MAY 2012
VOLUME 4, ISSUE 3
Software Scan |
The President's Column |
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In this month's Scanning IP section I once again answer the question Do Non-Practicing Entities Impede Progress? This time I respond to yet another editorial in the Wall Street Journal. How many times must I bust this myth? Send me your comments and critiques. I'm always interested in hearing from you. Regards, |
Scanning IP |
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Do Non-Practicing Entities Impede Progress? On April 12 an op-ed was published in the Wall Street Journal
entitled Patent
Trolls vs. Progress by Andy Kessler, a former hedge-fund
manager. I would like to correct some inaccuracies. Mr. Kessler
attributes Microsoft's recent purchase of AOL's patents and Google's
purchase of Motorola Mobility (presumably for its patents) as protection
against non-practicing entities ("NPEs") also disparagingly
known as "patent trolls." First, no portfolio of patents
will ever protect against an NPE. This is because an NPE, by definition,
does not produce a product. In a patent litigation between two companies,
the typical scenario is that company A owns a patent and attempts
to license that patent to company B that it believes is infringing.
Company B can pay a fee to company A or it can refuse to pay. Or
company A may attempt to get an injunction against company B to
prevent it from selling its product that incorporates the invention
described by the patent. If company A wants an injunction or requests
a fee that company B refuses to pay, then company A will almost
certainly take company B to court. At that point, company B takes
some combination of three possible countermeasures. Company B can
attempt to show that the patent is invalid. Company B can attempt
to show that its product does not infringe the patent. Company B
can countersue company A for infringement of some patent of its
own. Typically after months of threats, legal maneuvers, and negotiations,
the companies will settle on some payment from one company to the
other. The cases rarely go to court. Now suppose that company A
is an NPE. Company B's third option of countersuing is not an option
because company A produces no product and thus cannot infringe on
any patent. Thus buying patents provides zero defense against an
NPE, contrary to what Mr. Kessler asserts. Mr. Kessler reaches back seven years to 2005 for the case of NTP
v. Research-In-Motion, the famous case against the Blackberry manufacturer,
for his justification and concern about NPEs, but in recent years
it is the major players in high tech have been suing each other
over patents. The companies in the news for patent sales, patent
purchases, and patent lawsuits are not NPEs but the high tech goliaths
including Google, Apple, Microsoft, Motorola, Oracle, Facebook,
AOL, and Yahoo among others. Purchasing patent portfolios can be
used defensively against other companies and just as easily these
patent purchases can be used, and are being used, as offensive weapons
against competitors. Patent trolls are simply the bogeymen used
by large companies to convince politicians to "reform"
patent laws. Mr. Kessler argues that the extension of the patent term to 20
years, enacted in 1995 to make U.S. patent law consistent with the
World Trade Organization's Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPs), is a problem because "in
technology things move a lot faster." I do not understand the
reasoning behind this complaint. If technology moves so fast, then
a patent becomes worthless long before the term is over. What does
it matter if a patent is valid for five years or 50 years if the
patent is worthless after five years? Mr. Kessler states the "we have to stop allowing juries to
establish the value of patents… the market… [should] determine
value. " In fact, the market does determine value. The majority
of patent lawsuits are settled before reaching court, and both parties
determine a fair value based on free market principles. A negotiation
between two parties is a great example of such free market principles
where each party determines the value of the patent with respect
to its own interests, free from other considerations. For cases
that reach a jury, the jurists are provided information by economists
and accountants who determine the value of a patent based on the
market value of the products that embody the patented inventions.
Of course we can argue about whether their models and calculations
are correct, but our entire justice system is based on juries determining
values and awarding damages and so if Mr. Kessler believes that
juries are incapable of determining value, then he is implying that
our entire legal system-at least the civil system-is flawed. If
that is true, then it is the legal system as a whole that needs
to be revised. Perhaps the most disturbing recommendation is to require patent
holders to manufacture or sell products. This requirement would
fundamentally damage the patent system. Patents allow small, cash-strapped
inventors to create something new and protect that invention from
large corporations that have the money and resources to kill it
or steal it before the inventor can get funding or market share.
I know this from experience. Years ago I created a software tool
that I sold to a large company that enabled that company to sell
their expensive hardware to customers in the communications industry.
Each software package, that sold for about $25,000, enabled this
company to sell their multimillion dollar equipment to communications
companies that otherwise would never have been customers. The arrangement
seemed good to me, but the large company made it clear that they
did not like being beholden to me, so after several years of buying
my software, they created their own. My sales immediately went to
zero-in other words I became a non-practicing entity. Fortunately
I had patented my invention and so I had more leverage than the
large company expected. Had Mr. Kessler's recommendation been in
effect, I would have had no recourse against that large company. According to Kessler, James Madison was the man behind Article
1, Section 8, Clause 8 of the U.S. Constitution, giving Congress
the power "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." Historical
documents suggest that Thomas Jefferson and Charles Pinckney also
lobbied for this clause. In any case, this section of the Constitution
has been the justification for our patent system for over 200 years.
Mr. Kessler believes that Mr. Madison did not understand what he
was doing or, at best, did not foresee the expense that patent litigation
would involve in the 21st century. In fact, the founding fathers
knew exactly what they were doing when writing the intellectual
property clause into the U.S. Constitution. They were protecting
the individual from the overwhelming power of large entities. They
were enacting the very principles of American society for which
we fought the Revolutionary War. Since 1790 the U.S. patent system
has contributed to America becoming the most innovative society
in the history of the world. Fundamentally changing the system in
the ways suggested by Mr. Kessler would stifle that innovation. |
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