Are stronger IP rights good or bad for innovation? There is very little empirical evidence.
A recent report by the DoC claims to provide this evidence. Unfortunately, even a first reading demonstrates that the report is worse than worthless, it is downright misleading.
What is the effect of IP rights on the economy and on innovation?
There is very little empirical evidence on this question.
The basic question is (or should be): are IP rights, defined as temporary monopolies that serve as a tool for innovation policy, effective?
In other words, do we actually have more or better innovation and creativity because of the exclusive rights granted to IP holders?
In March 2012, the US government’s Department of Commerce (“DoC”) issued a report called “Intellectual Property and the US Economy, industries in focus”. You can find it here.
It was prepared by the Economics and Statistics Administration and the USPTO (the patent and trademark office).
The report aims to answer the question described above.
But unfortunately, it does nothing of the kind. Both the way in which the questions are formulated, and the methodology to come to an answer, are fundamentally flawed.
How are the questions asked, and why is that wrong?
The report sets out to identifying what are called “IP intensive industries” and examining their characteristics and contributions to the overall economy.
At the introduction, the report starts by making two fundamental mistakes.
First, the report states that “One important way to help encourage innovation is through the protection of Intellectual Property (IP).”
This statement is made without any reference or evidence. But this is exactly the key question in the IP debate – is this assertion correct?
Therefore, the report is fundamentally flawed, since it postulates as a paradigm a completely one-sided approach to the key question which is at the heart of IP debate: is high protection good or bad for innovation?
The second fundamental mistake of the report is in line with this approach. Throughout the report, the expressions “Intellectual Property” and “IP rights” (or IP protection) are used intertwined.
But they are not the same, and the distinction between Intellectual Property on the one hand and Intellectual Property Rights on the other is essential. Intellectual Property (a misnomer, it should be called Intellectual Capital) is the combination of know-how, innovation and creativity that is at the heart of innovative industries.
Intellectual Property Rights, on the other hand, are the legal tools like patents and copyrights, allowing businesses to claim distribution monopolies for certain aspects of Intellectual Capital.
But Intellectual Capital is much, much greater and more important than Intellectual Property Rights.
To give an example: it is the difference between a book and the copyright in that book. They are not the same, and their values are not the same, or even remotely connected.
The combined works of William Shakespeare have tremendous value in society. There is no copyright on those works.
But, in the approach of this report, the value in the works of William Shakespeare is used as an argument to state that “IP intensive” “copyright-based” industries have a lot of value and contribute a lot to society.
This is so deeply intellectually dishonest, that it actually boggles the mind.
You might as well make the claim that, because in the US, people of the catholic religion are involved in 25% of the total production of the US economy, there is a clear case for forced conversion of the whole population to Catholicism.
The findings of the report effectively mean that we have a lot of Intellectual Capital in the US, and that innovation and creativity are essential. I don’t think we needed a study to establish that.
But what is the connection with patents, trademarks and copyright? Not a single sentence in the report clarifies it.
That which must be proven, is taken for granted.
So, apart from establishing that the report, in its initial approach, is wrong and worthless, we also see some pretty fundamental mistakes in its methodology, to the effect that even if we were interested in understanding the value of Intellectual Capital, this report does nothing to help us.
The report tries to identify “patent-intensive”, “trademark-intensive” and “copyright-intensive” industries.
By overlapping these three IP rights, it makes a first fundamental mistake.
Trademark is not about innovation or creativity, but about identifying a business’ goods or services against those of competitors. While that is important, and represents a lot of value, it is not creative or innovative – no new technology is developed as a result of a trademark registration.
In other words, using trademarks to establish the importance of patents or copyrights is very, very sloppy thinking indeed.
A second fundamental mistake is how “patent-intensive” is defined. It is defined based on the number of patent registrations, but not on the number of patents actually used by businesses for the products or services they offer to the market.
Now, as any patent attorney can tell you, anywhere between 90 and 98% of all patents granted are never actually used, either for licensing or in another way.
In other words, this report measures something massively insignificant, and then extrapolates that information.
A third fundamental mistake is the definition of “copyright-intensive”, where hardly any mention is made of the software industry.
This is telling – most software is in principle covered by copyright, but the report does not find it necessary to regard software as an important copyright-based industry – it focuses almost exclusively on content protected by copyright (books, music, film, etc).
A fourth fundamental mistake, along the same lines, is how the report ignores open source or creative commons. The words are not even mentioned.
However, with more than a third of all software now in Open Source, that is plainly ridiculous. Especially since, according to the reasoning of the report, any use of Open Source would clearly demonstrate the importance of strong Intellectual Property Rights. This is rather absurd, since the claimed purpose of Open Source is to deny the applicability of Intellectual Property Right protection (with the exception of trademarks).
A fifth, and interesting, mistake is that the report seems to consider revenues of patent trolls as economic value created by patents. I think many would disagree with that approach – and the really interesting point here is, of course, that the report seems to avoid to go into this debate. My guess is, on purpose.
A final mistake clearly illustrates how the report’s methodology is pretty much worthless. The “Trademark-intensive” calculations show how certain companies and industries rely on trademarks to protect their brand.
The report’s methodology (again, based on registrations, not on actual use) indicates that companies such as IBM, Intel, General Electric and McDonald’s are not “trademark-intensive”. I think I can rest my case on that.
So, we have a report that aims to show that “IP-intensive” industries are important, and contribute a lot to the economy.
When we translate “IP-intensive” as “based on innovation and creativity”, the report says something we knew all along, but uses a methodology that is completely unreliable to come to its actual numbers – it is a waste of time and money.
When we translate “IP-intensive” as “based on Intellectual Property Rights” – as the report confusingly does sometimes, but not consistently – the report is downright misleading.
This is a great pity.
The debate on how IP rights affect innovation is an important one, and one that has entered the public debate, as evidenced by the SOPA, PIPA and ACTA discussions.
What is the best way to ensure more innovation and creativity? Stronger IP rights? Weaker IP rights?
Since IP rights are a tool of innovation by governments, shielding certain innovations from market efficiency, in the hope that the additional rent will cause additional investment in further innovation and creativity, it is important to know if we get this balance right.
Unfortunately, this report only muddles the water, and is an affront to the US government.