Patent Trolls: The IP Protection Racket?

Last month, James Bessen, Jennifer Ford and Michael J. Meurer of the Boston University School of Law released "The Private and Social Costs of Patent Trolls", which attacks the widely held premise that aggressive protection of patents is necessary to ensure innovation.

“NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.”

As Bessen (et al) admits, the tech industry is not the sole arena for patent challenges, but the rapid evolution of digital technology has provided some of the most dramatic causes and consequences.

Prior to the current ‘Digital Era’, there simply wasn’t much of a market for patent-specific ventures. Non-manufacturing entities (in nature but not yet in name) consisted of individual inventors and academic organizations. Sometimes, companies that created products had divisions that handled the resulting patents, and infrequently these divisions were spun off into distinct but related entities -- patent holding companies, the number and importance of which increased dramatically over the waning years of the 20th Century.

Patent law is complicated almost exponentially by the chief characteristic of modern technology: the necessary inclusion in any given single product of a staggering number of individual patentable components -- some software, some hardware.

Hardware alone is a considerable issue. For example, a single and relatively minor component can become the center of a patent challenge which prevents the product as a whole from coming to market (or from sale after production, or from import). Suddenly an entire corporation’s future is at risk because another company claims to have patented (for example) the particular kind of headphone jack mounted on the side of a flagship smartphone.

Software patents take this complication even further. The old yardstick was that patents refer to inventions that lead to products, while copyrights which refer to ideas that lead to works of art (broadly speaking, of course; in application, this covers everything from Michelangelo's David to YouTube copies of last week’s pro wrestling pay-per-view). Software makes this inaccurate distinction even less appropriate -- what kind of intellectual property is a line of code, a “Buy Now” button, or a scrollbar, for instance? There has been a heated debate concerning what types and components of software require copyright or patents -- and indeed, whether software patents should exist at all.

The United States Constitution, Article I, Section 8 established the foundation of copyright law "to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

It is difficult (although, as history has clearly shown, very possible) to interpret this in any other way than giving the inventors themselves a period in which they own the rights to their work. A full examination of the arguments surrounding such interpretation is far beyond the scope of this article, but it is certainly telling that the harder one needs to work to justify themselves as an ‘inventor’, the harder it is to reconcile their legal rights with any sense of reasonable sympathy and fairness. But when has fairness and sympathy ever played much of a part in Business?

Still, this reconciliation is at the heart of the distinction between ‘non-manufacturing/ non-practicing entity’ (which, as we’ve seen, can refer to research universities, individual inventors, and legitimate patent holding companies) and the term ‘patent troll’, which can only properly refer to a venture founded upon opportunistic and predatory aims -- namely, to enrich themselves solely through litigation.

Of course, few if any companies will call themselves patent trolls, and some will take great care to point out the benefits of NMEs. It is certainly a convincing theory that increased patent liquidity (the ease in the buying and selling of patents) and aggregation (concentration of amassed patent portfolios) could make patent ownership more organized and efficient on the whole. It is somewhat less clear cut whether this results in (as proponents claim) increased access and innovation.  

Bessen’s method was to investigate all known NME lawsuits against publicly traded companies (1600 lawsuits over a 20-year period). Keep in mind that this doesn’t include lawsuits against non-publicly traded companies, a category that includes everyone from large companies funded by venture capital and private investors (e.g., companies such as Facebook, Kingston, and many other familiar tech names) to the college kid who writes iPhone apps in his spare time.

Indeed, the patent trolls’ increasingly favorite theme is ‘the smaller the better’. Lodsys is a prime example of a non-manufacturing entity whose business plan seems to be to abuse the court system in order to extort settlements from small app developers who have neither the time, money, nor expertise to defend themselves. Initially, developers hoped for support from the companies that published their apps -- Apple and Google -- but it became apparent that neither was even inclined to pay lip service to the embattled developers. Ironically, both companies have paid for the license to Lodsys’ patents -- despite the fact that Apple and Google may be the only players in the game with sufficient resources to take the dispute to its legal conclusion.   

For the publicly traded companies, however, Bessen’s estimate was that over $83 billion dollars had been lost each year (for the past four years) due to litigation in patent disputes with NMEs. It is very difficult to see how this could result in a boon to innovation or efficiency; none of this lost wealth provided any boost to R&D, manufacturing, or even revenue for investors.

It remains to be seen if the Obama administration's reforms will have any bearing on this trend. Intuitively, one might think that patent trolls would have been be more hindered by a strict application of “first to invent” rather than “first to file”, but in application it would seem to have made little difference. The America Invents Act is far more recent than the rise in success among non-manufacturing entities; over the next months and years it may be difficult to separate the momentum of this trend and the effects of the legislative reform

McGill University researchers Shih-Tse Lo and Dhanoos Sutthiphisal examined a similar shift in Canadian patent law, and determined “that the switch failed to stimulate Canadian R&D efforts. Nor did it have any effects on overall patenting. However, the reforms had a small adverse effect on domestic-oriented industries and skewed the ownership structure of patented inventions towards large corporations, away from independent inventors and small businesses.”

In arguing against the America Invents Act, in “Venture Capital - The Buck Stops Where?“, Gary Lauder eloquently illustrates the power that large, established corporations wield in shaping patent reform -- and shows that the likely victims will be the ‘Silcon Valley model’ of innovative smaller startups powered by risk-taking venture capitalists. However, he begins with an assertion that can be chilling in its implications.   

“Ideas on a blackboard are useless; ideas only mean something when an investor and an entrepreneur join together to take the risk to turn ideas into product.”

On one hand, this would seem to exclude non-manufacturing entities from the equation. However (intentionally or not), Lauder has succinctly expressed the unrepentant and cancerous disdain for ideas that lurks at the heart of the business mind, the pathologically short-sighted view that is the systemic analogue to an individual’s tendency for instant gratification -- easily defensible, and ultimately self-destructive. Patent trolls eagerly proclaim their part in innovation, but only succeed in lining their own pockets and leaving the playing field ever more tilted.

Ironically, by focusing upon the patents (i.e., the ‘ideas’ themselves), the rise of NMEs may only succeed in reinforcing this disdain. Patent law is likely to provide protection in direct proportion to the size and and resources of a company -- resources to spare for ongoing and repeated legal challenges, and to exert influence upon the process of writing, enacting, and enforcing patent law.