After seeing his interesting new article, I asked Professor Andres Sawicki (University of Miami School of Law) to draft this short essay about his work. — Dennis.
by Andres Sawicki
In a recently published article, I report preliminary evidence supporting a novel view of what patents can do: keep inventive teams together. This evidence suggests that, in addition to their traditional role as incentives for innovation, patents may be doing important work in fostering collaboration in high tech industries.
To see how this works, suppose you’re the founder of a Silicon Valley start-up. After a few years, you’ve found modest success—a product launch, a small core of devoted customers. But it seems clear at this point that there’s no massive IPO exit on the horizon. Instead, your capital is running low and the venture capitalists who financed your firm are getting impatient.
Now Facebook shows up at your door: it wants to hire you and your team of engineers. The catch is that it wants the whole team. Facebook knows how hard it is to find talent that works well together. Plus, both you and Facebook know that if your team doesn’t go as a group, any team member that strikes off on her own is likely to soon become a competitor. What do you do?
One possibility is that you convince Facebook not only to hire your team, but also to buy the entire start-up. That way, Facebook can acquire the rights to any patents flowing from the work the team did at the start-up. These patents can then bind the team together by raising the costs to members of leaving—a departing team member won’t be able to continue working in the path set out by the team’s patents. Thus, while intellectual property is traditionally thought to prevent the entire public from freeriding on a creator’s investment in producing a public good, it can also regulate relationships among team members, as Robert Merges and Paul Heald have separately argued in the patent context, and as Tony Casey and I have jointly argued in the copyright context.
In my most recent article, I support this team-binding view of patents with data from Silicon Valley acqui-hires. Those transactions, illustrated by the founder-Facebook scenario posed above and explored in illuminating detail by John Coyle and Gregg Polsky, are understood to be driven by Silicon Valley norms of cooperation. Facebook and the engineers agree to send some money to the start-up’s equity holders to ensure that the VCs will be open to another pitch from the engineers a few years down the road. This usual understanding of the acqui-hire has little room for IP.
But sending money to the VCs may also be a way to ensure that the start-up’s IP follows the team from the start-up to the buyer. Before the transaction, the start-up will ordinarily have claims to the IP generated by its engineers. Diverting some of the purchase price to the VCs and other equity holders enables the buyer to obtain those claims.
To test the plausibility of this hypothesis, I examined a set of 63 acqui-hires over a two-year period, to see whether: (1) the start-up assigned some of its patents to the buyer; (2) the start-up assigned some of its pending patent applications to the buyer; or (3) the buyer filed, after the transaction, a patent application naming one of the start-up’s principals as an inventor. In 29 of the 63 acqui-hires, at least one of those three kinds of patent transfers occurred. In many of the remaining 34 acqui-hires, there were simply no pre- or post-transaction patents to speak of, indicating that patents cannot completely account for the acqui-hire trend. Still, there was only one transaction in which the start-up retained all of its existing patents and pending applications, and none of the start-up’s principals had been listed as an inventor on one of the buyer’s post-transaction patent applications. In short, when the start-up has rights to existing or future patents, the buyers consistently obtain those rights. This data thus indicates that patents are in fact an important part of the acqui-hire trend, without which it may be difficult for the founders and Facebook to consummate the deal. And, more generally, it suggests that patents are not only rewards for lone inventors, but also tools for keeping groups of inventors together.