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The Apple-Samsung Patent Wars and Our Broken IP System

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The multi-billion dollar battle royale between Apple and Samsung has headed to the jury deliberation phase. To sum up: Apple is accusing Samsung of violating five patents on its iPhone and iPad products, including the ones that cover such features as slide-to-unlock and auto-word-correct. Samsung, in turn, has accused Apple of infringing on two of its patents. A similar 2012 lawsuit between the two tech giants was previously settled in Apple’s favor. But Apple has filed suit against Samsung in courts across the globe, and regardless of the outcome of the current case, still more lawsuits between the adversaries are likely. This current case, Apple v. Samsung, is threatening to become the longest, as well as the most pointless, legal dispute since Jarndyce v. Jarndyce.

According to standard economic theory, the reason the legal system protects intellectual property rights is to encourage innovation. That’s why the government grants patents like the ones Apple and Samsung are currently squabbling over. According to this theory, innovation is so expensive that individuals and firms won’t invest in the resources it takes to develop new products unless they are granted the exclusive right to financially benefit from their creations. But as is the case with so many economic ideas, what may in theory sound perfectly reasonable, in practice frequently turns out to be the opposite.

In fact, an intellectual property regime that grants excessively strong protection to rights-holders has the potential to stifle innovation, incentivize unproductive economic activity, rip off consumers and taxpayers, and generally increase economic inequality. That, unfortunately, is the IP regime that has developed in the U.S. today. For instance, the current system makes it difficult to combine patented features by different companies in one product. Want to build a smartphone with Android-style widgets and a Siri-type search function? Unfortunately, you’re out of luck. Firms can also harass the competition by threatening lawsuits, especially against newer, smaller firms unable to afford access to our pricey legal system.


Simpler days at the patent office.
Photo in the common domain.

One area where our IP regime has gotten completely out of control is in software, which is the subject of the disputed patents in the Apple-Samsung dispute. Software patents are five times as likely to be the subject of a lawsuit as other patents, and litigation involving software patents has tripled since 1999. A single software patent can cover a ridiculously trivial concept; the patent for Amazon’s “one-click” shopping is one such example. The Europeans, being sensible as usual, ban software patents. Is it any wonder why? When even a hard-line conservative like Judge Richard Posner questions whether software should be covered by patents at all, you know we’ve jumped the shark in this area.

Our dysfunctional IP system has given rise to a species known as “patent trolls”: individuals or firms who, rather than creating new products, make a handsome profit by filing overbroad patents and then threatening lawsuits against entities who violate them. One Boston University study found that, in 2011, patent trolls imposed a direct cost of at least $29 billion the firms they preyed upon. Overall, patent litigation has been a huge drain on the economy, soaring from $3.6 billion in 1984 to $61 billion in 2009.

Let’s look at the overall impact of the current case between Apple and Samsung. It is certainly a staggering waste of Apple’s and Samsung’s resources. The legal bills alone are estimated to have run into tens of millions of dollars, and there’s also a substantial opportunity cost that comes from the failure to apply those dollars to otherwise profitable economic activity, such as developing new products. If, as seems likely, the court rules in Apple’s favor, that will be bad news for consumers, because it would enable Apple to charge higher prices for its product. Following the 2012 verdict for Apple, economist Dean Baker wrote that that verdict would enable Apple to charge consumer additional fees that “could well run into the hundreds of billions of dollars over the next decade.”

Indeed, Apple is reportedly negotiating with carriers for a $100 increase for its iPhone 6, even though the new model lacks the kind of “game-changing device” that would justify the price hike. Perhaps Apple would have raised prices anyway. But a legal victory that protects its monopoly over key patents enables it to charge far more for its products than would have been possible in a truly competitive market.

Finally, there is the burden imposed on our legal system and the cost to the taxpayer when our courts are forced to adjudicate these shenanigans.

The problems with our IP regime don’t end there. As Baker, Joseph Stiglitz, and other economists have pointed out, the excessive protection our laws grant to the holders of patents and copyright generate economic inequality by encouraging unproductive economic activity. Our laws create incentives for wealth appropriation, not wealth creation. This keeps incomes artificially high for the appropriators.

Our broken IP system has many other deeply pernicious effects. It is also destroying our intellectual and cultural heritage. The most thoroughly outrageous current example is the demand by the publisher Lawrence and Wishart that the Marxists Internet Archive remove the English language translations it had posted of the collected works of Marx and Engels. Our IP system is also, quite literally, killing people. Here’s another—the ability of pharmaceutical companies to enforce drug patents keeps the price of life-saving medication out of reach for many people.

The dispute between Apple and Samsung is troubling, but it is clearly a comparatively minor symptom of a far deeper problem.