Instead of the CHIPS Act, Congress should address the abuses of patent trolls

President Biden and Democratic Party leaders are trying to take credit for ushering in the next generation of innovation in the information technology sector. Praising his latest industrial policy, the CHIPS Act and the Science Act, Senator Schumer stated that “the federal government is taking the reins and putting its money where its mouth is when we say we want the future of technology to be ‘Made in America.'”

Politicians are right that the information technology sector is a key driver of economic growth, creating tens of millions of jobs, trillions of dollars in income and improving our everyday lives. The problem is that IT is constantly changing, and today’s leaders can quickly become tomorrow’s laggards.

Government industrial policy is shaped by a small number of decision-makers guided by political considerations. Coupled with sclerotic government bureaucracies, industrial policies like CHIPS and the Science Act rarely achieve their desired goals.

On the other hand, private investment involves millions of people experimenting with many ideas and technologies to develop next-generation technologies. Unlike government-funded processes, private sector ventures are only profitable if customers willingly buy their ideas or products (e.g., the innovations are successful).

This does not apply to technologies supported by industrial policy. Industrial policy supports companies that please the political classes, regardless of their actual profitability. Unlike the private sector, the government will throw good money after bad to support the right political cause. This is the industrial policy version of Milton Friedman’s famous saying that “nothing is so permanent as a temporary government program.”

In addition, there is the unfavorable financial situation of the government. Globally, private equity funds invested $675 billion in the technology sector in 2022, according to McKinsey & Company. In January 2024, Apple’s market value was $3 trillion, or “more than the entire British stock exchange.”

To put it simply, individuals, investors and companies have more resources, better knowledge and superior skills to invent the “future of technology”. Some ideas will fail. Others will succeed. Successes will attract more money and more ideas that will generate the desired beneficial development of next-generation technologies.

The proper role of government is to support an efficient market that enables a wide range of entrepreneurs, companies and individuals to experiment with private resources. Unfortunately, the government is failing in its responsibility to create an environment conducive to innovation. A glaring example is the shortcomings of the US International Trade Commission (ITC).

Companies known as patent assurance entities (PAEs) threaten to limit the innovation capabilities of U.S. companies, including semiconductor makers. PAEs, often called patent trolls, acquire and maintain patents but do not use them to develop or manufacture a product. Rather, PAEs use patents as financial leverage against manufacturing companies – they specialize in litigating questionable but profitable patent infringement lawsuits.

A hearing before the ITC provides these entities with a more favorable environment to resolve such issues. Unlike the courts, the ITC fails to strike the right balance between protecting legitimate patents and discouraging frivolous lawsuits. It does not carefully assess whether the exclusion will provide relief to the true American domestic industry and merely pays lip service to Congress’ requirement that the public interest be paramount in ITC-related activities. Worse yet, the ITC’s only remedy is to impose an exclusion order.

There are many examples of PAEs using the ITC to claim that products using complex technologies, including chips, infringe some obscure intellectual property patent. In 2019, Ireland-based PAE used the ITC to bring cases against some of the world’s largest automakers based on alleged infringement of a $3 component in a single electronic circuit.

Semiconductors, which are covered by tens of thousands of different patents, are susceptible to abuse by these entities. As Mondaq documented, Daedalus Prime, which acquired IBM’s old portfolio of 500 patents in 2019, used them to attack companies such as Qualcomm, Intel and TSMC, often before the ITC. In other words, PAE is taking advantage of the current partisan ITC lawsuit to target the very companies that U.S. industrial policy subsidizes. The symbolic left hand works against what the right hand is doing.

The ability to leverage the ITC process diverts attention from manufacturing operations and extracts capital and resources from semiconductor manufacturers that would be better spent investing in U.S. R&D and manufacturing facilities

Congress could enact certain policies that would help address problems that hinder economic growth. For example, the bipartisan Advancing American Interests Act (AAIA) would modernize the ITC, limit the ability of patent trolls to manipulate the system, and make it harder for patent trolls to slow down high-tech domestic production with costly settlement demands.

Instead of investing billions of dollars in a futile attempt to accelerate chip research, development, and production, the federal government could better encourage continued technological innovation by ending PAE’s ability to weaponize ITCs.