Google Buys Motorola: The Real Story

This is big news: Google buys Motorola for $12.5 billion. Why buy a mobile phone company that’s struggling? What makes it worth so much money? Why does Google want to get into the hardware business, anyway?

Everyone in the industry understands the real reason: Google wants Motorola’s 17,000 patents. Google doesn’t intend to use the patents to invent new products; instead, they intend to use the patents as defensive tools in an obscure but critical corporate battlefield: intellectual property law. Last month, a coalition of companies including Apple and Microsoft paid $4.5 billion for the 6,000 patents of Nortel Networks. Google felt threatened; they needed a comparable pool of patents to seriously compete in the legal battles that are guaranteed to follow.

The reason why legal battles are guaranteed is that every company is vulnerable. There are so many patents on software ideas, and they’re so vaguely and broadly written, that every company might be said to be in violation of something. Google’s chief lawyer recently wrote “A smartphone might involve as many as 250,000 patent claims” that are probably questionable, but still you have to defend against those claims in court. So what happens is that the big guys get their lawyers and accountants together in a room, and they trade patents like poker chips. Eventually, they come to an agreement not to sue one another, sometimes in exchange for a supplementary cash payment (if everyone agrees that one pool of patents is worth more than another).

Apple, Microsoft, and Google are mature companies and they’ll work out a deal. What everyone is more worried about are the so-called “patent trolls.” These are companies that don’t make anything; they only exist to sue other companies for violating their patents. (The nice term for them is “non-practicing entities.”) You can’t negotiate with them because they don’t need anything that you have; they only want a cash settlement.

Is this the way to foster maximum innovation? I’m not a lawyer, but I have to believe the answer is NO.

Also see my previous posts on patent law:

Creativity and the Law

I just returned from a fascinating event at Notre Dame Law School, the Creativity and the Law Symposium. Organized by Professor Mark McKenna, the symposium consisted of 14 presentations, most of them by intellectual property (IP) lawyers who are looking to psychological science to learn how IP law can best foster creativity and innovation.

The first thing I noticed was that all of these legal scholars accepted an instrumental view of IP law: that the purpose of IP law (which includes patent, copyright, and trademark) is to foster maximum societal innovation, for the good of all. I didn’t hear a peep about a competing view that you might call the property view: that my ideas and creations are my personal property, and I have an inalienable right to own them, just like I own my house or my classic BMW motorcycle. That’s fine with me, because I also believe that IP law should be designed to foster the maximum creativity of all. My own studies of creativity demonstrate how each new creation is always a rather small advance on the large body of knowledge and expertise that has come before, so being overly possessive about your own ideas is always an error.

Two information conversations stick in my mind: One with Professor Greg Mandel, of Temple University, who told me that many legal scholars had begun to draw on psychological research to inform the law. This move across disciplinary lines is similar to an earlier foray into economics; economics scholarship (particularly microeconomics and behavioral economics) has been influencing the law for some time now. Greg’s paper introduced the day’s symposium, and he drew on the sort of psychological research that I review in my book Explaining Creativity.

A second was with Abraham Drassinower, of the University of Toronto. In our conversation, we reflected on this whole endeavor, asking the question: What are the real-world implications for the law, of psychological research? After all, throughout history, law has never been based on scientific research. It has always been based on normative claims about human relations, it always involves culturally specific conceptions of the individual and his or her relationship to the collective.

In my talk, I described the “Western cultural model of creativity” and ten associated beliefs that are widely assumed in the United States (but which are not supported by research). I drew on the group genius of the assembled legal scholars, and for each of the ten beliefs, I asked them to tell me how current IP law was, or was not, based on these assumptions.

I share the approach of my legal colleagues: Our goal should be to align IP law with the way that creativity and innovation actually work, as revealed by empirical study. I was delighted to participate in this stimulating event.

Can You Patent a Process?

The Supreme Court has recently agreed to hear a case questioning whether a “business process” can be patented.  Thousands of patents now cover business processes, including the famous (or infamous) patent on ordering with “one click”.  But there’s been a lot of debate about whether a novel process should even be patentable at all.

The case is known as Bilski v. Doll.  And the Supreme Court rarely agrees to hear patent-related cases, so everyone is paying close attention.  The patent request, for a method for hedging risks in the sale of commodities, was filed by Bernard L. Bilski and Rand A. Warsaw in 1997.  The patent examiner rejected the application because it failed to meet a test laid out by the U.S. Court of Appeals for the Federal Circuit, which limited business process patents as follows: a process must be tied to a particular machine or apparatus, or it must transform a particular article into a different state or thing.  This has become known as the “machine-or-transformation” test, and the hedging risk process did not meet that test. The applicants appealed the rejection, which was upheld by the Federal Circuit (not surprising, because they came up with the test in the first place!).  Bilski further appealed to the Supreme Court, which is now considering whether or not this test is too restrictive.

Whatever the outcome, the issue of business process patents is complex and unlikely to be settled by the Supreme Court this time around.  The consensus in the business community is that process patenting has gotten out of hand.  Even IBM, which year after year is granted the most patents of any company, is against process patents.  IBM lawyer David Kappos says “In the industrial age, innovation primarily was the result of work by individuals or small groups within enterprise.  The nature of innovation has changed. Today, we benefit from innovations made possible through highly collaborative and interconnected technologies.” (quoted in L. Gordon Crovitz’s WSJ editorial on June 15, 2009, p. A13).  This is exactly the message of my book, GROUP GENIUS.

Idea Sharing in Nonprofits

The intellectual property issues just keep coming up! (See my previous posts on IP issues.)  Maybe I should go back to law school…

This morning, I was interviewed by a team of researchers at Blekinge Institute of Technology in Sweden; they are studying collaborative innovation networks and how they can contribute to transformational change towards a sustainable society.  Then, I read an article in the New York Times, an interview with Lawrence Lessig (famous advocate of creative commons licensing and other radical changes to copyright and patent).

My discussion over Skype to Sweden was focused on nonprofit organizations (in the rest of the world, they’re called non-governmental organizations or NGOs).  Anyone who works with nonprofit organizations has noted their seeming inability to collaborate, their need to keep control over their sphere of activity.  And accompanying this is a frustrating tendency to reinvent the wheel–for multiple nonprofits to be operating in the same space, with the same mission, when their target audience could be much better served if they joined forces.  I thought that perhaps this was a uniquely American problem, so I asked if they thought Swedish nonprofits collaborated well–their response was to laugh.  In fact, they were the ones who brought up the phrase “reinvent the wheel.”  So we know at least it’s not limited to the U.S.

So how do we foster collaboration and sharing among nonprofits?  The intellectual property scholars, like Lessig, have argued that the current IP regime blocks collaboration by granting too strong an ownership right to creators.  (I argued this as well, in the final chapter of my book Group Genius.)  The ownership right (patent or copyright) allows the creator to charge whatever he or she wants for the privilege of using it, or blocking its use altogether.  Lessig has argued for mandatory licensing at a government-specified usage fee.

But when it comes to nonprofits, people aren’t motivated by profit.  The incentives are very different, and I don’t have a good understanding of what they are–genuine desire to help the underprivileged…but if that’s the motivation, then why isn’t there more collaboration?  Maybe it’s a big ego, the sincere belief that you know best how to help the underprivileged.  Maybe it’s the “founder mentality” that you see in so many venture-capital startups, where the organization is so closely identified with the founder, and the founder (who remains the executive director) has difficulty delegating or sharing authority.

I don’t think nonprofits patent their business models; I don’t think they should!  I’m thinking of a local St. Louis organization, KidSmart, that provides school supplies to students who can’t afford to buy pencils and notebooks.  There are similar organizations in cities around the country; none of them are paying royalties to the very first such outfit (and that’s a good thing). They borrow ideas from each other all the time.  But what if another nonprofit started up in St. Louis, doing the exact same thing?  Wouldn’t that be odd–why wouldn’t those folks just join on with KidSmart?  That hasn’t happened…but similarly odd things happen all the time (thus the phrase “reinventing the wheel”).

So maybe the “creative commons” is the right way to think about innovation in the nonprofit sector. (I don’t think it’s a good model for for-profit innovation, by the way.) But we need more research on exactly what motivates nonprofit volunteers and workers, and what forms of collaboration and idea exchange will result in the greatest benefit to the greatest number of needy people.

Do Patents Increase Innovation?

The answer, according to a new study, is NO.

There’s a lot of evidence that property rights in general lead to more successful economies: countries that have laws to protect individual property owners experience more rapid economic growth.  Some economists have argued that this should hold true for strong patents, too–after all, a patent is a property right, just like owning a farm or a house.  But even though strong property rights lead to higher growth, that’s not true for strong intellectual property rights.

A recent paper by James Bessen and Michael J. Meurer* collects a wide range of evidence.

Historical evidence: Most patents are granted in industries that demonstrate little innovation.  Through the 19th century, most inventions were not even patented (only 11% of British inventions displayed at the 1851 World’s Fair, for example).  A study of important innovations at the 1851 and 1876 world’s fairs found that countries with patent systems weren’t any more innovative than countries without.

Cross-country evidence: An “intellectual property rights index” was calculated for each country, and there was no relation between a country’s score on this index and its economic growth.  Increasing IP rights tend to be correlated with R&D spending, but it turns out the causality goes the other way: first a country starts spending more on R&D, and then later they increase IP rights strength.

Natural “economic experiments”: Following changes in IP law, what happens historically?  Japan increased patent scope in 1988, and this has not resulted in greater innovation nor in increased R&D spending (beyond what would have been expected without that change).  The U.S. changed its treatment of software inventions in the 1990s, but this did not result in an increase in patents by software firms.  (Instead, patents went up in companies known for “stockpiling large arsenals of patents to use as bargaining chips”.)

Surveys of companies find that most inventions are not patented; instead, companies rely on trade secrets and on their first-to-market advantage, or on complementary products and services.

The one exception is pharmaceutical companies, where patent protection seems to increase innovation.  But for other industries, it turns out that the costs of getting, enforcing, and defending a patent are much higher than the profits to be earned from it.  In 1999, for example, the total profits from patents in all U.S. public firms (excluding pharma) was about $3 billion, but their litigation costs associated with those patents were a whopping $12 billion!

The authors’ conclusion?  “in most industries today, patents may actually discourage investment in innovation.”

*Bessen & Meurer, August 2008, “Do patents perform like property?” Academy of Management Perspectives, pp. 8-20.

The Creative Industries Around the World

This last week, I visited the World Intellectual Property Organization (WIPO), a United Nations agency based in Geneva. I was the lead-off speaker of a two-day conference called “Intellectual property and the creative industries.” By “creative industries” they mean money-making ventures based in the creative process: the primary topics of discussion were movies, music, and videogames. There were speakers on the program who represented each of those industries, and the ministers of culture from Lebanon, Jamaica, and Nigeria.

The creative industries make a big impact on the bottom line: in the average OECD country, between 5 and 6 percent of GDP comes from the creative industries. The United States is far ahead of the pack: over 11 percent of U.S. GDP comes from the creative industries. (And we’re just about the only country without a ministry of culture!)

Our stereotype of creative activity is the starving artist, painting in the basement; or the depressed poet, writing somewhere out in the woods. But the forms of creativity that make a big economic impact are complex, organized, and collaborative–think Hollywood movies or major new videogame releases: a single new movie or videogame involves hundreds of people and costs $20 million dollars plus. In spite of the high cost, these investments can pay off big: Halo 3, the new videogame for Microsoft’s XBox, made over $300 million in its first few weeks. The studio music recording industry is also complex and collaborative; it starts with a song, but then enters a multi-staged collaborative process (brilliantly demonstrated at this conference through a documentary video displayed by Ms. Laura Tesoriero, President, EPSA Music, Buenos Aires).

A few things were missing from the conference. Most of the speakers were advocates for rightsholders, and for mechanisms to protect against copying and piracy, such as Digital Rights Management (DRM). But there are strong voices out there arguing for “free culture” and “creative commons”; developing countries who argue that protected pharmaceuticals cost too much and that they are morally justified in producing copies, because they save lives; such voices were not present at this conference, and the result was that it felt like we were all preaching to the choir. When I presented my argument for mandatory licensing and for a cap on licensing fees (you can find it at the end of my book Group Genius), I felt like I was upsetting the consensus–even though I’m a big supporter of intellectual property rights.

A second thing missing was those industries based on patents rather than copyrights; most of the talks clearly assumed the copyright as the model for IP. But many people would argue that software, for example, is a creative industry, and patents are more relevant than copyrights in that industry.

And, finally, those traditionally high status creative activities like painting, poetry, and novel writing were not represented. It’s perhaps to be expected that national governments would focus on the highest-revenue industries. But publishing is not an insignificant business; many books generate millions, and a large number of successful movies are based in novels. And the art world is often the source for new trends in graphic design and packaging. While focusing on the big-money industries, we shouldn’t lose sight of the full range of creative activities–all of them are critical components of culture.

It’s Obvious (KSR v. Teleflex)

How do you translate a new idea into a profitable innovation? One of the first steps is to get a patent, to make sure that no one else can steal your idea. To receive a patent, you have to show that your idea meets three criteria: it has to be novel; it has to be useful; and it has to be not obvious. It turns out that this notion of “nonobviousness” is very hard to define, and this is a pressing issue among patent lawyers today.

Yesterday and today, I’m a participant in a conference at Lewis and Clark Law School, in Portland, Oregon, where scholars from different backgrounds are trying to work out this complicated notion of nonobviousness. I’m one of 16 scholars; three of us are psychologists who study creativity, and the others are lawyers, economists, and R&D managers at high tech companies (including IBM and Microsoft).

The issue is timely, because in April, 2007, the Supreme Court decided a case about nonobviousness–the first case they’ve taken on this topic since 1966. A company named Teleflex had received a patent for combining two existing patents. The first prior patent was an adjustable gas pedal, so that drivers with short legs could move the pedal forward. The second patent was for an electronic sensor that could detect how far down the driver had pushed the pedal; the sensor would send an electronic message to the carburator, thus getting rid of the wire cable that used to do the job. Teleflex had been granted a patent for an adjustable pedal with an electronic sensor; they had sued another company, KSR, who had later come up with the same combination and was selling the product. KSR argued that the combination was obvious, and therefore that the Teleflex patent should be invalidated.

Every major player in the U.S. economy took sides in the case, because the potential was that the Supreme Court could radically raise the standard for receiving a patent, making life harder for inventors, university technology transfer offices, and small high-tech companies. Larger companies (Microsoft, Cisco), generic drug manufacturers, and open source software advocates hoped that Teleflex’s patent would be overturned, and hoped that the Court would specify a harder-to-meet standard of nonobviousness.

The unanimous, 9-0 decision overturned the patent, on the grounds that the combination was obvious. And this was a hugely important decision, because the Court rejected the standards that the Patent and Trademark Office, and the lower courts, had been using to determine obviousness.

The Court’s decision is complex, and leaves a lot of issues unresolved. But overall, I think the Court made the right decision, because I believe this new decision allows collaborative webs to innovate more smoothly (in the way that I describe in my book, Group Genius). What are your thoughts?