BERKELEY, CALIFORNIA — “There’s one thing we’re very good at in this nation, and that’s innovation,” Tusher Center Director and Professor David Teece said recently in setting the tone for a day of discussions inspired by the launch of the new center at the University of California at Berkeley.

The new centre is the Tusher Center for the Management of Intellectual Capital at the UC Berkeley Haas School of Business. The 14 July daylong event at the UC Berkeley Faculty Club was the First Annual Management Conference and was titled, “Intellectual Property Issues in a Global Context: Management & Policy Concerns.” The event website includes videos of the speakers.

Tusher Center Director David Teece

“The competitive advantage of the US lies in innovation, and creativity, not manufacturing,” Teece said in prepared opening remarks. “Accordingly, it is most important that US public policy support the US innovation ecosystem.”

But this is difficult, he said, because the US does not have an agency advancing innovation, while it does have “strong and well-funded” agencies promoting antitrust in the Justice Department and Federal Trade Commission. The US Patent and Trademark Office (USPTO) is “pro-innovation,” he said, it is “relatively small.”

Teece stressed the importance of academic debates to policy debates, saying it is important to “get it right” and noting the complexity of these cross-cutting issues. The Tusher Center, which launched with support from UC Berkeley alumnus and former Levi’s CEO Tom Tusher, will look at innovation and US competitiveness from the business perspective and will try to assess all aspects of the complex issues.

Teece and other speakers during the event took aim at the antitrust laws in the United States. Teece said the manner of the breakup of AT&T due to antitrust concerns was a mistake as it led to the downscaling of Bell Labs. Silicon Valley was built largely on innovations that came out of Bell Labs, he said, despite it having been, as he said in his prepared remarks, “in the eyes of many … the greatest research organisation that human civilization ever created.”

“The pre-divestiture Bell Labs campus was 20x the Googleplex of its day, and its focus was even more long run,” said Teece. Civilisation-altering technologies such as the transistor, the laser, and cellular technology all started there. With Bell Labs gone, there is a lack of long run research.

“We’ve been eating our seed corn for years,” and if there is no change, the US might run out of seed, he said.

Teece noted the importance of intellectual property rights and standards to innovation, and said the increased speed of diffusion of new ideas and loss of lead times have made it harder for the creative classes and inventors to profit from their activities and investments.

A focus of the day’s discussions was standard essential patents (SEPs), patents on technologies that are important to standards that apply to all.

A debate that came up repeatedly was about patent “hold-up”, essentially the argument that patent holders’ threats to obtain an injunction could lead to higher royalty rates. This idea and other evidence showing that patent holders may be overcompensated and that too many patents are clogging the innovation system, promoted by Stanford and Berkeley professors Mark Lemley and Carl Shapiro, helped fuel antitrust interventions and legislation.

Teece argued in the prepared remarks: “Hold-up theories were put forward by Lemley and Shapiro and latched onto by infringers and the antitrust agencies without (1) any evidence to support them, (2) any consideration given to the ‘hold-out’ or ‘reverse hold-up’ problem… i.e. that inventors have already sunk their money into R&D so they are more vulnerable to infringers expropriating the fruits of their investments. Clearly, if there is a ‘hold-up’ problem there is also a ‘hold-out’ problem too.”

Teece told the event that indications are that the standards-setting apparatus “is in jeopardy” as a result. This is one of the reasons for setting up the centre, he said.

Perlmutter, Marks, Teece, unknown, Chesbrough

A key concern for Teece and other speakers is an effort by the Institute of Electrical and Electronics Engineers (IEEE) to develop a new patent policy. The IEEE was encouraged by a letter from the Justice Department, which Teece said endorsed the patent hold-up ideas, and provided support for the notion that standards-setting organisations can “make rules requiring that patent owners eschew even the opportunity to seek (much less receive) injunctive relief, despite the importance of this threat to getting license agreements out of the courtroom and into the marketplace.”

Teece concluded in his prepared remarks that: “the DOJ [Department of Justice] doesn’t know what it is doing and has once again shown that it is biased against innovation and has chosen to listen to users of IP, not inventors. It is unfortunate that the DOJ has made a political decision, not a reasoned public interest decision.”

Other Speakers

A variety of suggestions were made during the day for potential research topics into which the new centre might look.

David Kappos, a partner at Cravath, Swaine & Moore in New York and the former US Patent and Trademark Office director, offered that to say innovation is what the US is good at is to say it is good at “the most important thing.”

He took aim at what he sees as a trend of antitrust activity, including the “very dangerous runamok” of antitrust activity overseas to regulate patent licensing beyond their borders.

Secondly, he said the overextension of the antitrust regime in the US is a “precipitator” of a bad precedent overseas, as the US is “fuelling the wrong-headed belief that antitrust should be used to check IP rights, where it really should be the other way around.”

Former USPTO Director David Kappos

He said “international antitrust runamok” is a way to use competition law to help local champions to the detriment of consumers and everyone else. He gave an “egregious nightmare example” of an antitrust regulator threatening to flaunt all notion of international comity, ensuring that decrees run within the borders and not outside the borders. “It’s so over the top I bet you think it could never happen except in an academic environment like UC Berkeley, but it is happening,” said Kappos, himself a UC Berkeley alumnus.

Kappos’s complete remarks will be the subject of a separate story on Intellectual Property Watch.

Another area that has been being looked into is the use of basic terminology, such as patent “thicket,” which is often used to refer to too many patents interfering with the ability to innovate. Ed Egan, an assistant professor at Imperial College, discussed research on the “considerable controversy” over whether the terms for market failure are accurate. An analysis of well over 100 papers published since 1988 found that the term “patent thicket” meant “entirely different things,” suggesting that the patent system should be left alone unless there is greater agreement.

Prof. Adam Mossoff of George Mason University School of Law, who specialises in the history of patents, talked about how companies will make a commitment not to enforce their standard essential patents but they are patents that do not factor importantly in their industry anyway.

He also spoke strongly about China starting to use its anti-monopoly law, as “very troubling.” China’s law has almost no basis in law, he said: they can invade your offices, throw you in jail.

And Mossoff criticised the trend in US agencies, saying other governments are now quoting back US Federal Trade Commission statements to the US government in their explanations for taking uncompetitive actions in relation to patents. He mentioned the dispute between the US and South Korea involving Apple and Samsung, noting that the case Samsung won was vetoed by President Obama, while the case Apple won was upheld. This sort of political behaviour is leading other governments “to hold IP hostage” to domestic priorities. And it is a reduction of patent protections.

Mossoff said he is concerned, and hopes to see the US return to “being a beacon.”

Ron Katznelson, president at Bi-Level Technologies, explained the IEEE effort on patents, saying that standards development organisations are saying the licensing terms for SEPs of fair, reasonable and non-discriminatory (FRAND) need more information to be complete. The IEEE is trying to address that, with measures in its new patent policy such as adding more definitions, and requiring substantive SEP holders to make concessions beyond those in the legacy letters of assurance.

Prof. Henry Chesbrough of the UC Berkeley Haas School of Business discussed how the concept of “open innovation” has changed since he coined the now household term years ago. An internet search on open innovation now brings tens of millions of pages of results, whereas when he started looking at the concept a search drew only a few pages typically about the opening of a new innovation centre or the like.

As an example of embracing open innovation, Chesbrough noted the decline of the pharmaceutical industry’s old model, with productivity down and costs up, so that now different companies are taking care of specialisation.

His current focus is on “type 2” errors that occur in development, that is, failed negatives in which an idea is rejected in the R&D process but might have been useful after all. A prime example is when a secondary use for a drug is developed. For instance, he said, Viagra was a failed heart disease drug.

“One person’s abandoned compound is another’s market opportunity,” he said, adding that the thinking is not “one patent one use.”

Shira Perlmutter, chief policy officer and director for international affairs at the USPTO, suggested adding “creativity” to innovation as what the United States does well.

Perlmutter mentioned exceptions to copyright as critical to creativity and often the focus of debate and legal activity. The bundle of rights provided to rightsholders are relatively simple, she said. Exceptions are complex and diverse around the world, ranging on what can be done without a licence.

Perlmutter’s keynote remarks will be presented more fully in a follow-up story on a copyright panel at the conference that also included: Berkeley Law Prof. Peter Menell; Washington, DC Legislative and Appellate Advocate Jonathan Band; and Dean Marks, executive vice president, deputy general counsel, and chief of global content protection at the Motion Picture Association of America.

Image Credits: Bruce Cook