Protect Patents to Stay Ahead

Ross Marchand

January 31, 2018

This article originally appeared on Economics21 on January 26, 2018

The Trump Administration once again has set its sights on China, signaling that tariffs alone won’t be enough to protect America. Even after levying onerous tariffs against Chinese-made solar panels, President Trump hopes to apply additional pressure to prevent Chinese companies from copying Americans’ work with impunity. An administration investigation in the works will likely corroborate reports that the Chinese government and state enterprises engage in cyber-theft against US businesses, and nudge American companies to give up their intellectual property (IP) in exchange for access to local markets. President Trump has threatened to slap an unspecified “large fine” in response to forthcoming recommendations by the United States Trade Representative.

If these allegations and reports are true, they mask a larger, opposite trend. China, along with neighboring countries, has been steadily improving its protection of intellectual property. In the past few years, China has put forward ambitious targets to increase patent holdership and facilitate IP legal cases that previously would not have seen the light of day. Wealthier exporting powerhouses in Asia have been shoring up IP protections at an even faster pace, ensuring that businesses small and large continue to innovate at arm’s length. Japan’s IP-related business revenue has soared 74 percent over the past five years, placing the country a close second behind the United States in gains from patents, trademarks, and copyrights.

While it is encouraging that other countries are taking steps to protect IP, these developments raise challenges for the American patent protection system. Faced with key economic rivals bent on protecting IP, members of Congress have allowed America’s patent protection systems to falter. The Global Intellectual Property Center notes increased costs and uncertainty in the patent opposition system over the past decade, as increased transparency and allowable damages have buoyed China’s standing.

Specifically, Section 18 of the 2011 America Invents Act emboldens third parties to invalidate business method patents via an administrative process overseen by the US Patent and Trademarks Office (USPTO). But, as Heritage scholar Alden Abbott and others have pointed out, patent invalidation rates in these hearings are far higher than traditional patent reversal rates by courts.  In recent years, antitrust law has increasingly infringed on business returns comfortably within the scope of held patents.

Contrary to the claims of IP opponents, this uncertainty harms American innovation and acts as an implicit tax on American businesses. Research demonstrates that, of various government measures to foster innovation, only patent protection and basic financial market rules are effective. These measures are found to be superior to tax incentives for innovation. Additionally, prominent British biochemist Terence Kealey notes that little correlation exists between levels of public R&D investment and economic growth. Other countries’ rise in IP enforcement shows a widespread acknowledgment that patent protection matters.

This is not to say that the United States will soon be eclipsed by rising Asian powers. America still has the most stalwart IP protection system in the world, with ease and predictability in enforcement and resolution. It is important, however, to remember that company relocation decisions can be affected by modifications to tax, regulatory, and property enforcement regimes. The United States can retain a top position in IP enforcement via beefed-up enforcement and system reforms. In particular, the STRONGER Patents Act, sponsored by Senator Chris Coons (D-DE), would increase due process on the Patent Trials and Appeals Board, and restore injunctions as the primary method to fend off patent infringement. Antitrust enforcement should be curtailed to allow businesses to fully benefit from gains garnered by intellectual property. Finally, pressure must increase on China and other developing nations to cease stealing and nudging secrets from American businesses.

While it is vital to sound the alarm on Chinese infringements on American intellectual property, the administration must also acknowledge the big picture of increasing enforcement across the globe. A sense of urgency is needed to implement reforms that will keep America at the top of the innovation pack, to the benefit of millions of consumers.