In basketball, when you foul, you get penalized for it. Recently, basketball has been plagued by “flopping” — players dramatically falling to the floor, pretending to be fouled, trying to fool the referee into calling a foul. This has been recently recognized as a plague on the game.
When it comes to business, competition is a powerful conceptual framework. We admire companies competing, generating better products for their customers, and producing rewards for founders, management, and workers. We recognize that competition is sometimes rough and tough, and companies learn from each other’s innovations, trying to outdo each other.
In life, more generally, theft is another powerful conceptual lens. You must not steal goes a Commandment. We dislike people who steal.
In the last couple of years, in some important parts of the tech world, the framework of theft has trumped that of competition.
The most visible evidence of that is the princely and unexpected sums paid for the carcasses or the near carcasses of companies such as Nortel, Novell, and Motorola, whose products failed or were failing in the marketplace. Despite the fact that the companies were not competitive as demonstrated by their performance among customers, other companies saw great value as they could hurt (or defend themselves against such actions from) their competitors through patent litigation and seeking royalties (i.e. tolls to play in an area). The fact that a company’s value in death trumped its value in life, as a competitive force, suggests something very powerful.
This is upside-down. For innovation, the framework of competition must sit above the framework of theft.
Of course, this is not to defend theft. Instead, it is to say that to a great extent, the phenomena of companies claiming theft is both a strategic and tactical effort to ride the moral force of the concept of theft — the way we all understand it in the moral sense — to squelch competition.
The reality is much more complicated. As just one example, the “property” that is at the heart of some of these cases is often not of great value in itself as a result of its innovative importance, but because of the position an industry standard setting has elevated it to.
Here is how Judge Posner explains it in the recent ruling I noted was coming in the smartphone litigation between Apple and Google (Motorola):
The proper method of computing a FRAND royalty starts
with what the cost to the licensee would have been of obtaining,
just before the patented invention was declared essential to
compliance with the industry standard, a license for the function
performed by the patent. That cost would be a measure of
the value of the patent qua patent. But once a patent becomes
essential to a standard, the patentee’s bargaining power surges
because a prospective licensee has no alternative to licensing the
patent; he is at the patentee’s mercy. The purpose of the FRAND
requirements, the validity of which Motorola doesn’t question,
is to confine the patentee’s royalty demand to the value conferred
by the patent itself as distinct from the additional value—
the hold-up value—conferred by the patent’s being designated
as standard-essential.
Judge Posner also quotes the FTC, in a recent third-party filing in a smartphone litigation at the ITC, to bolster this point:
High switching costs combined with the threat of an exclusion
order could allow a patentee to obtain unreasonable
licensing terms despite its RAND commitment, not because
its invention is valuable, but because implementers
are locked in to practicing the standard. The resulting imbalance
between the value of patented technology and the
rewards for innovation may be especially acute where the
exclusion order is based on a patent covering a small component
of a complex multicomponent product. In these
ways, the threat of an exclusion order may allow the holder
of a RAND-encumbered SEP to realize royalty rates that
reflect patent hold-up, rather than the value of the patent
relative to alternatives.
It is time for the moral force of competition to take its rightful place above the lens of theft. In part, it’s through using antitrust more aggressively to discourage the abuse of patents. In part, it’s through influential judges like Posner here, creating persuasive precedent and giving other judges the support to take similar actions. But mostly, it’s due through a cultural change and for tech companies to stand down.
takingpitches 