Dec. 10, 2018

Federalist Society Regulatory Transparency Project Paper: Will Overzealous Regulators Make Your Smartphone Stupid?

I. Introduction

We live in an extraordinary time. No area of our lives is untouched by remarkable innovations in technology. The revolution in digital technology that first began in the mid-twentieth century has changed how we live, work, and play. We navigate using GPS-enabled map services on “smartphones” (really micro-computers) in our pockets; we instantly communicate with family, friends, and colleagues anywhere in the world; we enjoy computer-operated coffee machines, refrigerators that create grocery lists, and remotely programmable home heating and cooling systems; and we entertain ourselves with programming accessible almost anywhere, any time, and on any number of devices. Innovation makes our lives easier, more productive, and more fun.

Unfortunately, the benefits of all this innovation is threatened by overzealous regulation by government bureaucrats. While some regulation is necessary and plays a laudable role in society, it is becoming increasingly intrusive, and is hindering innovation. Specifically, interference in the patent system is deterring innovative enterprises from doing what they do best—creating new and ever more useful products for us to use and enjoy.

To understand how overregulation is hindering innovation, it is important to understand the relationship between innovation and the patent system. Inventing is expensive and time-consuming, regardless whether we’re talking about the next generation of smartphone, new diagnostic equipment that enables early-stage detection while disease is still curable, or some new device none of us can yet imagine. Inventing is also risky. For every technological advance that shows promise, many more fail; and even successful inventions may not prove popular with consumers. For an innovating company to spend millions, or even billions, of dollars on research and development (R&D) to create these inventions, the company has to believe that it will recoup its expenses and earn enough profit from the few successful inventions to fund ongoing R&D to create more innovation.

Companies working in the innovation industries justify R&D expenditures and assumption of associated risk on their ability to obtain reliable and effective property rights in the fruits of their inventive labors. These property rights include patent protection, which secures to the inventor the right to exclude others from practicing an invention for a limited time, in exchange for making it known to the public (and allowing it to enter the public domain at the end of the patent term). The idea that an inventor possesses a property right in her invention has long been recognized in America as mutually beneficial to both the individual inventor and to the public.1 The same principle applies to all property; for example, farmers till the soil and husband crops for many months based on the promise of property rights in the output, which benefits everyone with increased food. This same commonsensical idea, securing reliable property rights in the output of inventive activity, underlies the patent system.

Unfortunately, regulatory overreach in the past decade has diminished the patent property right and has called into question the value and enforceability of these rights. The evidence is growing that the U.S. no longer has what was once known as the “gold standard” patent system. For example, for the past two years in a row, the United States has fallen from its perennial first-place position in a prominent annual ranking of world patent systems by the U.S. Chamber of Commerce. After falling from first place to tenth last year, the U.S. patent system is now ranked twelfth in the world, tied with Italy and behind Ireland, France, Spain, and Singapore, among others.2  China, a country many people think of as characterized by intellectual property (IP) theft has risen rapidly in that same ranking, and now stands at twentieth in the world in the quality and stability of its patent system—a mere eight places behind the U.S. ranking. It is especially disconcerting that, as rapidly as the U.S. is dropping, China is rising. We are losing our innovative edge, and it is directly attributable to the weakening of our patent system.

Although the evidence for and impact of a weakened patent system can be seen in many areas in the innovation economy, this paper focuses specifically on regulatory interference under antitrust laws. Bureaucrats in various government agencies, such as the Federal Trade Commission (FTC) have abused their authority to diminish innovation-oriented property rights. They have done this by seeking to substitute their views for the R&D decisions, business judgments, and market forces that would otherwise permit commercial enterprises to bring us beneficial new products and services in the marketplace. What is worse is that regulatory officials have not been merely substituting their views for the business and legal judgments of innovators, they have been choosing among those they believe should be winners or losers in the innovation economy on the basis of theories that are either unproven or directly contradicted by the evidence of rigorous economic studies.

Where are these theories coming from? They have been advanced in Washington, D.C. by vested interests who would directly benefit from regulatory interference, and an overall diminishment in the health and vitality of our patent system. Specifically, these interests have promoted laws and regulations that would hamper their competitors and undermine the business models of their competitors or suppliers who sell them the patented technology they use in their own products or services. In essence, they have lobbied for action, under the antitrust laws, against innovators in order to gain access to this technology at below-market prices or at government-set prices, and thereby avoid paying innovators for the investment and risk they assumed in developing those inventions.

This paper will explain the damage done to the innovation economy by burdensome and ill-conceived antitrust regulation and enforcement. First, this paper will briefly describe the patent laws and antitrust laws, as these are the two legal systems central to the recent damage done to the innovation economy. Second, the paper explains two areas of high-tech innovation that have been negatively affected by meddling by antitrust authorities in the innovation economy—technological standards and patent licensing. Third, the paper discusses past regulatory actions by FTC officials that had a deleterious effect on high-tech innovation in the spaces of standards and patent licensing, as well as how these actions hinder innovation.