Reinvigorating the U.S. Innovation Economy Requires Strong Enforcement of IP Rights

Thu, 26 Jun 2025

Professor Jonathan Barnett, Contributor with the Forum for Intellectual Property at the Hudson Institute and Director of the Media, Entertainment and Technology Law Program at the Gould School of Law at the University of Southern California, discusses how the U.S. policy climate has been unsympathetic to intellectual property (IP) rights in recent years, three policy resets that will help reinvigorate U.S. innovation leadership, and adverse national security consequences of neglecting IP protections.

Transcription

Giachino (00:04.0989 - 00:37.0389)

Welcome to IP Protection Matters. I'm your host, Renee Giachino. Today, we are joined by Professor Jonathan Barnett. He's a contributor with the Forum for Intellectual Property at the Hudson Institute. He also is the Director of Media, Entertainment and Technology Law Program at the Gould School of Law at the University of Southern California. He joins us today to talk about how reinvigorating the US innovation economy requires strong enforcement of intellectual property rights.

Professor Barnett, thank you again for joining us today.

Barnett (00:37.0549 - 00:39.0529)

Pleasure to be here. Thank you.

Giachino (00:39.0950 - 00:49.0569)

Drawing from the title of our podcast, “IP Protection Matters,” why should we care about intellectual property protections, in your opinion?

Barnett (00:49.0669 - 03:24.0354)

I’m going to give you two reasons. I think one reason will be familiar to your listeners and the other one less familiar, but it's just as important. So let's start with the familiar reason. That's simply basic incentive logic. If I'm a biotech startup, I need money to convert my idea all the way into a drug or treatment that patients can actually use. Well, that's going to require hundreds of millions of dollars in testing. It's going to require capital, expertise and working with larger pharmaceutical companies to actually take that idea and convert it into something that generates value in that example. Not just economic value, but health values. Our investors need to see a property right because otherwise others are going to reap the returns and they would have no incentive to invest. So that's known as the incentive function of intellectual property. I think that's widely recognized, especially in pharma.

But there's another function that I like to call the enabling function, or transactional function, that is less widely understood. But it's really just as important. Let's go right back to that same example and give a little bit more detail. Let's imagine we have our biotech startup scientists. They need to interface with investors and with pharma companies to enter into those transactions. Well, guess what? Those investors and those pharma executives are going to want to know a whole lot about that invention before they put money on the line. That requires the inventor to reveal sensitive, proprietary and valuable information about an invention.

Without a property right, that's not going to happen either because the inventor is going to be concerned that the parties on the other side of the negotiating table may in some cases, not all of them, but may in some cases take that information, run with it and reap returns without investing in the original labor. The IP right, or the patent in that case, allows the inventor to put that invention on the table and start negotiating price and terms like in any other market. Both of those transactions and those functions are important. The incentive function, or the enabling function, enables us to convert technology into products and services that can help out consumers and patients.

Giachino (03:24.0574 - 03:46.0175)

Thank you for explaining that to us. I'd like to ask you to explain something else to us. In a recently authored article, called “Three Policy Resets to Promote US Innovation Leadership,” you referenced the creative destruction cycle. What is meant by that, and why is that important in this discussion?

Barnett (03:46.0294 - 06:31.0940)

That phrase, which has gotten wide currency, goes all the way back to an Austrian economist named Joseph Schumpeter. What he pointed out is that one of the essential characteristics of the most robust forms of market economies is the phenomenon of creative destruction. The creative destructor is the entrepreneur, the inventor, the individual or the startup that doesn't just tweak or improve the existing technological paradigm, they challenge it. They overturn it.

Now what does this have to do with IP? Schumpeter's hero is the creative destructor. It's the inventor. It's the entrepreneur. Now, let's take Schumpeter's theory and put some technological history on top of that, specifically US tech history, which I've studied in detail. If you go back to the early 20th century, and you run it all the way through the present, what you often find is that the creative destructor is what I call the maverick inventor. It's not the person working at Bell Labs in the 1950s and 1960s. It's not going to be the person working inside Google today in 2025. It's the person who leaves Google, leaves AT&T, or never was there in the first place, and is outside the system.

What does IP have to do with that? Well, the reason IP is often essential, whether we look at pharma, computer hardware, or deep tech, is that often the only asset that the maverick inventor has is his or her idea. On every other element of the technological supply chain - production, distribution and financing - they are outmatched by the incumbent.

So what does the IP right do? The IP right levels the playing field. This is a very counterintuitive idea, because we often think of IP rights as increasing barriers to entry into markets and keeping entrants out. We have examples where IP rights actually lower entry costs by enabling that inventor either to challenge the incumbent or in some cases to partner with the incumbent where they each can bring to the table what they're good at. The inventors are good at inventing and the larger company is often good at deploying that invention into the market at a low cost and at a high speed.

Giachino (06:32.0339 - 06:59.0785)

From an investment perspective, and you write about this, how with US policy we are faltering both at the entry and then the exit side of innovation. I think that goes to what you just spoke about. Explain to us what you've studied and reported on when it comes to the involvement of venture capital and IPOs. Does that have to do with both the incentive and the enabling function as well?

Barnett (07:00.0035 - 09:03.0460)

Yes. It brings them both together. It brings us back to this really important figure of what I'm calling the maverick inventor. That's who the VC is looking for, right? The VC is looking for that blockbuster invention that challenges the existing paradigm and renders it obsolete. To invest, the VC has to have a reasonable prospect of an exit opportunity. For a variety of reasons that doesn't necessarily have to do with intellectual property, although that may be part of the story, the IPO is no longer the principal exit route, or monetization scenario for inventors. Instead, it is often the sale to a larger corporation.

Here's where the intellectual property is essential to enable the smaller firm to negotiate on a level playing field with that larger company, with that systems-based company. It enables, like in any other market, those parties to set a price that reflects the value of that technology. As intellectual property rights become weaker, what happens? The larger firm, which has advantages at every other part of the supply chain distribution like financing and production, now has a reasonable option of copying the technology that has been developed by the smaller inventor instead of purchasing it at a price that is discounted. This reflects the increasing lack of ability of the smaller firm to credibly bring an infringement action, to seek an injunction, against larger firms that may be tempted to copy new inventions rather than purchasing them or licensing them.

Giachino (09:03.0919 - 09:10.0000)

Professor Barnett, is the US doing enough to enforce these intellectual property rights?

Barnett (09:10.0369 - 11:41.0070)

Unfortunately, since roughly the mid 2000s, the policy climate, which is the dominant intellectual climate in this country, has been unsympathetic to intellectual property rights in technology markets. In particular, patents. That intellectual climate has in turn been translated into decisions by the Supreme Court, the Federal Circuit through antitrust policies and through legislative action and inaction. All of this has limited the ability of IP owners, in particular patent owners, to have a credible threat of litigation. In particular, to have a credible threat of an injunctive remedy against infringers who are often far larger than them and who are often among the largest companies in the world.

To zero in on one particular example, in 2006 the Supreme Court issued the eBay Inc. v. MercExchange LLC decision, which overturned a longstanding, at least a century old tradition, principle and doctrine that a patent owner, after having demonstrated validity and infringement, is entitled to an injunction. This is just simple common sense. The patent is a property right. But the essence of a property right is the ability to exclude others from using it without a negotiated transaction.

For increasingly large categories of patent owners, and especially in the information technology industries, the injunction is very difficult, if not impossible, to obtain. What this does, and the reason this is a policy mistake, is that it shifts bargaining leverage from those who invent to those who use inventions. Inventors generally want to license their inventions. That's how they monetize their inventions. But when you don't have an injunction, infringers, especially larger infringers who can sustain litigation almost indefinitely, now have the bargaining leverage. That creates a perverse scenario where we actually have incentives to and we are encouraging infringement by larger entities in the market, which in turn distorts all of the pricing of intellectual assets, especially in the information technology markets.

Giachino (11:41.0530 - 12:20.0640)

Let's talk about the three policy resets you outline in your recently authored article that carries that title that will help to promote US innovation leadership. We are certainly seeing bipartisan support in Congress for promoting US innovation and continued global leadership in technology markets, but as you've pointed out, and we've talked about today, some federal agencies and other governmental entities are working to undermine innovation. What do you see as the three policy resets that would likely reinvigorate US technology leadership?

Barnett (12:20.0960 - 14:48.0380)

So all of these three resets are motivated by the idea that a healthy innovation ecosystem is an ecosystem that serves all of the stakeholders in the system. Our two big stakeholders in the information technology part of the sector are big tech and we have what's increasingly called little tech. And both of these constituencies are critical. Big tech is important because it delivers the economies of scale that allows a new technology to be deployed rapidly and at the lowest cost possible. Our antitrust enforcement should reflect that. We should be vigilant in scrutinizing the practices of the platforms that stand as the hubs in the innovation ecosystem, but we should do that in a balanced manner that takes into account the scale economies that only the largest companies can bring.

Shifting back to little tech. If we want to make sure there's a level playing field for the smaller inventor, for the entities that often stand at the top of the technology supply chain and that deliver what I call the brains that fuel the supply chain, we want to make sure that intellectual property rights are robustly enforced in order to sustain those firms and sustain incentives for investors to invent in those firms.

To give you an example - if we look at the smartphone device that we're all familiar with, the technologies that drive those devices - the communications, the data processing technologies, the chip designers - those tend to be firms that are invested almost entirely in the R&D levels of the supply chain that then monetize those innovations through intellectual property rights. We need intellectual property rights for those little tech firms, or what I sometimes call idea factories. We need those idea factories to have strong intellectual property rights so they can interface with the platforms and with the hubs that then deliver the scale.

Barnett (14:48.0390 - 16:43.0580)

To continue the ecological metaphor, this is a symbiosis that works well for the innovation ecosystem as a whole, but it needs to have one antitrust policy that takes economics into account and doesn't dismiss economics as was done in some cases at least under the prior administration. We need to have an intellectual property policy that reflects the common sense principle that investors need property rights to invest and startups need that investment capital to develop inventions.

So you've got two policy resets I've talked about. One is on antitrust. One is on IP. The third one is in securities. We’ve seen the decline in the IPO over roughly the past 10 years. Reforms are required in order to reduce the costs of being in the public markets, whether that's due to compliance or due to litigation. That is likely to reinvigorate the IPO as a monetization mechanism for startups rather than predominantly using M&A as the monetization mechanism. That would be a win for innovation because it would expand the monetization possibilities for startups. It would enhance the investment prospects for VC Capital, and we would likely see more startups choosing to vertically integrate moving forward since they could do so through the IPO, rather than being compelled to monetize by selling to a larger corporation. So you would get a win on innovation and you would get a win on competition as well.

Giachino (16:44.0119 - 17:26.0125)

We have been seeing this decrease in innovation, as you've talked about, and the need for the three policy resets - antitrust, IP, and securities. Let's switch to a different form of security by taking it outside the realm of economics. As you've written about, there is the risk of adverse national security consequences when we don't pay attention to what is happening and how we are faltering in terms of the protections that we are giving to our intellectual property rights. Can you elaborate on that from a national security consequences point of view?

Barnett (17:26.0305 - 21:31.0560)

I think there are two adverse national security-relevant consequences that have arisen from this multi-decade neglect, or in some cases even antipathy, towards intellectual property rights. The first consequence is a signal that is sent around the world that the US no longer takes intellectual property rights seriously. This is most clearly illustrated in the prior administration's support for the so-called TRIPS or IP waiver to COVID-related vaccines and treatments. This was unnecessary since there was a glut of vaccines on the market. Over the longer term, it was one of the first times, if not the first time in decades, where irrespective of partisan affiliation, the US, which always had, [did not] lead in advertising or promoting the principle that a baseline level of IP protections are necessary or essential to sustain a global market in developing technologies and distributing technologies. This operates to the benefit not just of the US as an innovator, but to innovators around the world and to countries that benefit from the dissemination of innovation. So the first adverse consequence is a signaling effect.

The second adverse consequence is domestic. We have at least some evidence that VC investment over roughly the last decade or so seems to shift away from industries such as pharma and IT hardware and tends to concentrate in industries that are software dependent, that have fast product life cycles and that are focused on the consumer industries and finance. What may be happening there is that the market is rationally reacting to the weakening of intellectual property rights and VC investors are shifting capital away from industries that are clearly dependent on patents, such as pharma and certain sectors of IT hardware and the semiconductor market. They are rationally moving capital over to industries with faster product life cycles that are not as dependent on patents.

That's a perfectly rational market response. It makes sense in terms of economics. You could say it's efficient. But in terms of national security, in terms of collective benefit, we are moving capital away from sectors that have public health benefits like pharma and the IT hardware and semiconductor sectors that have national security implications that give them the importance that I think we can venture to say we are probably going exceed things like apps for a smartphone or finance apps and so forth. When we reduce intellectual property protections, we induce market responses that may be efficient for investors operating in that weakened IP environment, but operate to the disadvantage of the US as a whole in terms of national security and in terms of maintaining global technology leadership.

Giachino (21:31.0910 - 22:08.0838)

Our guest has been Professor Jonathan Barnett, a contributor with the Forum for Intellectual Property at the Hudson Institute. He is the Torrey H. Webb Professor of Law and the director of the Media, Entertainment & Technology Law Program at the Gould School of Law at the University of Southern California. Professor Barnett, thank you so much for sharing your thoughts and your expertise with us today by helping to educate us on why IP protection matters and the biggest threats to IP protection today. We appreciate your time. Thank you so much. Have a wonderful afternoon.

Barnett (22:09.0088 - 22:11.0100)

Same to you. It was a pleasure being here. Thank you.

Giachino (22:11.0100 - 22:12.0030)

Thank you.