Let’s Compete on Innovation Rather Than Patents

The next generations of telecom technologies are called “LTE” or “4G”. China’s Huawei believes that by 2015, it will hold 15–20% of the worldwide patents in these technologies, and that these will earn it at least 1.5% of the sales price of every device—every cell phone, laptop, and tablet—that uses them.  Huawei is on track to achieve its goals: in 2007, it held just 152 patents; by the end of 2009, it had applied for 42,543 patents, of which 11,339 had been granted in China, 215 in the United States, and 1282 in Europe. Huawei’s rival, ZTE, claims to hold 7% of the world’s LTE patents and plans to increase this to 10% by 2012.

Emboldened by these successes, the Chinese government has initiated a nationwide program to make China the world leader in patents in every important industry.  The New York Times reported that the government is offering cash bonuses, better housing, and tax breaks to individuals and companies filing the most patent applications. According to the Times, China’s goal is to increase the number of its yearly “invention” patent filings from this year’s 300,000 to one million by 2015. And it wants another one million “utility-model patents”, which typically cover items like engineering features in a product. In comparison, there are 500,000 invention patents granted every year in the U.S. The requirements for “utility-model patents” are so mundane that they are not even recognized in the U.S. as a legitimate criterion for the existence of intellectual property.

The Times quotes David J. Kappos, director of the United States Patent and Trademark Office, as saying that the leadership in China “knows that innovation is its future, the key to higher living standards and long-term growth. They are doing everything they can to drive innovation, and China’s patent strategy is part of that broader plan”. Kappos seems to believe that, with patents, China is unleashing a golden age of innovation.

Kappos is wrong.

The reality, as I explained in my BusinessWeek column China Could Game the U.S. in Intellectual Property, is that patents will neither make China more innovative nor benefit the global economy. Just as the vast majority of China’s academic papers are plagiarized or irrelevant, so will its government-sponsored patents be tainted. In contrast to the tiny proportion of Chinese academic papers that serve to expand the world’s knowledge base, however, Chinese patents will serve as land mines for foreign businesses. They will allow China to demand license fees from companies that do business there or to shut them out entirely. (And these will hurt China’s own startups.)

In the tech world, patents don’t foster innovation; they inhibit it. They are like nuclear weapons in an arms race, in that companies use them to hold competitors back or to extort license fees from companies that can’t afford the time and cost of litigation. These battles play out every week in Silicon Valley: among the behemoths—Microsoft, Hewlett-Packard, IBM, Oracle, and SAP—and between behemoths, startups, patent trolls, and large corporations. Startup entrepreneurs live in constant fear that behemoths or patent trolls will bankrupt them with frivolous lawsuits.

Most U.S. patents are commercially frivolous and irrelevant. The Chinese patents will be even more so. As The Economist reported, Chinese patent examiners are paid more if they approve more patents, and so routinely approve even the most dubious filings. Chinese academics, companies, and individuals have strong incentives to patent worthless ideas: with more patent grants, professors gain tenure, workers and students gain residence permits to live in a desirable cities, corporate income tax is reduced from 25% to 15%, and companies win lucrative government contracts. The reward doesn’t come from innovation, but from the act of filing a patent application.

So in the years ahead, China will have lots of patents—far more than the U.S. You can’t fault China; it is simply taking a page from Silicon Valley’s playbook. Its leaders have figured out how the American patent system works and how to master it.

In addition to the huge numbers, what will make it even more difficult for western businesses is that these patents will be in Chinese. These businesses will have to hire Chinese lawyers to search the Chinese State Intellectual Property Office database for patents that cover any of the technologies they want to sell in China. And if someone has already beaten them to the punch and filed an application for a similar invention, they must fight it out in Chinese courts—where judges are likely to side with locals. Intellectual-property lawyer JiNan Glasgow told me of a case in which this happened recently: a supplier used e-mailed design documents and product specifications and filed its own patents in China and then enforced them against the inventing company (its customer).  Rules of evidence made it nearly impossible to prove that the invention and figures originated in the U.S., because e-mail and electronic documents are not considered admissible reliable evidence in China.

This is a battle we can’t win. The Chinese economy will be littered with millions of stumbling blocks for foreign business. These companies will have to offer up their intellectual property in exchange for Chinese intellectual property—in the same way that IBM and Microsoft trade patents. Or they will have to pay license fees to enter the Chinese market. And China may challenge the U.S. globally with its new patents as it plans to do with 4G.

It’s best to disarm before it is too late.  That means reforming the patent system. We really don’t need software patents, and we really don’t need patents in other technologies that evolve rapidly. In these fields, speed and technological obsolescence are the only protections that matter. I’ll concede that in some slow-moving fields, patents do have a role. Patents successfully protect the designs of industrial equipment, pharmaceutical formulations, biotechnology products and methods, biomedical devices, consumer products, advanced materials and composites, etc. But we can have different rules for different types of products.

And once we reform our patent system and unleash greater innovation in the U.S., we can teach other countries how to reform their systems. Innovation is a game that the U.S. can easily win at. And when we compete on innovation, it’s win-win rather than lose-lose.

Editor’s note: Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. You can follow him on Twitter at @vwadhwa and find his research at www.wadhwa.com.