JONATHAN BARNETT

THE “GLUE” BETWEEN INNOVATION AND CAPITAL

Jonathan Barnett’s book “Innovators, Firms and Markets” examines role of patents in supporting small, influential entrepreneurs

By Leslie Ridgeway When patent protection is weakened, large companies gain protection against the competitive threats posed by smaller firms that are rich in innovation but poor in the capital required to convert ideas into new technologies. That’s the central argument made by Jonathan Barnett, Torrey H. Webb Professor of Law, in his new book, “Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property “(Oxford University Press).

“The book can play a role in the policy conversation right now about the role of big tech in the economy in general and the innovation economy in particular,” says Barnett, director of USC Gould’s Media, Entertainment and Technology (MET) program. Published in mid-January, the book is the culmination of more than a decade of research on the underappreciated transactional structures used to commercialize innovations in technology markets. Ranging over 120 years of U.S. economic history, Barnett examines the role of patents in supporting entrepreneurial innovation ecosystems in which outside capital supports the emergence of small-firm innovators who can challenge larger firms dominating the market.

WEAK PATENT PROTECTIONS AND THE “INNOVATION DROUGHT” Barnett’s book studies the symbiotic interaction between entrepreneurial innovation and venture capital prominent during the late 19th and early 20th centuries and the late 20th and early 21st centuries. Barnett argues that strong patent protection provided the “glue” that sustained these relationships. He contrasts this with four decades of weak patent protection and extensive use of compulsory licensing by antitrust regulators from the late 1930s through the 1970s.

Innovation as measured by R&D dollars remained robust during this period, but the small innovatorentrepreneur shrank back as technological research concentrated in large companies like AT&T, General Electric and RCA. While important innovations were developed during this period, the large companies were often slow in translating basic research into new technologies for consumers. “By the 70s, people were talking about an innovation drought,” Barnett says.

Barnett’s argument runs counter to a widely shared view of patents as a tax that stifles innovation, slows technology adoption, and raises consumer prices. Barnett argues that secure intellectual property rights are critical to an innovation economy that is hospitable to small-firm innovators, some of which have supplied dramatic innovations in U.S. technology history.

Barnett studied the lobbying activities of different firms and research institutions to understand the value these entities placed on patents, and why weakening patents might benefit some entities while harming others. “I found that large businesses outside the life sciences mostly file briefs asking [the Supreme Court] to weaken patents,” Barnett says. “I also found that venture capital firms, tech transfer divisions within universities and biopharma firms usually favor strong patents. The contrast was striking and is closely tied to a firm’s business model or position in the technology supply chain.”

Since 2006, the “patent tax” analogy has driven a sequence of decisions from SCOTUS, weakening patent protections, Barnett says. Congress’ enactment of the America Invents Act in 2011, and the ability for any party to challenge patents at the Patent Trial & Appeals Board, has weakened patent protections further. He hopes the book will lead policymakers to rethink whether U.S. innovation policy is heading in the right direction.