Patents as weapons of mass destruction

The Patent Office is the mother-in-law of invention.  Anonymous

Next came the patent laws. These began in England in 1624, and in this country with the adoption of our Constitution. Before then any man [might] instantly use what another man had invented, so that the inventor had no special advantage from his own invention. The patent system changed this, secured to the inventor for a limited time exclusive use of his inventions, and thereby added the fuel of interest to the fire of genius in the discovery and production of new and useful things.  Abraham Lincoln

Don’t negotiate with terrorists; patent trolls have done more damage to the United States economy than any domestic or foreign terrorist organization in history, every year. Entrepreneur Drew Curtis during a TED presentation.

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 For the last few years the world’s biggest technology companies have been embroiled in a series of acrimonious legal disputes. Apple, Google, Samsung Microsoft, HTC HP, Amazon and others have being suing one another in courts around the globe, alleging that they are infringing one another’s patents. Steve Jobs famously threatened to “go thermonuclear” over what he saw as Android’s ripping off of the iPhone. Indeed, Apple recently won an important legal victory over Samsung in the U.S. courts. All this litigation has been a goldmine for lawyers. In the smartphone industry in the past couple of years, as much as $20 billion has been spent on patent litigation and patent purchases. Why has it become such a controversial and expensive area of the law?

A patent is the government grant of monopoly on an invention for a limited amount of time. Different countries have different periods of time; a typical period is around twenty years. The economic rationale behind granting patents is relatively clear; imitation is a lot cheaper than innovation. If there were no patents, then someone who invested time and money to create a valuable invention would not necessarily be rewarded commensurately. Not every idea is susceptible to being patented; In order for a patent claim to be valid, the invention must be “useful,” “novel,” and “nonobvious.”

Patent trolls have become an important force in patent litigation in the last few years. This pejorative term is used for a person or company that enforces patents against one or more alleged infringers in an aggressive or opportunistic way, with no intention of making or marketing the patented invention. Patent troll was popularized in 2001 by Peter Detkin, former assistant general counsel of Intel, to describe TechSearch, its CEO, Anthony O. Brown, and their lawyer, Raymond Niro, while Intel was defending a patent suit against them. He first branded the litigants “terrorists”, but they threatened to sue him for libel. So he decided to organise a competition:

… we got a lot of suggestions, but none really fit. But at the time my daughter was, I think, four or five and she liked playing with those little troll dolls. The original one, in fact, is still in my office. And so I turned to her and I said, oh, the story of a troll kind of fits because the whole Billy Goats Gruff thing. It’s someone lying under a bridge they didn’t build, demanding payment from anybody who passed. I said, how about a patent troll?

There is a less loaded term for such companies – NPEs, non-practising entities. One of the key players is Nathan Myhrvold. The former Chief Technology Officer at Microsoft is co-founder of Intellectual Ventures, one of the top-five owners of U.S. patents. Its business model is focussed on developing a large patent portfolio and licensing these patents to companies. Intellectual Ventures has received a little over 1,000 patents on what they’ve invented in their labs, but they have bought more than 30,000 patents from other people. They claim that their goal is to assist small inventors against corporations. It could be someone with a brilliant idea. He has a patent, but despite this, companies are stealing his idea and he has neither the money nor legal nous to stop them. Intellectual Ventures can buy this inventor’s patent and make sure that companies who are using the idea actually pay for it. Curiously, Peter Detkin, who coined the term “patent troll” now, works for Intellectual Ventures.

I do think that patents are a good idea, but we need to be aware that there are downsides. By creating a monopoly you are imposing higher prices on consumers. And patents can also have a negative effect on innovation, becoming a toll gate on the road of innovation. Opponents of patent trolls point to the statistics about their economic impact. From 2004 to 2009, the number of patent infringement lawsuits jumped by 70%, while licensing fee requests went up 650%. According to James Bessen, the costs of patent litigation exceed their investment value in all industries except chemistry and pharmaceuticals. In the software industry, litigation costs are twice the investment value.

One noticeable trend is that companies are patenting concepts. Companies come up with a concept, and they file the patent for this concept before they actually figure out how to convert it into a product.  It becomes a race to get your invention to the patent office first. When you have vague, overreaching patents, it becomes harder for people and companies to innovate without falling foul of them. One of the more ridiculous examples of the granting of a patent must be Amazon patenting their one-click buying system. Then there is Drew Curtis’s company Fark.com, which was sued along with Yahoo, MSN, Reddit, AOL, TechCrunch and others by a company called Gooseberry Natural Resources. Gooseberry owned a patent for the creation and distribution of news releases via email! And finally last year Google was sued over its Google Offers business venture. This is like those daily offers I receive from Groupon on my PC every morning.

The federal lawsuit, which was filed in Delaware, involves four patents owned by research firm Walker Digital. They have also sued Amazon and the aforementioned Groupon. In fact, there were some 100 companies involved. They were all accused of infringing the following patents:

7,039,603: “Settlement systems and methods wherein a buyer takes possession at a retailer of a product.”

6,249,772: “Systems and methods wherein a buyer purchases a product at a first price and acquires.”

6,754,636: “Purchasing systems and methods wherein a buyer takes possession at a retailer of a product.”

7,689,468: “Purchasing, redemption and settlement systems and methods wherein a buyer takes possession at a retailer.”

The cases were settled out of court with Walker Digital receiving $25m. The previous November they had sued Facebook for friending, or “Method and system for establishing and maintaining user-controlled anonymous communications“.

Invention is always going to be a minefield. History is littered with inventors unable to benefit from their creations. You need to strike a balance between protecting inventors and having a system that chokes off further innovation. It has to be said so far technology does seem to be a pretty vibrant sector. Of course this may be despite the patent system. Judge Richard Posner has argued that patents are unnecessary. He contends that even if other companies and copy and imitate their products, Apple will still be more than adequately compensated for their investment in research and development. I wouldn’t go as far as Posner but I would like to see more flexibility. How about 3-year patents in technology? And I would like to see them issued a little less liberally. In August two congressman brought in the SHIELD (Saving High-tech Innovators from Egregious Legal Disputes) Act, a bipartisan bill aims to bring in a “loser pays” system for software and hardware patent lawsuits, to protect start-ups from companies that want to force settlements through the threat of high legal bills. However, there is no perfect system. Individuals and companies will always try to game the system.

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