One of the most critical strengths that any company can have is what they know how to do. Knowledge, or intellectual property, is a vital tool to enable a company to distinguish itself from its competitors. This is true of all industries, but is critical in the technological world due to the intense competition and the rapid advancements that have been made in this arena—especially within the last forty years. Moore’s Law, published in April of 1965 in an essay called “Cramming More Components onto Integrated Circuits,” which is really more of a conjecture than a law, suggested that the number of transistors in an integrated circuit would double approximately every two years. This prediction has actually been relatively consistent with the progress that has been achieved. There are several methods available to companies, as well as to individuals, to protect their intellectual property. One of the most common methods, which has been in use in various forms for hundreds of years, is patent protection. Depending on the jurisdiction, patent laws provide some level of protection, normally civil but in some cases criminal, to allow inventors to limit the use of their inventions by others without their consent. I’ll discuss how these work in more detail shortly, but, at least in the United States, the life time for most patents is seventeen years, after which time the protections are no longer in place.

Consumers are hungry for new and better technology and inventors and producers are similarly hungry to grow their market share in this enormous industry. The video game market alone is expected to exceed $100 billion in size globally in 2014 and has grown by approximately 30% since 2012 per Gartner, Inc., a research and advisory firm that specializes in technology. The rapidity of the advancement in technological consumer products that we are seeing, coupled with the protective measures that these producers have available to them to defend and leverage their intellectual property, poses some interesting conundrums. Although the protection is valuable to the filer, it does become obsolete quickly, which diminishes the actual benefit to the company for the expenditures involved in obtaining and enforcing their patents. Some of the key benefits that patent laws were originally meant to provide, to protect the inventor and to spur innovation, aren’t being achieved to a level that is congruous with the resources required. Intellectual property protections are absolutely vital, but the effectiveness of the systems we rely on can be improved with reform.

How Does This Thing Work?

The patent process and what exactly it is designed to do varies by country, though efforts have been made to harmonize patent laws to diminish the differences, with the World Trade Organization (WTO) playing a significant role. The 1994 Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) made significant strides. To put it simply, it seeks to set some standard principles for intellectual property rights with which member nations are expected to comply. One of the goals was to reduce the negative impacts to international trade that could be caused by significant differences between countries’ laws surrounding protection. A company or inventor that files a patent, in general, must submit the required information to that country’s patent administrative office, which includes specifications for what process or product they are seeking to protect in sufficient detail to support its uniqueness. Subsequent to this, the onus is largely on the company to enforce perceived violations of their patent—in most cases through civil courts. They can generally seek monetary damages for losses they can reasonably support as having incurred or an injunction to prevent the offending company from continuing to sell products using that patented component or process. This is a cumbersome and costly process, but a necessary safeguard to protect inventors.

How much does it cost? That’s difficult to answer with more detail than “it depends.” The complexity of the product or process, the level of review of the marketplace that a company deems necessary and appropriate to be comfortable that it is not being inappropriately used by another party, and any litigious costs in the event of a violation or a perceived violation are all factors. Microsoft Corporation disclosed in their annual report for their fiscal year ended June 30, 2014 that they have over 90 patent cases pending against them (Part II, Item 8), they currently have over 55,000 patents with another 40,000 pending (Part I, Item 1, 10), and that they have spent “significant” amounts to settle claims related to patent infringement and expect to continue to do so (Part I, Item 1A, 19). “Significant” isn’t an easy to define amount and varies by company as well as by investor or stakeholder. It’s less than material but more than de minimus, and the amount changes commensurate with the size of the company and the nature of the transaction or balance being discussed. With a company the size of Microsoft, it would certainly be a substantial dollar amount. Obtaining and defending patents can be extremely expensive and, depending on the patent and the products it is used for, the return on it, if any, would be extremely variable.

Microsoft Xbox 360

Protection in Practice

One of the issues with this process is that it isn’t particularly conducive to timely results. In May of 2014, U.S. Philips Corporation sued Nintendo Company, Ltd. for alleged infringement of two patents related to the motion control technology that was used for the Wii. Philips requested a sales injunction, a tripling of the damages with interest, and a trial by jury. This suit was filed over seven years after the console’s release, the sale of over 100 million units, and roughly half a year after the release of the Wii U console. Ultimately, Philips reached a settlement agreement with Nintendo where the companies agreed to cross-license portions of their patent portfolios to one another. The financial specifics of the case were not disclosed, which is not unusual. Considering that Philips filed these patents in 1996 and 2003, it’s clear that their intellectual property was not protected from third party use. Now that they have settled, they’ve agreed to remunerate one another as consideration for use, or apparent use, of one another’s intellectual property rights. Since the claim initially asserted that Nintendo had violated Philips’s patents, it is intriguing to me that the payments ended up going both ways. The delay in the claim and in the resolution, in addition to the legal costs involved in reaching a settlement and the administrative burden going forward of complying with the agreement suggest that in this case, the protections provided by the patents weren’t particularly effective.

With the level of complexity involved in accessories like this, it’s easy to see how a patent protection does little or nothing to allow an inventor to stake a claim to a concept.

The motion control technology that helped the Wii become Nintendo’s highest-selling home console of all time, at least to date, wasn’t so unique that their approach to providing this control interface couldn’t still be developed and executed by other parties. Sony released the Playstation Move controller in 2010, about four years after the Wii’s initial release and almost at the same time as the Wii Remote Plus. Both of these products improved on the technology that had been used for the original Wii Remote. Not to be outdone, Microsoft released its own motion control system, the Kinect, around the same time. There’s a reason that a great level of detail is required to file for a patent. Subtle differences in approach or design can allow a company to get a comparable outcome provided that they approach it in a sufficiently unique way. With the level of complexity involved in accessories like this, it’s easy to see how a patent protection does little or nothing to allow an inventor to stake a claim to a concept, as much as they would prefer to do that. Ideally, if someone thinks of something truly new, as the Wii motion controls had been, I think it would be fair to reward them for their creativity (though certainly not for seventeen full years). In Nintendo’s case, they still got the reward at least for that generation by dramatically expanding the user base even though it remains to be seen how much of them will return. Judging by the Wii U’s sales pace since its release, it appears that many of them have found alternatives to home consoles. By the time Sony and Microsoft entered that field with good alternative products, the newness of the interface had ebbed and they didn’t reproduce the same level of success. The good part of the specificity involved in patent filings is that it forces companies that want to create a product that fills a similar function to adapt enough to be able to do so without exposing themselves to civil liability. This pressure to go to the drawing board is positive for innovation, as approaching problems in new ways is a catalyst for discovery.

Similar patent claims have been brought up late in products’ lives, such as the 3D technology used on the Nintendo 3DS, the touchpad on the Apple iPhone and iPad, and many more. This is a litigious arena and it is not uncommon for patent claims to be dismissed or awarded based on the facts and circumstances of the case. The plaintiffs and the defendants have to bear the costs of monitoring their patents and litigating their claims. It’s a cost of doing business, but the process isn’t particularly timely or efficient.

What’s Next?

Although I’ve spent quite a bit of time discussing perceived shortcomings of the patent system, I do believe that it does a lot of things right. In the absence of these protections, the competitive advantage of innovators would basically vanish, as whoever has the resources and productive capacity could reproduce a new product and sell it without any compensation provided to original creator. There are some environments where the laws are less protective or enforced less consistently resulting in more frequent violations. The 2009 Special 301 Report issued by the Office of the United States Trade Representative names the Peoples’ Republic of China as an example of a country that presently does not have strong protections consistently in place. As a result, innovators are more likely to operate in countries where protections are stronger. In any event, this is just a characteristic that a company or inventor needs to consider when determining where and how they will create. Different countries in the world have different strengths and resources to offer and this is just another feature of what determines their role in the global economy.

Where patent protections are in place and consistent enforced, I think the system isn’t broken, though it could use some improvements. It doesn’t need to be fixed, it just needs to be tweaked. In the United States, the laws for patents had not been amended in nearly sixty years prior to the 2011 America Invents Act. Considering how much has changed in the consumer world during that time, it is not surprising that the system had been overdue for reform. This reform involved a few key adjustments meant to modernize the patent system and harmonize it with much of the rest of the world. One of the principal changes was going from a first-to-invent system to a first-to-file system. There is still a process for defending one’s position that their patent application should be the definitive one in cases where it is filed later, but it is a more difficult process. There were a number of other changes, but I wanted to emphasize this one as it seems to be a significant change that could improve protections for inventors provided that they exercise due care in filings. The National Law Review has provided a succinct overview of the changes that were made with this legislation for those that don’t have the time or interest to read the voluminous original document.

Additional reform may occur in the United States next year to address, among other things, patent-trolling. This term refers to a process where non-productive companies acquire patents and hold them with the intention of later filing suits on larger, productive companies. If passed and effective in its goals, this reform would address one of the cost burden issues discussed above. Congress deferred attempting to pass it this year because Senator Harry Reid was concerned that the bill would get filibustered in the Senate. Senate Minority Whip John Cornyn believes the new congress going in session in January of 2015 may have enough of a change in power to support passing this amendment (Wall Street Journal).

Conclusion

Patent systems have been in place for a long time, and they continue to evolve and adapt to accommodate changing business environments. They are becoming more globally consistent, which is beneficial since businesses themselves are becoming more global, and their existence and enforcement continue to provide an environment that is conducive to invention and innovation. Although the specificity of a patent does not allow for a creator to claim an idea, it does result in some pressure being exerted to innovate if only in minor ways. I’m hopeful that, in time, amendments to our patent systems will help to reduce the level of cost involved for companies to litigate claims. I don’t believe that broadening what can be covered under a patent would be prudent to add further rewards to the creator. The market can and should identify the bulk of those rewards and no one is excluded from markets by the patent system—only delayed and compelled to bring something new to the table when they come.

A Sony PlayStation Move controller and a Nintendo Wii Remote

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Works Cited

“Agreement on Trade-Related Aspects of Intellectual Property Rights.” Wikisource. 14 Apr. 1994. Web.

“Gartner Says Worldwide Video Game Market to Total $93 Billion in 2013.” Gartner. 23 Oct. 2013. Web.

Jones, Ashby. “Leading GOP Senator Says More Patent Reform on the Horizon.” Wall Street Journal. 14 Nov. 2014. Web.

“Koninklijke Philips N.V. et. al. v. Nintendo et. al.” Scribd. Web. Accessed 12 Jan. 2015.

Lu, Deborah L., Samantha B. Uthaman, and Thomas J. Kowalski. “Summary of the America Invents Act.” The National Law Review. 12 Apr. 2012. Web.

Microsoft Corporation. 2014 Annual Report. Microsoft Corporation, 2014. Web. 31 July 2014.

Moore, Gordon E. “Cramming More Components onto Integrated Circuits.” Proceedings of the IEEE 86.1 (1998). 82-5. Web.

Office of the United States Trade Representative. “2009 Special 301 Report.” 30 Apr. 2009. Web.

Royal Philips. “Philips and Nintendo resolve patent disputes and sign patent license agreement.” 2 Dec. 2014. Web.

United States Public Law 112-29. Leahy-Smith America Invents Act. 16 Sept. 2011. Web.