It turns out that the more patents you have, the more likely it is that you can extort exorbitant royalties from people who might have easily come up with the same idea or the same feature that you did but never thought to patent it. And the more patents you have, the more your competitor wants so he can retaliate with a patent suit of his own, claiming that it was you who stole the ideas from him.
In other words, it’s an arms race to buy as many patents as possible, bidding up the price of patents without anyone gaining a permanent competitive advantage. Like all such races, this one involves a huge waste of time, talent and capital, not only in the race to buy patents but in trying to win a patent on every half-baked notion that anyone thinks up.
Instead of spurring innovation and entrepreneurship, patents are being used by companies, venture capitalists and their cynical lawyers to stifle and discourage them.
The latest escalation in this arms race came last week when Google announced it would pay $12.5 billion to acquire Motorola’s division that produces wireless telephones and smartphones. Analysts figure that less than half the purchase price is for the struggling handset operation. The rest is for Motorola’s 17,000 software and telecom patents so it can defend its Android operating system — along with all the other companies that are using it or writing applications for it — all of whom are under legal attack from the likes of Microsoft, Apple and Oracle.
For years, these companies have complained bitterly about the economic damage caused by patent “trolls” — companies that exist solely for the purpose of buying up patents and using them to sue companies that might or might not be violating them. But having failed to reform the patent system, those same companies say they have no choice but to adopt their methods and tactics.
Google moved quickly on Motorola after it was outbid by the same Android rivals for a package of 6,000 patents put up for sale by what is left of Nortel Networks. The original asking price was $1 billion. It went for $4.5 billion.
As with all arms races, everyone admits this is crazy but nobody has the means to stop it short of mutually agreed-upon disarmament.
The best reporting I have found on the subject was by National Public Radio, which ran the results of an investigation last month as part of its “This American Life” series, in cooperation with its Planet Money staff.
The segment focused on a company called Intellectual Ventures, which was started by Nathan Myhrvold, the former chief technology officer of Microsoft. Myhrvold began collecting a war chest of patents while at Microsoft, at the suggestion of Bill Gates, as a defensive maneuver. But when he left, he took the patents with him and began buying more, using $5 billion from the likes of Stanford, Brown, the University of Texas and the Rockefeller Foundation and leading venture capitalists.
The original idea was not a bad one: to build a pool of patents large and broad enough that it could serve as a legal deterrent against unfair patent suits, not just for Microsoft but also for any company willing to rent it out, in essence, through payment of an annual licensing fee. A number of Silicon Valley companies that originally signed on as investors also signed on as customers.
To put a patina of innovation on the project, Myhrvold also invested some serious money to build a cool new laboratory in Washington state and hire scientists and engineers to come up with breakthrough ideas. And Myhrvold penned an article for the Harvard Business Review claiming Intellectual Ventures would be a “disruptive” force that creates an efficient market to allow innovators everywhere to capture the full value of their creativity.
What may have started out as a clever way to “turbocharge technological progress,” however, seems to have morphed into something closer to a Jersey City protection racket. When Intellectual Ventures came knocking on the door of tech companies offering to license its patents, companies began to get the sense that it was an offer they couldn’t refuse — and if they did, they might find themselves at the receiving end of a patent suit filed by Intellectual Ventures itself.
Indeed, by the end of 2009, Intellectual Ventures began suing companies for violating its patents. The first targets included Symantic, Dell, Hewlett Packard, Kodak and even Intel, reportedly one of its original investors. Also included were a number of those small entrepreneurial start-ups. And, as NPR discovered, Intellectual Ventures was sometimes doing it in a sneaky, underhanded way, acting through straw companies with no employees domiciled in empty offices in East Texas, where the federal court docket and juries have proved most receptive to patent suits.
None of this would be possible, of course, if all patents were as straightforward as those for a corkscrew or car battery. But products such as smartphones are a collection of thousands of little ideas and inventions, many that probably should never have received patents in the first place because they weren’t particularly new or original, or could have been “invented easily by anyone trained in that particular art.” Given the broad manner in which many of these patents were drawn, there are often several patent holders who could claim the same innovation.
To some degree, this has always been a challenge for the patent system, particularly with new technologies. Henry Ford and the Wright Brothers were involved in prolonged patent disputes. But it has been a particular problem with software or patents covering “business methods,” or the look and feel of a product or how it can be used.
Next month, after six years of hand-to-hand combat between various industries and industry sectors, Congress is expected to complete work on a patent reform bill that should help by making it easier to challenge a patent before it is issued, or immediately thereafter. And the courts have recently tightened up the criteria for the damages that can be awarded when patents are violated.
What is missing from the bill, however, is any attempt to narrow the range of what can be patented in the areas of software and business methods to reflect the changing nature of technology and innovation. That’s hardly surprising. The big companies that complain about abuse of the patent system are big patent holders themselves, with as much to gain as to lose from a restriction on what can be patented. The final bill is as much of a disarmament treaty as the business community would accept.
All of which means that the costly patent arms race is likely to continue until federal judges step in to stop it. It’s more than a bit ironic that a conservative Supreme Court majority that has done so much to slam the courtroom door on consumers and workers has left it wide open for corporate interests running a legal protection racket. If there ever was an abuse of the judicial process, this is surely it.