Prof. Robert Merges of UCal Berkeley Law School sent some thoughts triggered by recent patent blogs:

1. Patents and Small Business. An important article on this topic is Ronald Mann, "Do Patents Facilitate Financing in the Software Industry," 83 Tex. L. Rev. 961 (2005). This is a nuanced study, as befits a serious scholar, but the bottom line is that patents are associated with success (particularly later-round venture capital financing) in the software industry.

On a somewhat related front, I have recently written a paper "A Transactional View of Property Rights" [issued by the Berkeley Center for Law and Technology (2005)] in which I argue that patents serve a very important purpose in facilitating contracting. In the final section of the paper, I argue that this is particularly important in the emerging economy, characterized as it by the emergence of many small, specialized firms -- a setup that puts a premium on inter-firm contracting.

Paul Heald, of the University of Georgia Law School, has a similar paper making the rounds, called I believe "A Transaction Cost Theory of Patent Law" (March 5, 2003).

2. Patent Reform and the Standard for Injunctions. This has become a very contentious issue in the patent reform wars. I think that your argument that it relates to the FOSS model is not the heart of the matter. The essence of the problem, it seems, is that the patent system as currently constituted is both important to innovation, and full of opportunities for socially wasteful activities, in particular patent "extortion" games -- what economists call "rent seeking." What the Intels of the world experience is a relentless stream of demand letters, many from patent extortion shops of one description or another. They are sick and tired of being punished for making successful, valuable products -- which makes them targets. They are the heroes of the US innovation system, yet they feel beleaguered by those who would use patents to feed off their success. Since the threat of injunctions drives many of these extortionate threats, Intel and others logically take aim at this issue.

The problem is that the legislative solutions proposed to date might have the effect of damaging some of the small startup firms I mentioned in point 1, above. The trick, as I see it, is to differentiate the extortionists mentioned above from the "virtuous" startups discussed in point 1. Ideally, wise, sagacious district court judges armed with a flexible, deferential appellate court standard would weed out the good from the bad in applying the injunction standard. I am not sure we can get there with the current institutions in place, so a legislative push may be necessary, but we have to be careful not to overdo it. That's my main point: we have to be careful not to harm true innovators with a ham-fisted standard. And I think a simplistic test, such as "is the patentee a manufacturer?" is not the right approach. Look at all the startups that do not, and in the age of globalized outsourcing *should not* manufacture their own products. Dolby Labs here in SF is a good example. I would hate to see Dolby patents devalued by a broadbrush legislative "fix" to the rent-seeking of the extortionists.

posted by James DeLong @ 2:33 PM | Patents

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