Patently Geopolitical: The New Frontier of Government And Market Interaction

By Brian Kahin

Summary: The USTR’s disapproval of the ITC order excluding Apple products from the US raises difficult issues about the relationship between public decision-making and private solutions – and invites strategic policymaking by other governments.

It is often forgotten that the patent system is a government response to perceived market failure.  Reasoning that the private sector will underinvest in innovation if competitors are free to copy inventions without incurring the costs of R&D, governments grant rights to exclude others for a limited time.  Different branches of governments promulgate patent laws, examine and grant applications, and adjudicate infringement claims.  These bodies, agencies, and courts develop their own views, influenced by private and political interests that see patents not as a limitation on the free market but as a source of competitive advantage.

On Saturday, August 3, the US government jumped in boots-first from the very highest level, adding a new perspective to the mix.  Two months earlier, the US International Trade Commission (ITC), an independent government agency, had found that certain Apple smartphones infringed a Samsung patent and issued an exclusion order barring them from the US market.  The statute allows the President to disapprove the order within 60 days, a decision delegated to the US Trade Representative (USTR) in 2005.  Lobbied by Apple and a number of US companies, USTR formally disapproved the ITC exclusion order on the 60^th day, the first such disapproval since 1987.

In a judicial appeal, the appeals court must explain its reasoning, how it applies to the facts, and how the lower court got it wrong.  Here the President’s disapproval is based on “policy reasons.”  The letter merely recites policy issues surrounding standard-essential patents, in particular a policy statement by the US Patent and Trademark Office [corrected] and the Department of Justice, but does not explain their application to the specifics of the case.  It cites consultations with the Trade Policy Staff Committee and the Trade Policy Review Committee (along with “other interested agencies and persons”).  However, it disclaims any consideration of the ITC’s legal analysis or findings.  This is not the rule of law but pure disembodied policy that has been lobbied like a political decision.  So naturally it looks like a political decision, all the more so because Apple is a US national champion and Samsung is an upstart success from an upstart foreign economy.

[The disapproval] is not the rule of law but pure disembodied policy that has been lobbied like a political decision.

The facts uncovered by the ITC reveal how murky and blurred the relationship between standards and patents really is, even in an international organization like ETSI where the standards in question were developed.  Unlike patent pools, standards organizations make no effort to determine whether patents are essential.  As noted by Jorge Contreras, “recent studies have found that only 27% and 28% of patent families declared ‘essential’ to ETSI’s GSM and WCDMA standards, respectively, were actually essential to implementation of those standards.”  Apple even undermined its own case by arguing: “Of course, only Samsung has declared the ‘348 patent as ‘essential,’ and the ALJ [administrative law judge], like numerous other courts have, correctly found that Samsung [was] wrong to do so.”  In fact, Samsung’s declaration was duly tentative (“may be” essential).

Given the uncertainty surrounding the large number of patents in high tech, standards organizations cannot demand firm patent representations (ETSI speaks of “reasonable endeavors” and “bona fides”).  Most simply require a commitment to licensing on “fair, reasonable and nondiscriminatory” (FRAND) terms – also not defined – if any of the participant’s patents prove needed to practice the standard.  ETSI allows FRAND commitments to be conditioned on reciprocity, but does not define reciprocity, so it is not necessarily limited to patents essential to the standard.

Most importantly, ETSI has no rule that required patent holders to forego injunctive relief, even though it was capable of establishing it.  As Andrew Updegrove, who has counseled scores of standards consortia, has noted, standards organizations are remarkably resistant (despite his urging) to establishing rules for patent behavior beyond the undefined commitment to “reasonable and nondiscriminatory” licensing.  It should be added that the ETSI declaration was to be interpreted under the laws of France, but neither Samsung nor Apple offered any information on what that might mean.

The ITC found that portfolio cross-licensing was typical, an observation that squares with other reports that firms normally cross-license patents en masse without distinguishing standard-essential patents from non-essential patents.  As expressed in an extensive study funded by the European Commission, “companies have large difficulties to assess average licensing conditions and see also no differences between essential and other IPRs.”  Wholesale bilateral negotiations solved all problems at once: information costs, transaction costs, and the risk and uncertainty of potential litigation.

Until recently, comity prevailed and complaints were rarely heard.  Competition agencies shied from addressing the larger problems that the patent system creates for complex products (although the FTC stands out by virtue of its 2003 and 2011 reports).  More recently, in the shadow of global patent wars, competition agencies have taken a small bite at manageable problems – like limiting injunctive relief for standard-essential patents.  From a policy perspective, this makes perfect sense – but so does limiting injunctive relief for patents in complex products in all cases where the patent represents a tiny fraction of the value of the product.  Lost profits are also hard to prove, so damages are increasing calculated in terms of a “reasonable royalty,” for the patented technology under the notoriously indeterminate 15-factor Georgia-Pacific test.

The big unanswered question is what is the difference between “reasonable” under a FRAND commitment and “reasonable” in the context of damages.  Should determining the former take into account the fact that self-declared standard-essential patents may be invalid, uninfringed, or non-essential?  How should we weigh incentives for standards development and FRAND commitments against incentives for non-essential patents?  Tough questions, but central to the regulatory architecture of innovation.

And who decides?  Is this a question to be left to participants in standards organizations?  Or competition agencies?  Or national legislators?  Or international organizations?  And is this a matter of trade, standards, intellectual property, or competition policy?  (Bearing in mind that what’s everybody’s business is nobody’s business….)

Does established practice matter?  Interventions limiting the draconian effects of exclusion orders and injunctions may be right in principle, but they may also be upending or distorting industry expectations and practices.  Google’s purchase of Motorola Mobility and its vast portfolio, heavy in standard-essential patents, was seen as a response to the threat presented by patent attacks on Android by Apple and Microsoft — and being outbid by a consortium led by Apple and Microsoft for the portfolio of bankrupt Nortel.  But the heft of the standard-essential patents in Motorola’s portfolio elicited a shift in industry views – most notably by Microsoft, which just two months before, had argued to the FTC in support of injunctive relief for standard-essential patents.

Ammunition for Nuclear War

The smartphone patent wars are rooted in a private sector dispute remembered in Steve Jobs’ vow of “thermonuclear war,” something one might think that only governments are capable of launching.  A recent study for WIPO confirms that Apple is an outlier among smartphone producers – that it has filed more lawsuits by far, institutionalized the assertion of design patents, and spurred market-wide escalation of patent acquisition and assertion.

Of course, it is the US government that provides the weapons and leverage for nuclear-scale Armageddon.  This used to include automatic injunctions, which could take an entire product line off the market.  In the 2006 eBay decision, the Supreme Court ruled that patent injunctions were not automatic but subject to the weighing of traditional equitable factors.

Nonetheless, the Federal Circuit has ruled that the ITC is not subject to the Supreme Court’s ruling in eBay, so patent asserters can still get automatic exclusion orders from the International Trade Commission.  Exclusion orders are only effective against imports, but virtually all digital consumer products are imported.  The ITC’s patent powers may have made more sense in the days when a common consumer product was not subject to hundreds of thousands of possible patents and when unfettered trade was not an article of faith.  Today, the greatly expanded ITC role in patent disputes blatantly discriminates against imports as well as against complex products where inadvertent infringement is practically unavoidable.

Today, the greatly expanded ITC role in patent disputes blatantly discriminates against imports as well as against complex products where inadvertent infringement is practically unavoidable.

So at one level, the USTR disapproval struck a blow for free trade and the availability of complex consumer products.  Yet from a broader perspective, it is an unreasoned political decision against a decision by an independent agency that made detailed findings.  The ITC applied its own statutory “public interest” criteria, but determined that they did not apply against the exclusion order.

This takes place on a very public global stage in which the current face of innovation, the smartphone, is embroiled in litigation around the world.  It presents the appearance of national interest trumping principle – an incumbent economy asserting hegemony over a newly developed economy that was playing by the rules.  At a time when policy arguments are often made against export-led neo-mercantilism, it exposes Apple’s state-enabled IP mercantilism – a fortress business model dependent on high profit margins that erects barriers to market entry and limits the market to high-end purchasers.

Apple’s attorneys (and many others) will argue that its patents are its rights to assert as it pleases, but the USTR letter highlights the reality that patents are what governments say they are.  Governments create patent laws, examine and grant applications, adjudicate infringement in tax-subsidized tribunals, and make exceptions for policy purposes.  Patents are territorial and other governments have their own ideas.

In setting the rules on patents and standards, governments mediate among a diverse set of interests – from patent owners to producing companies to consumers.  Thanks to the explosion of patents in high tech there is a greater diversity of stakeholders affected by the patent system – including aggregators, speculators, monetizers, assertion entities, and other specialists, as well as an impossibly large number of patents purporting to regulate the work and behavior of innovators.  Beyond the community of patent professionals who are paid to deal with the legal apparatus and excruciating detail of the patent system, the world looks different.  In a recent paper, The Regulatory Turn in IP, Professor Mark Lemley observes:

It is worrying that our fastest developing, most innovative industries, the ones that are generating the most new innovations and the most money, by and large hate patents. They view patents as a tax and a cost of innovation, not as a benefit to innovation.

Government Failure:  Mission Creep and Regulatory Sprawl

How could we possibly get into a situation where the dean of patent scholarship in the US reports that the most innovative industries view the patent system so negatively?

One of the problems with premising a policy solution, like the patent system, on market failure is that a narrow focus on the problem tends to assume that the problem is ubiquitous and forever: one size not only fits all but will always fit all.

Yet as economists have long known, the patent system is experienced differently by different technologies, industries, and business models.  For example, a survey by economist Edwin Mansfield found huge variation in need for the patent system:

 Edwin Mansfield, Patents and Innovation: An Empirical Study, Management Science, Vol. 32, No. 2. (Feb 1986)

The survey showed that while patents were critical for pharmaceuticals and, to a lesser, a few other industries, they had little or no effect on nearly half the industries surveyed.  Of course the patent system was not curtailed for those industries, in fact it was expanded through the judicial decision-making of the Federal Circuit which unilaterally extended patents to software and business methods in the 1990s, areas of creative endeavor not known for deficiencies in innovation.  Not surprisingly, one of the FTC’s recommendations in its 2003 report was: “Consider possible harm to competition – along with other possible benefits and costs – before extending the scope of patentable subject matter.”

“Market failure” invites policy intervention based on uniform principles – without attention to different contexts, unintended effects, and the costs of intervention.  The result can be “government failure,” which may present its own set of remedial challenges.  Government programs have a well-known tendency to create vocal constituencies which benefit disproportionately and help perpetuate bad policies.  Constituencies can include not only direct and indirect beneficiaries but those who manage the program inside and outside of government.  Inertia results, especially if responsibility and interests are fragmented and dispersed.

One of the dangers is “mission creep” – the tendency for government agencies to expand the scope of their activities and agenda without authorization.  Public choice theory tells us that like individuals and firms, government officials are motivated by self-interest to enhance their budget, prestige, portfolio, and power.  In the case of patents, mission creep comes not from an agency, the US Patent and Trademark Office, but from the Court of Appeals for the Federal Circuit, created in 1982 to oversee all patent appeals from the USPTO, district courts, and the ITC.

From the outset, the Federal Circuit’s decisions made patents easier to get, easier to assert, and harder to invalidate, as well as available for more abstract subject matter.  It was able to do so because the Supreme Court declined to take up patent cases after the Federal Circuit was formed.  The result was to increase the scale and scope of patents in the US at least until criticism from the IT sector surfaced after the turn of century.  By that time, the IT sector itself was of multiple minds because some companies (IBM, Microsoft, Motorola, Texas Instruments) had amassed immense portfolios that arguably earned them privileged positions in the market.

While the ITC has not engaged directly in mission creep, its workload shifted in response to the expanded patent system created by the Federal Circuit.  From 1998 to 2011, its Section 337 (unfair trade practices) workload rose roughly six-fold.  Colleen Chien found that patents accounted 85% of the workload.  Her paper also notes:

Although created to deal with the special problem of “unfair trade,” the ITC has gone “mainstream”: 65 percent of the ITC cases studied had a district court counterpart, which indicates that the ITC is often not the venue of only resort as it was originally conceived to be.

As a patent venue of “only resort,” the ITC’s role would be limited to the few cases where it is not possible to bring a foreign defendant before a district court.

Instead, the ITC is being used for legal arbitrage because of specific benefits it provides against imported products.  It circumvents eBay, giving patent owners additional leverage against complex products.  It avoids the risk of permanent patent invalidation that can happen in district court.  It demands an accelerated response from an alleged infringer.  It imposes additional legal costs by expanding the legal playing field available to patent owners and their lawyers.

While discriminating against imports and complex products, this also comes at the expense of the US taxpayer, who pays for the high-priced talent that goes into both ITC and district court decision-making.  Unlike the Federal Circuit, the ITC did not unilaterally expand its mission, but its role within the patent system has greatly expanded thanks to arbitrage and tactical advantages.

The Market Responds to Government Failure

Just as governments can address market failure, the market can address government failure — here a one-size-fits-all lawyer-driven regime of property rights designed for the near product-to-patent equivalence.  The problems of fitting this regime to the innovative promiscuity of the smartphone, which faces an estimated 250,000 active US patents, is left to the market to figure out.

Just as governments can address market failure, the market can address government failure — here a one-size-fits-all lawyer-driven regime of property rights designed for the near product-to-patent equivalence. The problems of fitting this regime to the innovative promiscuity of the smartphone, which faces an estimated 250,000 active US patents, is left to the market to figure out.

The market has figured this out, but imperfectly – some companies more than others, with some winners and some losers, at the expense of market distortions, and certainly not in the way that patent laws intended.  In particular, companies have engaged in massive defensive patenting, building portfolios that provide protection either explicitly through cross-licensing or implicitly through the prospect of mutually assured destruction.  There is a substantial cost to all this patenting, of course, especially since cross-licensing means that large companies are bargaining their way out of the patent system, at least with respect to their peers.

Nevertheless, this helped avoid patent wars among the major stakeholders for many years, until the recent breakout of the smartphone wars.  It also embedded blanket bilateral cross-licensing that did not segregate standard-essential patents from other patents.  On the surface, peace prevailed.

But defensive patenting generated demand for more patents and for a while (1996-2002) the USPTO adopted as its mission: “to help customers get patents.”  Inflated demand and expectations generated more patents and more opportunities for aggregators, brokers, and patent assertion specialists (trolls).  Producing companies found that they could gain by selling patents into the secondary market along with evidence that someone was using the technology without a license.  As explained by an intermediary in an FTC hearing in 2010:

[T]he licensing marketplace has moved very strongly in the direction of what we call fact-based licensing… in my Intel days, which is demonstrating actual use. As a consequence, there has been an increasing value in capturing patents that have demonstrated value, that is, there are issued claims that you can show actually are infringed by folks.

In other words, this is a market for enforcement, not for developing and commercializing technology.  It appeals to a business model of “being infringed” and asserting patents.

For producing companies, the value of IT patents relative to products is diluted by volume but that does not diminish demand for strategic purposes (the so-called “patent paradox”).  Furthermore, patent value is uncertain because of the possibility of patent-invalidating prior art, uncertain claims interpretation, issues of scope, and ease of designing around the patent.

Yet there are so many patents out there along with so much prior art that the principle of public disclosure has become meaningless.  Texas Instruments claimed before the FTC that it could not afford to know what was in its own portfolio of 8,000 active patents.  More patents that companies cannot afford to know about means more opportunities for surprise and hold-up.

Trolls thrive by arbitraging this ignorance and uncertainty, exploiting leverage against products, and enforcing patents efficiently because they are not exposed to counterclaims and adverse publicity.  IBM’s aggressive licensing program pioneered the way, but the success of trolls made it clear that anybody could play and that “value extraction” from technology that others had developed on their own offered an easy alternative to the hard work of innovation in the real economy.

The success of trolls enlarged the secondary market for patents, leading to new forms of intermediaries.  Aggregators, for example, specialized in licensing acquired patents to insiders and then selling patents back into the market to be asserted against the rest of the world.  This helps migrate patents from portfolios to a “higher and better” use in the hands of enforcement specialists.

Portfolios may be ineffective against trolls, who have no need to license patents because they produce nothing, but portfolio owners have found that they can buy off trolls with patents.  This, too, expands the secondary market with patents that can be asserted against competitors, startups, anybody who has independently come up with the same idea….

The US Government Responds to Market Pathologies

In 2002, the Federal Trade Commission (like the ITC, an independent agency) held 24 days of hearings, mostly joint with the Department of Justice, in response to widespread but unfocused concerns that the patent system was not working well, especially in IT-related sectors.  A year later, the FTC published an extensively documented report on the patent system and its role in innovation and competition with recommendations for improvements.

After eight years of debate, only one of the FTC’s recommendations, post-grant review, was duly enacted by the America Invents Act of 2011.  Yet the new fee schedule recently issued by the USPTO prices post-grant review petitions at many times the price of pre-AIA reexamination procedures, while retaining large front-end subsidies for patent applicants that will in turn ensure a continuing oversupply of marginal applications.

Furthermore, contrary to one of the FTC recommendations, the Administration successfully argued to the Supreme Court in favor of a heightened presumption of validity for issued patents despite the mere 18 hours of scrutiny that patent applications get at the USPTO.  This rule, that a patent cannot be invalidated by a preponderance of the evidence, amounts to an additional subsidy for marginal patents.  In particular, it provides trolls with additional heft for threatening those who cannot afford to fight back.

The America Invents Act of 2011 offered little in response to the troll problem other than a provision limiting the joinder of multiple defendants.  In fact, after a tightening of standards toward the end of the Bush administration, the USPTO was again feeding the fundamental overpatenting problem by increasing its allowance rate.  The 252,000 patents issued in 2012 represented a 51% increase over three years.  For software, recently shown to account for 62% of troll litigation, the increase was 75% over three years!

The White House and Congress are finally responding to the escalating troll problem by trying to bite off manageable approaches to problems that other government bodies created (the Federal Circuit) and continue to exacerbate (USPTO).  The current response has been elicited only by the most visible and egregious symptoms: trolls attacking startups and other small companies that cannot afford the high costs of defending against patents, as well as companies in retail or services that are mere users of “off-the-shelf” technology.

The White House initiative is welcome as the first substantial presidential effort on patents in 47 years.  In a balkanized policy environment with agencies operating at cross-purposes and markets developing rapidly in unanticipated ways, leadership is sorely needed.  The economic analysis that accompanied the action agenda is especially helpful in reframing issues around trolls, including the problem of functional claiming that allows software patents at high levels of abstraction.  Issued by the three White House offices concerned with the economics of innovation – the Council of Economic Advisors, the National Economic Council, and the Office of Science and Technology Policy – the paper closes by acknowledging the overarching problem: “adaptability of the innovation system to challenges posed by new technologies and new business models.”  Note that’s “innovation system” – not just the patent system.

The White House analysis has little to say about FRAND, except to warn of “a potential incentive for patent owners to raise the price of a license after the standard is set.”  This is not what Samsung did; Samsung wanted to treat standard-essential patents within the same broader reciprocity framework as non-essential patents, as was and is currently common practice.

The USTR letter of disapproval also has little to say about FRAND, despite the fact that the disapproval purports to turn on FRAND issues.  Instead, the absence of reasoning says a lot about fragmentation of law and policy in the US.

The Supreme Court was right to require consideration of equitable factors in injunctions.  The ITC’s renewed concern for public interest factors as required by its charter is overdue and still underdeveloped.  Patent law should be tempered by policy, as the provision for presidential disapproval of ITC exclusion requires.  However, there should be a consistent, coherent, and duly articulated vision of how these three exceptions to rigid application of patent exclusivity should work, together and in concert with underlying patent law.

This is all the more important because the USTR continues to argue internationally for strict enforcement of expansive, and controversial, subject matter.  The disapproval of the ITC order draws international attention to the legal/economic/political confusion around patents and patent policy in the US.  It invites other governments to view patent law and institutions as a matter of national strategy, which they can make up as they go along.

The disapproval of the ITC order draws international attention to the legal/economic/political confusion around patents and patent policy in the US. It invites other governments to view patent law and institutions as a matter of national strategy, which they can make up as they go along.

The Varieties of Intervention

And other governments have done so.  Japan, Taiwan, and South Korea have responded to what they perceive as deficiencies in patent markets through government intervention at yet another level: sovereign patent funds.  As described in a recent OECD report, these funds take a variety of approaches that could morph as need and opportunity arise.

Perhaps the most forthcoming is the French government’s fund, France Brevets, which was designed to commercialize technology but recently announced its first lawsuit – against a US company in Germany.  The fund cited the favorable litigation environment in Germany, which is known for low legal costs and easy-to-get injunctions.

Sovereign wealth funds are fairly common and well institutionalized, although there are other substantial differences among nations in terms of state-owned wealth, currency and other liquid reserves, and the fiscal and political limitations imposed by public debt.  Sovereign patent funds, by contrast, are not merely passive investments but are market interventions whether they are commercializing technologies or enforcing patents.  In this regard, they are closer to state-owned and state-supported enterprises (SOEs and SSEs), which evoke controversy over how state subsidies may be permitted to affect international trade.

It is difficult to imagine the US creating a sovereign patent fund for a variety of fiscal, political, and policy reasons.  Yet public universities are invested in Intellectual Ventures, the gigantic patent aggregator that plays a prominent role in the secondary market and asserts patents through a large number of shell companies and, more recently, on its own.  Several mineral-rich US states have sovereign wealth funds, and they may invest in hedge funds, which in turn invest in patent aggregators and assertion entities.

But the market failure argument for intervention is especially weak in the US.  Unlike France Brevets, which has to see itself as operating internationally, US investors are focused on the US market, which because of its sheer size has made the US patent far more valuable than patents that protect smaller markets.  That inherent value, along with contingency fee litigation, the patent friendly jurisprudence of the Federal Circuit, forum shopping, and patentee friendly juries, and venture funding for trolls, has led to a US-centered secondary market focused on US patents.

Within the US, it is easy for policymakers to forget that patents are strictly territorial.  However, patents have been used aggressively by high-tech companies, including Apple and Google, for reducing or eliminating taxes by shifting patent ownership and profits to affiliates in low or no-tax jurisdictions.  Governments fear tax base erosion, and the problem is now being worked aggressively by the G20 and OECD.  OECD’s work to date shows that the effective subsidy of patent-related R&D can amount to over 100% when tax credits and profit-shifting are combined.  This also effectively discriminates against innovating small companies that do not have the resources to set up foreign affiliates.

No country takes national patent strategy more seriously than China.  Its public agencies subsidize and promote patent applications in various ways at local, provincial, and national levels.  The national government subsidizes foreign patent filings by Chinese nationals, a practice that drew fire from the National Association of Manufacturers in the US.  It has touted the example of Chint, a Chinese company, which successfully asserted a utility model patent against Schneider, a French company that had sued Chint repeatedly in other countries.

SIPO (the Chinese patent office) issued 571,000 utility model patents in 2012 on top of 217,000 “invention patents” (equivalent to US utility patents), three times the number of patents issued by the USPTO.  SIPO also issued 467,000 design patents, 21 times the 22,000 issued by USPTO.  The rapid growth in these numbers suggests a national-level patent thicket that may reflect a national strategy to outdo the explosive trend in US patents.  China matters, because as the size of economy grows, its patents become commensurately more valuable, and the size of the market protected by a Chinese patent will eventually exceed that protected by a US patent.  Recognizing this principle, the Taiwan patent fund has chosen to invest in Chinese patents.

Patents and the Real Economy

In all the debate and drama around patents and patent markets, it is important to remember that there is a real economy out there.  In some respects the patent system is eerily similar to the financial system.  They both redistribute wealth rather create wealth, although arguments are made that they enable wealth creation indirectly.  That argument gets harder to make for naked credit default swaps and patent assertion entities.

The key question is what is the connection between patents and real products.  In complex products, it is clear that the connection is pretty remote.  People value and use real products, and the few smartphone patents that have been at least momentarily upheld and found infringed have involved particular implementations of minor features that can be dropped or designed around.  Meanwhile, one billion smartphones will be sold in 2013.

The real battle is around two opposing business models: Apple’s exclusive control of an integrated appliance and Google’s managed channel for information, services, and advertising offered gratis to scores of manufacturers.  How will these models play out politically, as well as within a patent system optimized for patent-to-product equivalence?

It is in the real global economy of one billion smartphones that one can discern the greatest international divergence once the Apple iOS vs. Android rivalry is isolated from lesser operating systems and competition among Android manufacturers.  Within this context, Apple has gained in US shipments from 2012 q2 to 2013 q2.  What was a 60-40 split for Android is 56-44 a year later.

But the rest of the world (ROW), led by China, is on a diverging path with respect to the two leading systems.  In 2012 q2 Apple iOS accounted for 16% of ROW shipments, compared to 84% for Android.  A year later Apple iOS had only 8.4% against Android’s 91.6%.  A parabolic divergence that raises far more questions than it answers….

So far Apple has not carried its thermonuclear war to China, even though there is roughly twice as much patent litigation in China than in the US — and even though the war is raging in ten countries on four continents around the world. Yet China’s laws and institutions, amplified by the size of its market, will provide a critical theater for addressing hard questions about the relationship between patents and markets.

In the past, thoughtful discussion has often been cut off by invocations of TRIPS and its clause against “discrimination” among technologies – a quaint clause that drew on legal ideology and the short-term aspirations of pharmaceutical interests.  But even if technologies are to be granted something akin to civil rights, it is not clear where differentiation leaves off and discrimination begins.  Or how the proliferating uses of government-defined property rights should be limited by the varieties of competition policy, financial regulation, or other forms of state action.  Or the extent to which these issues can or should be addressed by overrides in the name of “public interest” or “policy.”

Should discrimination be addressed in terms of legal process or economic results?  De jure versus de facto discrimination?  Is it discrimination to favor discrete products over complex products?  Discrete product industries over complex product industries?  One platform strategy over another?  Centralized innovation over open and distributed innovation?

The developments in the US show that policymakers will ultimately have to face high-level tradeoffs far removed from the intricacies of patent law or the validity of particular patents and how their claims are interpreted against the multitude of features in particular smartphones.  What most people (and by extension, most policymakers) want are tangible market outcomes in the real economy.  In short, people want smartphones.  But we now have thermonuclear war enabled by government-created rights asserted in government-sponsored venues.

Brian Kahin is a Senior Fellow at the Computer & Communications Industry Association and a Fellow at the Center for Digital Business at the MIT Sloan School of Management.