Patent Trolling

If you’ve been following the tech circles for the last week and a half, you have no doubt heard about a recent spat between Google and Microsoft over a collection of patents from Nortel and Novell that were recently auctioned off.

The patents, which sold for $4.5 billion dollars (that’s billion, with a “B”), included technologies that are used in mobile devices such as Android-powered smartphones, as well as the Apple iPhone and Microsoft’s Windows Phone 7.

But whether you agree with Google’s side of the story or Microsoft’s response, the most important aspect of this story – and indeed, the most distressing – is that neither Google nor the Apple/Microsoft consortium had any intention of using the technologies in the patent block in their mobile operating systems.

Wait, huh? These companies were bidding billions of dollars for technology patents that they weren’t even going to use? Exactly. Welcome to the real life, high profile example of the folly of the American patent system.

The context of the status quo of patents in America was captured in a recent episode of NPR’s This American Life, entitled When Patents Attack! It’s a great listen, and expertly makes the intricacies of patent trolling accessible to the lay observer. (Another good primer on the premise of patent trolling comes courtesy of the Freakonomics blog, and it won’t take up an hour of your day like the TAL piece.)

The episode chronicles the story of a small technology company in the mid-90s that was working on creating photo sharing technology. But the company is stopped dead in its tracks when it receives a letter alleging that part of the technology it is using has been patented to someone else. Despite attempts to learn exactly what technology the company was infringing on, the company is informed that it must either risk going to litigation (at a likely expense of $2-5 million), or settle. The company settled.

This story is not unique. Small companies trying to innovate and create new technologies are constantly being threatened by large entities that are solely in the business of offensively enforcing patent rights. These patent holding companies own thousands of patents, and, for a fee, will license these patents out to companies that want to use the technology. At least that’s the squeaky clean version of the story that these holding companies put forth. But more often than not, these companies make money by bringing lawsuits against other technology companies, using their vast patent arsenal as a weapon to force alleged patent infringers to either pay a settlement, or risk facing costly litigation. The term for this these holding companies is “patent trolls.”

Google claims that Apple, Microsoft, and the other companies that bought the Nortel and Novell patents are merely trying to “tax” the Android operating system, forcing Google to pay a licensing fee for each Android phone that is activated, thereby driving the cost of an Android phone above, say, a Windows Phone 7.

Of course the irony here is that Google, in bidding for the same patent block, was essentially trying to do the very same thing – that is, purchase the patents so that it would have a competitive advantage in the legal marketplace for mobile technology. Whether it decided to use these patents offensively or defensively is really immaterial, the point is that all of the companies involved – the winners and the losers – had no interest in using the technology in those patents beyond the extent that they were already using the technology. Instead, these companies wanted to snatch up these patents as part of the latest iteration of a favorite Cold War strategy – mutually assured deterrence. They wanted to collect an arsenal of patents as a defense mechanism to deter potential litigants from bringing suit against them.

But weren’t patents supposed to inspire innovation by assuring inventors that they would have a temporary monopoly to exploit the marketplace for their idea? What happened? Where did things go wrong?

One problem seems to be that it’s not the original inventor exercising his patent rights, but rather it is a subsequent owner of the patent that is exercising the right. This means that the one seeking damages is not the person that patents were designed to incentivize – the inventor. Thus, the incentive is no longer to create an invention, instead the incentive is merely to get your hands on a patent that can be enforced. Which leads us to the second issue…

Patents are being awarded for ideas that are simply too general. By awarding patents for very general technology ideas, it creates an unnecessary limitation that prohibits the use of the idea, even though there may be prior widespread knowledge and use of the idea.

How do we fix this broken system? Certainly the patent system is very complex, but there are a couple of ways we could make it better. First, as mentioned in a comment on a patent post over at TechCrunch, we could create limitations on standing in patent litigation suits. The plaintiff in a patent suit could be required to be either the original inventor with or without a product, or a company that has been assigned the patent so long as the company is producing the product and the damages are limited to the profits that the company is making from the invention. This would still create an incentive for inventors to innovate, while deterring companies from buying patents with the sole purpose of using them offensively with no intent to create a product based on the technology.

Second, we could shorten the duration of patents. This is based on the premise that the rate of innovation is faster than it has been in the past, and by shortening patent duration it would allow ideas to enter the public domain faster, thus giving more people the ability to innovate using that technology.

In the short-term, however, the Department of Justice is addressing this issue by examining the purchase of these large patent blocks through the lens of anti-trust. Companies are essentially snatching up these patents as a means of eliminating competitive threats in the market, and when large blocks of patents concerning a particular type of technology are being purchased, it could have the effect of severely restricting the ability of competing companies from challenging the dominant holder of the patented technology. Meanwhile, Congress is working on legislation to reform the patent system in the United States.