America's Out-of-Control Patent Laws

Apple may think it has won a huge victory not just against Samsung but against Google and almost everyone else in the smartphone and tablet worlds. Not just the US$1 billion damages in cash but, it is assumed, by judgments that make life difficult for all manner of non-Apple suppliers.

But what may play well in a nationalistic, litigation-obsessed America may not go down well in the rest of the world. Indeed the first reaction of some device users, particularly outside the US, may be worry that Apple has become over-powerful and so their next purchases would be of anything except Apple.

It seems unlikely that courts in the rest of the world are going to agree with Apple as readily as a jury in the company’s home state. Indeed, on Aug. 23, a South Korean court ruled that Samsung hadn’t copied the look and feel of the iPhone and ruled that it was Apple that infringed on Samsung’s wireless technology.

In any case, patents are supposed to exist to protect new technology and processes. Apple has created almost none of either. Its forte is design and usability and the claim to innovating curves and color ought to be laughed out of court. But in a nation where half the population still rejects evolution, anything is possible.

This would be a subject for hilarity were it not for the possible global impact not so much on sales of devices but on the very notion of free trade. Some doubtless believe that this is a US plot to do down non-US companies, in the same way that foreign banks have been singled out for punishment for drug money laundering while billions are laundered on a daily basis by US banks.

There is a similar misuse of the patent laws by companies that manage to use subterfuges to extend patents far beyond the five to seven years normally granted by the US Patent office. Pharmaceutical companies are the biggest abusers of the system, often changing the medical formulary of a given drug by no more than a molecule or two to renew the patent as an entirely new drug.

That has meant that tens of thousands of patients, particularly HIV sufferers and their insurance companies or governments if they are on welfare, have had to pay amounts far in excess of the cost of the drugs or even the development costs, to satisfy the greed of the pharmaceutical companies.

In a signal victory for sanity, India’s Patent Office in March 2012 issued the first-ever compulsory license to a generic drug manufacturer, effectively ending the German pharmaceutical company Bayer’s monopoly in India on the drug sorafenib tosylate, used to treat kidney and liver cancer. The patent office acted on the basis that not only had Bayer failed to price the drug at a level that made it accessible and affordable, the German company also was unable to ensure that the medicine was available in sufficient and sustainable quantities within India.

Competition from the generic version is expected to bring the price of the drug in India down dramatically, from more than US$5,500 per month to close to $175 per month – a price reduction of nearly 97 percent, and a dramatic indication of how pharmaceutical companies can profiteer on patents.

That 97 percent reduction is an indication that there is something obscene about companies profiteering hugely on drugs that, if priced legitimately, could save thousands of lives. It is hardly any wonder that Indian pharmaceutical companies have made themselves respectable and profitable through what is euphemistically known as “reverse engineering.”

In other cases it seems the main problem is not nationalism but litigation gone wild. It is reported that patent litigation costs and awards are now running at almost US$30 billion annually, a five-fold increase in just six years. In a complete reversal of the theory of patents, which are awarded to protect invention, a new brand of company has sprung up, formally called “non-practicing entities,” or NPEs, and derisively known as patent trolls. The patent trolls’ whole existence is built around buying up hundreds or thousands of unused and dormant patents and waiting to spot the prey, a legitimate company that has created a similar product. Then along come the patent lawyers with plans to sue or extract lucrative licensing agreements.

The biggest of these is Intellectual Ventures, co-founded by Nathan Myhrvold, the former chief technology officer for Microsoft, which has been widely criticized for its tactics in hoovering up thousands of disused patents. The Washington state-based company argues that it exists to protect small patent-holders and investors whose rights are often ignored by big companies that steamroll them into selling their ideas for pennies on the dollar.

If Apple can win against Samsung for design features, no doubt nail clinics will soon be suing each other for design theft and chefs for their food presentation. Think back just a moment to cars. Devices such as air bags had patents. But was the first car manufacturer which fitted them able to claim a patent for doing so? No way. But it could today – at least if you asked a California jury.

The tragedy for consumers is twofold. The growth in patent litigation has coincided with the near demise of anti-trust enforcement, and the wholesale theft of personal information carried out by companies such as Facebook and Google thanks to the pages of unreadable conditions and consents that innocent users are obliged to click to.

These trends both limit consumer choice and explain why, although the hardware industry is intensely competitive, the system, browser and search space is occupied by a tiny and probably diminishing number of players. Outrageous patent claims rely on using the courts, not the consumer to determine commercial success. Retail users of the internet have home pages and spying software infiltrated by big name companies which only experts can neutralize.

The whole space is occupied by companies such as Microsoft, which started out stealing or buying other companies’ ideas but marketing them better. Apple is the same. They use their dominant position in one sector to drive out competitors in a nearby one – remember Netscape?

In the meantime the real innovation goes on daily – by the people who develop and manufacture the hardware, names of which are often little known. The actual physical contents of an iPhone are almost identical to those of a Samsung or HTC equivalent. There is actually little more difference than between Caltex and Shell gasoline. At best Apple is a slick design and marketing exercise and at worst an arrogant expensive con.

But either way the courts have no business here. Let the consumer be king and the devil take the hindmost. And may courts in other countries treat America’s mania for litigation with the contempt it deserves.