Will Patent Reform Tackle Government Trolls? | Commentary

Posted November 30, 2014 at 12:17pm

With the election victory by the Republicans, Congress at last seems ready to tackle two issues on which the parties’ differences are narrow: trade and intellectual property.

There’s already a broad consensus that the U.S. must do more to open markets in Europe and Asia and that our patent system is badly broken.

These two issues are linked. The goal of reform for each is economic growth, driven in large measure by technological innovation, America’s comparative advantage. But Europeans and Asians are well aware of the U.S. edge, and they are working hard to blunt it. One effective means affects both trade and IP policy. It’s the sovereign patent fund, or SPF.

SPFs have become tools to deter foreign competition in countries where such practices exist, such as China, Japan, Korea and France. They are, in effect, government-sponsored patent trolls. Like private-sector trolls, or patent-assertion entities, they exist not to produce anything themselves but to own patents, license them and threaten or file litigation against what they consider to be infringers.

Certainly, there’s a good case to be made for private patent-assertion firms, such as Intellectual Ventures, founded in 2000 by Nathan Myhrvold. He argues persuasively that “our goal is to grow a more efficient invention economy that will energize technological progress, potentially changing the world for the better.”

But SPFs are different. They are owned, or co-owned, by governments, and the unabashed goal of these funds is to protect and promote home-grown industries, not improve the global economy. “Some SPFs, like France Brevets, even admit to being retaliatory or discriminatory instruments against foreign actors regardless of whether the original claim is legitimate or not,” concludes a recent report by the European Centre for International Political Economy.

France Brevets is a €100 million SPF owned jointly by the French government and Caisse des Depots, a private firm “under Parliament’s supervision and guarantee.” It’s been aggressive in defending national interests, filing lawsuits last year against HTC America and LG Electronics. As a state-owned enterprise, SPFs can marshal government resources — including not just money but regulatory power, or the threat of it — against foreign firms.

Such behavior appears to be a violation of the spirit, and perhaps the letter, of the Agreement on Subsidies and Countervailing Measures, which prevents members of the World Trade Organization from using government power to secure advantages against foreign competitors. By marshaling state authority against innovators, they deter economic growth.

France Brevets, however, pales in comparison to China. Local and federal authorities are establishing patent pools “to defend domestic companies,” the ECIPE report states. SPFs are becoming an important element of China’s announced strategy of promoting “indigenous innovation.” The ECIPE authors worry that SPFs “legitimize similar behavior by bigger economies like China that are actively pursuing industrial policy through  . . .  the establishment of their own SPFs.”

Japan, an innovator in industrial policy if not necessarily in technology, established the Innovation Network of Japan in 2009 as a public-private partnership to promote home-grown industries. In July, the Network set up its own pool with plans to acquire and defend 5,000 patents to start.

These SPFs — still growing in Asia and Europe — are exercises in mercantilism in nations where growth and innovation is slowing. IP rights are valuable assets, and with the weight of government behind them, they can be mobilized into battle against foreign competition.

In the long run, protectionism is futile. Only innovation itself can bring economic rewards. But SPFs can do enormous damage, igniting retaliation, raising the costs of innovation and reducing the value that flows to consumers from new technology. The ECIPE study says it’s a “lose-lose scenario.”

Patent reform in the United States must address the SPF phenomenon, placing restrictions on the ability of funds sponsored by foreign governments to litigate unfairly against U.S. firms. Also, the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership, both under negotiation, must prevent SPFs from becoming protectionist instruments with the power to corrupt the free-trade objectives of those agreements. And last, the G20 should assert its opposition to the very concept of SPFs with a consensus declaration that they should be outlawed by the WTO. The G20’s goal is to promote global economic growth and stability. SPFs do the opposite.

Ambassador James K. Glassman, a visiting fellow at the American Enterprise Institute, served as undersecretary of State for public diplomacy and public affairs from 2008 through 2009. From 1987 to 1993, Glassman was part owner and editor of Roll Call.