Game Theory and Patent Enforcement

By Evan Jensen

The patent system is a complex and sometimes controversial aspect of the American economic, technological, and legal systems. I will attempt to explain why both sides of the controversy; both the ‘pro-patent’ and many of the so-called ‘anti-patent’ advocates are actually substantially in agreement, but prefer different strategies for dealing with collective action problems.

Inventions, Secrecy, and Collective Action Problems

The American patent system created in the Constitution is a solution to a particular collective action problem. Before there was a patent system, anyone could copy anyone’s inventions without fear of patent infringement. If an inventor had an idea with the potential to be widely used and make a lot of money, the inventor could choose either to share the idea with others, or keep it secret. But sharing the idea exposes the inventor to the risk of a copycat stealing the inventor’s work and profiting, to the inventor’s detriment. By keeping the idea secret the inventor could capitalize on it exclusively. Without a patent system an individual inventor would obtain maximum benefit from his or her invention by leveraging the invention without informing society at large how it works, for fear of being copied.

However, in the aggregate, if every inventor keeps his or her work secret then all inventors and society at large would suffer from a stagnant technology sector. Inventors would waste most of their time duplicating other inventors’ work, working in secret to solve problems that another inventor has already (secretly) solved. As a society, it is beneficial for inventors to share their ideas with each other to allow others to build on the current state of the art instead of wasting immense amounts of time by concealing and reduplicating work. Keeping science and technology inventions secret is very undesirable for society, and for each inventor.

The patent system gives inventors who publicly disclose their work special protection to guarantee nobody copies their ideas without permission. As a result, inventors can share their work so society benefits from vibrant technology development, while the inventors’ ideas are protected from copycats. The patent system was created by the Constitution as a solution to this ‘inventor’s secrecy’ collective action problem.

 

Strategies for Collective Action Problems

Collective action problems are everywhere. The canonical example is fishermen who catch from a limited fish population. Each fisherman wants to catch as many fish as possible. But if every fisherman always catches as many fish as possible then there will be no fish left. This outcome is called the “tragedy of the commons.” If each fisherman overfishes then each will actually catch fewer total fish than they would if all the fishermen agreed to catch fewer fish to preserve the fish breeding population.

There are countless examples of collective action problems in every walk of life, from freeloaders on power lines to responding to environmental harm. The defining feature of all collective action problems is that individual, self-interested rationality will actually fail to maximize individual utility. Cooperation to an individual’s immediate detriment will actually result in improved outcomes for that individual, a perverse and paradoxical dilemma.

The basic structure of collective action problems is boiled down in a game theory thought experiment called the “Prisoner’s Dilemma.” In this thought experiment, two bank robbers have been arrested by the police and detained in separate cells where they cannot communicate. The police offer the same deal to both bank robbers; confess where you hid the money and you get a light sentence, while your partner-in-crime goes to jail for life if he doesn’t confess. However, if neither bank robber confesses then they both go free, and also get to split their ill-gotten gains. The question is: should you confess, or cooperate?

The Prisoner’s Dilemma boils down a collective action problem to its essential elements. If both bank robbers cooperate then they both go free and get a sack of cash, which is the best possible outcome for them both. But for each individual player, cooperating is very risky because it could potentially land that player in jail if the other player confesses. Both bank robbers know that the other could confess. If both robbers are smart, they should know that their co-conspirator also knows it is in his rational self-interest to confess, especially so if he expects the other to confess. As a result, the rationally self-interested player of this game should choose to confess. But confessing rules out the utility-maximizing outcome of both bank robbers walking off with the loot. Rational self-interest by both robbers, perversely, results in a worse outcome for both than if both robbers irrationally risked cooperating.

There are essentially two strategic archetypes for dealing with collective action problems. The first is the direct competitive strategy to simply maximize the individual’s immediate expected value (i.e. “confess”; receive light sentence and avoid jail). The other is a utility-maximizing cooperative strategy that does not immediately maximize the individual’s benefit, but leads to a superior outcome for every individual (i.e. “cooperate”; both go free with loot) if the other player also cooperates. Neither strategy is ‘correct,’ but most people will tend to favor one strategy in a given context.

 

The Patent Collective Action Problem

The patent system solves the ‘inventor’s secrecy’ collective action problem of disclosure. However, the patent system also creates a new collective action problem; enforcement of patents. The question is: how broad should patent enforcement rights be?

In my opinion both the ‘pro-patent’ and ‘anti-patent’ camps are generally in agreement about the nature of patents, and why they should exist. The disagreement is over how to address the collective action problem of enforcement of patents.

Broad patent protection directly benefits the owner of the patent by giving the patent owner broader options regarding who can be successfully sued for infringement. Advocates for broad patents are adopting the “confess” strategy in the Prisoner’s Dilemma. They are fishermen who are catching as many fish as they can, to their immediate benefit, by not agreeing with other fishermen to limit how many fish they can catch.

However, in the aggregate, with hundreds of thousands of firms, inventors, companies, and patents, broad patent protection also gives everybody else broader options regarding who can be successfully sued. This changes the entire dynamic. Granted, the inventor or company certainly does benefit from owning a broad patent. But broad patents in the aggregate also expose every inventor and company to every other broad patent. As the number of firms, inventors, and patents increases, the potential liability, the discovery costs, and risk of infringement grow faster than the relatively constant benefit of owning a broad patent. Your patent gets more useful from being broader, but the jungle of patents you don’t own becomes many times more dangerous when all patents are broader. The tragedy of the commons result is a thicket of broad patents and a lot of litigation when patents are unclear.

Narrow patent protection limits each patent owner’s rights to successfully sue. On the surface, this appears to be disadvantageous for a patent owner. But in the aggregate, every other patent owner also has narrower rights to sue. Innovators’ possible liability for infringement is greatly reduced by limiting the breadth of all the other patents, with the substantial downside that it limits their own patents as well. Advocates of narrow patents are adopting the “cooperate” strategy in the Prisoner’s Dilemma. They are fishermen who are cooperating with the other fishermen to limit how many fish they can catch, to their mutual benefit. By narrowing patent protection, the patent thicket and its attendant confused litigation is eliminated. But on the other hand, there is the danger that inventors’ ideas will not be sufficiently protected to stop copycats from infringing, and there could be a rise in patent infringement.

So we have another collective action problem regarding enforcement of patents. Each individual patent owner benefits from aggressive enforcement of its own broad patents protecting its inventions. But each inventor is also exposed to potential liability by every other patent owner that does the same. Thus, in the aggregate, each innovator is actually better off with reduced risk of being sued for infringement.

In terms of the fishing analogy, in the patent sphere each innovator is both a fisherman and a fish. Each innovator wants to be able to catch as many infringement fish as possible. But each innovator also wants to stop patent-holding fishermen from overfishing.[1]

 

Tesla’s Patents

I imagine at this point some readers believe this is an academic point about game theory, and not an immediately practical idea. But the idea of choosing a strategy to apply to a collective action problem deliberately to maximize your benefit, rather than from impulse or intuition, is immensely practical.

Case in point- Elon Musk from the electric car company Tesla announced on June 12, 2014, that Tesla was opening up all of its patents, making all of the company’s patents available for anyone to use.[2]

Musk described Tesla’s former approach as a competitive, risk-averse, immediate maximization, “confess”-type strategy. In his own words, “At Tesla, however, we felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla.”[3] His description translates neatly into the Prisoner’s Dilemma competitive strategy of confessing to avoid jail, rather than relying on others to seek the best possible outcome. Tearing up all of Tesla’s patents is a sharp change in approach.

Tesla’s choice to change to a utility-maximizing “cooperate”-type strategy is not founded in idealism, but in business pragmatism. Tesla absolutely did not relinquish its patent protections as a gesture of generosity or surrender. Tesla stands to gain immensely from allowing others to use its patents. Tesla needs more electric cars on the road, so letting others build electric cars helps Tesla gain traction. Tesla wants car technology to advance quickly, so blocking inventors from using its technology would be counterproductive. Tesla wants to benefit from others’ self-interested motivation to improve electric car-related technologies such as batteries and motors. Electric cars need a common platform and infrastructure, and Tesla wants its supercharger to become the industry standard, so allowing others to use Tesla’s standard makes perfect sense. An open-source philosophy will attract the best engineers, and encourage other engineers to work on electric cars even if they don’t work for Tesla. By opening up all of its patents, Tesla sacrifices the opportunity for immediate personal gain through patent assertion, and instead stands to gain from the efforts of others, making Tesla more likely to reach its larger goal of a strong position over an American fleet of electric vehicles.

Tesla is not just throwing away value in the form of patents; relinquishing all of its patents will give Tesla an advantage in the marketplace. For Tesla, the best possible outcome is to gain control of the car industry, and Elon Musk sees that the immediate value of his company’s patents should be sacrificed for an improved chance at the much greater returns of controlling the American car market.

Elon Musk made the deliberate choice to shift from a competitive patent strategy to a cooperative strategy because in his judgment, opening up all his company’s patents would benefit Tesla to a much greater extent in the long run. Whether Musk’s gamble pays off depends on what other inventors and companies do with the technology formerly protected by Tesla’s patents.

 

Conclusion

The difficulty with collective action problems is that, perversely, individual, self-interested rationality will actually result in a worse outcome for the individual. In order to maximize an individual’s benefit, it is actually necessary to choose a strategy that does not yield immediately maximum utility. Applied to patents, an innovator (excluding NPE’s) has the conflicting desires to both obtain broad patent rights and also to avoid being sued for patent infringement.

There isn’t one final solution to any collective action problem. The tension between an individual’s interest and the best outcome for each individual is an enduring problem, and it isn’t going anywhere. But it is important to keep the collective action issue in mind when discussing policy regarding patents.

Even large patent owners who have a vested interest in broad patents should be aware that their own immediate interest in broad patent protection is actually in tension with their own best possible outcome of dominating a market using an innovative product. Sometimes, it might be highly advantageous to pull a Musk and try to dominate the market.

 

[1] Non-practicing entities (NPE’s) behave differently, since they do not make products and therefore are not vulnerable to patent infringement lawsuits. To extend the metaphor they are fishermen, but not both fishermen and fish like inventors/producers. However, a discussion of non-practicing entities is outside the scope of this article.

[2] Elon Musk, All Our Patents Are Belong to You, June 12, 2014, http://www.teslamotors.com/blog/all-our-patent-are-belong-you

[3] Id.

Opinions expressed in this article are those of the author and do not necessarily represent the views of Stein IP.

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