Protecting Ideas is Crucial for U.S. Business

Ron Edgerton is fighting on the front lines for the future of America's economy. That may seem melodramatic. For the moment, Mr. Edgerton is doing fine. He is chief executive of SigmaTel Inc., a Texas company that makes computer chips for MP3 audio players, and his business is booming. The company is expected to have revenue of more than $300 million this year -- up more than 50% from a year earlier -- with a net-profit margin of about 20%.

But Mr. Edgerton is battling a Chinese rival, Actions Semiconductor Co., that he believes stole SigmaTel's intellectual property: its chip design. "We're quite frustrated," he says. "We are a leader in this industry. Once we were successful, other people decided to follow."

At SigmaTel's request, the International Trade Commission has agreed to investigate and is expected to rule by spring. If it finds Actions violated SigmaTel's patents, it can stop MP3 players with Actions' chips from coming into the U.S. That would do little to help SigmaTel overseas, however, where its biggest business is found.

And here's the real salt in the wound: Actions recently filed with the Security and Exchange Commission to sell shares in the U.S. stock market. Even if Actions loses the ITC case, that won't prevent it from raising money in the U.S.

Actions denies any patent theft. The company's in-house lawyer, Xie Qiwen, declined to comment on the ITC case, but a statement on Actions' Web site says the company "has always been dedicated to developing independent technologies and respecting and protecting intellectual property rights."

The case raises an important question: If Actions is found guilty of intellectual property theft, shouldn't it also be barred from U.S. capital markets?

Intellectual property is one of the thorniest problems facing modern capitalism. History has demonstrated that market capitalism excels at allocating scarce resources in a way that not only maximizes profits, but also comes closer to maximizing social benefits than any other system ever devised.

But intellectual property is different, because it isn't inherently scarce. A good idea -- unlike a barrel of oil, or a piece of equipment, or a person's labor -- can be used by billions of people. The classic economic model, in which competition drives the price of widgets down to the marginal cost of producing one more widget, breaks down for intellectual property. In the digital age, there is no marginal cost, or at least very little, for copying ideas. Great books and movies, clever software, life-saving drugs, breakthrough computer chips, all are difficult to create, but are replicated with ease.

The challenge for capitalism is to protect the creators' right to profit from their creations while still ensuring that the benefits of those creations are widely spread. That is at the core not just of the SigmaTel suit, but fights over Google's library project, who can make the Tamiflu flu drug, Grokster and other global controversies.

There are no clear-cut answers to these problems, and no free-market solutions. Ultimately, governments must decide how to balance the need to encourage innovation against the need to spread its benefits. As the recent breakdown of trade talks in Latin America demonstrates once again, different governments have different ideas about how best to do that.

For the U.S., and for much of the developed world, this issue has become paramount.

"It's a huge issue," says U.S. Commerce Secretary Carlos Gutierrez. "There is so much of our economy that is linked to branded products, patented products, copyrights. So much of our economy thrives on creativity."

Intellectual property, in all its myriad forms, has become the leading product of the U.S. economy. A recent paper by economists Robert Shapiro and Kevin Hassett puts its total value at about $5 trillion. Unless the governments of the world can reach some agreement on how to protect that property, the economic future of the U.S., and other nations at the top of the global food chain, is in doubt.

Mr. Gutierrez travels the world arguing that unless countries develop strong protection for intellectual property, they won't get American investment. But that argument is undermined by American companies that pour resources into China, despite its poor protection of copyrights and patents. He also argues that countries such as China and Brazil -- which now have weak intellectual-property protection -- will strengthen those protections as they become more innovative and recognize the need to protect their own creations. But it could be a long, long time before intellectual property has the kind of importance to China and Brazil that it has to the U.S.

Meantime, the U.S. government's push for better intellectual-property protection world-wide will be an uphill battle. To succeed, the government may have to resort to tougher measures, like denying companies such as Actions the right to raise money in the U.S. capital markets if found guilty of infringing patents.