Panasonic, Qualcomm, Samsung, Siemens

24 Relationship Between R&D and Declaration of SEPs by 12 Largest Owners of SEPs* 35,000 30,000 25,000 20,000 15,000 10,000 5,000 $50,000,000,000 $45,000,000,000 $40,000,000,000 $35,000,000,000 $30,000,000,000 $25,000,000,000 $20,000,000,000 $15,000,000,000 $10,000,000,000 $5,000,000,000 Declared ETSI Patents R&D Expenditures $- * Ericsson, Huawei, InterDigital, LG, Motorola, NEC, Nokia, NTT, Panasonic, Qualcomm, Samsung, Siemens

25 Did The System Adequately Incentivize Innovation and Adoption?

26 Why Banning Injunctions Might Lead to Sub-FRAND Rates Jurisdiction Distinct Declared Patents Estimated Suits Estimated Litigation Costs United States 1, $ 654,500,000 China 1, $ 599,500,000 Republic of Korea $ 550,000,000 Japan $ 412,500,000 Australia $ 192,500,000 Germany $ 165,000,000 Canada $ 143,000,000 Russia $ 126,500,000 Brazil $ 71,500,000 Austria 64 7 $ 38,500,000 (Others) $ 313,500,000 Total 5, $ 3,267,000,000

27 Marketplace Guidance that Intervention Reduced Value of SEPs Enforcing SEPs is problematic in China: injunctions may not be possible; royalties are lower than normal. Patenting standards are no longer a brilliant idea. Contrary to the traditional notion, standard essential patents now seem to have limited value. Implementation patents are much more valuable than standard essential patents. China_IPR_Considerations_for_the_ICT_business.pdf at 5-6.

28 Looking at the Impact of Rule Changes 3000 ETSI US Primary Patent Declarations ETSI US Primary Patent Declarations 500 0

29 Conclusion Public Policy Implications Axinn, Veltrop & Harkrider LLP LLP New New York York Washington, DC DC Connecticut Connecticut Axinn.com Axinn.com

30 It s All Connected Smartphone Wars Involve at Least 3 Patent Types Design patents Utility software patents Utility air interface patents Each Patent Type has Different Curve Different shape Different location Increasing Power of One Type Reduces Power of Other Voluntary cross-license Litigation cross-claims

31 Public Policy Implications Design Patents Did increased protection reduce output? Suggests we were overprotecting And we protected even more Software Patents Lots of innovation without protection Suggests we are overprotecting And we protected even more (enabling trolls) Air Interface SEPs Any evidence we were over/under protecting? Any movement will reduce output