“Big tech multinationals know that if they steal an invention, they can easily invalidate the patent [and that], even if they fail to invalidate it and they lose an infringement case, the worst that will happen is they will be awarded a compulsory license with damages calculated by a liberal arts major in a robe.”
In a functioning patent system, inventions become investible assets when they are patented, and the value of the invention increases as market demand increases. Because of the direct relationship between market demand and patent value, a patented invention can attract enough investment to compete with entrenched incumbents in the market for the invention.
This effect introduces new competitors into the market who are protected against incumbents for a long enough period that they can survive after the patent expires. Thus, patents act to increase competition by introducing new competitors into the market and thereby create competitive markets. But perhaps even more important, some inventions deliver a strong dose of creative destruction to monopolistic incumbents who did not innovate fast enough, causing those companies to fail and clearing the market of dead weight, thus opening the market to innovative new companies.
Patents are the ultimate anti-monopoly in a free market. But for this to work, the market must function undisturbed by crony laws and regulations. A patent must be a presumed valid “exclusive Right.”
The Exclusive Right Creates Market Scarcity
Like any free market, the value of an invention is determined by variations in supply and demand. Demand for an invention cannot be increased or decreased for an invention except by market effects outside of the invention. But supply is different.
If supply for an invention is unlimited, the value of the invention is zero no matter how high demand goes. Therefore, an invention with unlimited supply has no value and can never attract investment. The problem of unlimited supply was corrected by the Founders, who wisely constructed a patent as an “exclusive Right” in the U.S. Constitution. (The word Right is used only once in the Constitution and capitalized in the original.)
The exclusive Right creates scarcity in the market for the invention—it prevents anyone other than the inventor from commercializing an invention protected by a patent. This limits supply so that demand can act to increase the patent’s value. Thus, the exclusive Right creates an investible asset that can be collateralized to attract enough investment to commercialize an invention and supply it at a level that meets demand.
The exclusive Right also keeps entrenched competition on the sidelines, allowing the startup to build the substantial resources necessary to compete against entrenched competition when the patent expires.
The exclusive Right encourages everyday people to invent and patent their inventions because a patent generates a value in relation to demand of the invention. They can license it, sell it, or commercialize it, but whichever path they choose, they get the investment of their hard work and money returned.
Without the exclusive Right, huge incumbents take marketable inventions and massively commercialize them by leveraging their established markets and deep pockets, thereby excluding from the market all others who cannot match their resources. The big win and the little lose. The inventor who risked so much to get their piece of the American Dream is left with a booklet of paper, a line on their resume, and tens or hundreds of thousands of dollars in debt, while the huge multinational thief gets even bigger. Without patents, monopolies are perpetuated.
Patents Are Most Valuable at the Earliest Stages of a Startup
In a perfect system, when an inventor invents something and files for patent protection, the startup has no customers, no product, no employees, and no sales, marketing, production or distribution capabilities. In most cases, there are no assets that can be collateralized to attract investment other than a patent.
At this early stage, demand for an invention is not known and will not be known until the product is created and put on the market. This is the point of highest risk for the inventor and investors. They bet it all on the patent’s exclusive Right that will create economic scarcity, thus limiting supply, and their own calculations of future demand.
Nobody can accurately project demand for an invention until it is tested with a viable product on the market. So, the first investment a startup attracts (often called angel or seed investment) is often just enough to prove demand. As the startup tests demand, it creates a product, attracts a core team and builds other investible assets.
If demand is proven and assets are built, the startup may attract venture capitalists (VC) who invest bigger money. Each subsequent round of VC funding builds more investible assets, so the patent becomes less and less valuable in relation to the other assets in investment decisions.
It is important to note that the first investment is primarily based on the patent and its presumed valid exclusive Right. This first investment is the most important investment because without it there can be no further investment. Without the first investment, the startup does not start.
Patents are Anti-Monopolies Only When Law Supports Free Markets
Patent’s anti-monopoly power is only effective if a patent is truly an exclusive Right that is presumed valid because there is a legitimate belief that the courts will uphold it.
The U.S. government has abandoned protecting patents for startups on multiple levels. Injunctive relief is highly restricted due to eBay v MercExchange; the Patent Trial and Appeal Board (PTAB) remains a killing field, wiping out over 80% of challenged patents; Section 101 exceptions have destroyed business method and software patents; patent suits must be filed at the headquarters of the infringer, creating venue chaos and radically increasing risks and costs; damages models have been obliterated, crashing damages awards as a result; the rational tests for obviousness are gone, replaced with hindsight bias; and much more. There is no longer any presumption of validity and no longer an exclusive Right.
Virtually every decision coming from any branch of the U.S. government related to patent protection in the last 15 years has gone against startups, independent inventors and other small entities. These decisions have tilted the field so far in favor of big tech that there are no longer contingent fee attorneys and no investors. The small cannot even get their day in court.
Today, big tech cannot be challenged with better technology because the only effective tool enabling competition has been destroyed. Judicially-created Section 101 exceptions specifically target business methods and software inventions—the very type of inventions that make up the core business models of the big tech giants. Business methods that are today unpatentable subject matter include page ranking algorithms (Google), “like” or “friend” buttons (Facebook), shopping carts (Amazon), online auctions (eBay), and many more. But big tech defends 101 exceptions because they have already monopolized these technologies and patents are the sole threat to their monopolies.
The sad result is that big tech multinationals know that if they steal an invention, they can easily invalidate the patent. They also know that, even if they fail to invalidate it and they lose an infringement case, the worst that will happen is they will be awarded a compulsory license with damages calculated by a liberal arts major in a robe who has never started up a company or marketed a product, and cannot possibly know what the market value of an invention is. If they steal it, they keep it and the cost is lower than licensing it in the free market.
Big tech multinationals simply watch and wait as new startups are built on new business methods and software. If the startup earns significant market adoption, big tech swoops in and copies the business method into their own platform. Then, leveraging their monopolistic user bases, search algorithms, data mining, endlessly deep pockets, app stores, and oligopoly relationships, they drive market saturation to their own platforms, thus running the startup out of business and burning all that was invested into it. The inventor and their investors are powerless to stop it.
Their business models are safe from creative destruction served up by a startup with better technology, and they have monopolized as a result. So now politicians consider enforcing antitrust laws against big tech to end the abuse of their monopolistic positions. It is beyond unfortunate that it is now necessary to use antitrust laws to restore free markets by breaking up big tech’s operating control of these markets.
If the U.S. government had not destroyed the patent system, startups with better technologies could disrupt big tech and more competition would be inserted into the market. Big tech companies that are not innovating faster than startups would be cleansed from the market and replaced by more innovative companies. Free and competitive markets would return without government intervention because patents are a natural anti-monopoly.
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