Not quite music to my ears: The problem with intellectual property laws

Students and the technology sector alike have been abuzz with the announcement of the Apple Watch, which is already creating quite a buzz in the marketplace.

Such excitement is certainly warranted. Not only is this the first Apple product without the “i” prefix, but through its music storage capabilities, it also marks the end of the era of the iPod — the device that transformed the portable music industry.

But “smartwatches” aren’t the only market in which Apple has been making moves lately — this May, it agreed to purchase Beats Electronics LLC, the company behind the popular “Beats by Dre” headphones.

To borrow from SAT analogy lingo, Beats Electronics is to headphones what Apple is to portable music. With the production of the first iPod in 2001, Apple drew attention, and consumers to the entire market with each new release and now comprises over 65 percent of market share.

Similarly, the production of Beats headphones drove growth in the premium headphones market, of which Beats Electronics now controls 57 percent. So, just as white iPod headphones were easily spotted publicly over the past decades, the signature “b” on Beats headphones are now ubiquitous.

The development is certainly not welcome by competitors in the premium headphones market. Once-dominating firms like Bose and Sony are now facing serious competition.

Rather than competing directly with Beats Electronics, these firms are choosing to use legal mechanisms to drive these new products out of the market. Unfortunately, this is merely symptomatic of larger problems with the overprotection of intellectual property — in this case, patents.

This past July, Bose took legal action against Beats Electronics for its alleged violation of five Bose patents on noise-cancelling technology. 

Bose was the pioneer of headphone technology when it released its QuietComfort headphones in 2000. This lawsuit isn’t new ground for the firm — it took similar action in 2008 against Phitek Systems Ltd. and more recently against Monster Cable Products Inc. this past February. 

Given that Beats Electronics controls more than half of the market for premium headphones, the question arises as to why Bose decided to sue now rather than earlier. The reason, as you might have already guessed, is because Apple is in the process of buying the company.

In this situation, two important conditions arise: First, the legal department at Beats Electronics is currently very busy working on the buyout, which means that they have less resources to devote to fighting a patent infringement lawsuit. Because of uncertainty about the outcome of legal disputes, firms that are being bought out try to avoid legal battles. 

Both of these conditions imply that Beats Electronics will be more likely to settle than they previously would have been. By choosing to sue now, Bose is maximizing its legal payout from a patent infringement lawsuit.

Unfortunately, such behavior is the norm rather than the exception. As economists Michele Boldrin and David Levine describe in their book “Against Intellectual Monopoly,” big firms often amass large amounts of patents that function like ammunition in large legal disputes.

Patents are advantageous to hold for two reasons: First, they give firms the ability to establish and maintain a monopoly on their patented production. Additionally, firms can use them for defense.

When charged with patent infringement from another company, firms can claim their products under a different, yet very similar patent that they own. Also, holding patents that can be used to sue other companies for patent infringement will prevent them from suing the first firm. In that, it initiates a “If you sue me, I’ll sue you” type of mentality.”

Not only does the bulky legal institution of intellectual property protection cause a lot of unnecessary legal work on the part of firms, it also encourages rent-seeking and discourages innovation. In this situation, rather than competing directly with Beats Electronics, Bose is choosing to flex its legal muscle to recreate and protect its monopoly on noise cancelling headphones. 

Beats Electronics has repeatedly shown itself to be a creative firm willing to go toe-to-toe with the established players in the headphone market. Most likely, Bose has calculated that it would be better off trying to battle its new competitor legally than compete in the marketplace.

That being said, Bose itself is only reacting rationally to the legal and economic framework set in place that incentivizes creating and enforcing a monopoly on a patented product. The reduction or elimination of U.S. intellectual property institutions would lead to less legal action from tech firms and more innovation and competition.

Write to Thomas at teh18@pitt.edu