Patents: "The Good and the Bad"

Patents: fixable, or the next weapons of financial destruction?

The big issue of the evening came from a discussion of the treatment of so-called "non-practicing entities" or NPEs—organizations that hold patents and assert them, but do not conduct a business that applies the patents.

By Ron Wilson, Executive Editor -- EDN, 5/7/2009

A panel sponsored by the Commonwealth Club of Silicon Valley last night brought together three significant players in the US patent-law debate to discuss the future of the patent office, the current reform legislation in Congress, and the future of intellectual property. The discussion ranged from pessimism over short-term fixes to a dire warning about the arrival of the investment banks in the patent business.

Steve Perlman, founder and CEO of invention-factory Rearden, David Simon, chief patent counsel at Intel, and Ronald Yin, partner at law practice DLA Piper, discussed the issues under the questioning of Wall Street Journal Deputy Bureau Chief Don Clark. Initial conversation focused on the pending reform legislation, which Intel, through the Council on Patent Fairness, has done much to promote.

Not surprisingly, Simon was supportive of the legislative efforts, citing three areas in which he feels the system needs reform: reduction of damage awards, limitation on plaintiff's choice of venue, and the question of willfulness. On this latter point, Simon explained that as the law is interpreted today, the simple fact that you have read other patents in an area can "put you under dire threat," to use his words, in case of later litigation.

Perlman in response dismissed the proposed bill, saying it did nothing to address the real issues in the patent system, and implying, without directly saying as much, that the bill served primarily the financial needs of the big companies in the Council. Perlman stated that in his experience filing many applications, just the time required for a patent application to get its first reading could vary between a few months and five years. Times for granting can be even more variable. Meanwhile, he said, patent applications made in other countries are published as soon as they are received, leaving inventors in the US unable to assert their rights in the US on an idea that is now available on the Web to anyone. Perlman charged that fundamentally the Patent Office is a drastically underfunded wreck, and that the supposed reform legislation is in fact a mess that could further corrupt the system.

A voice of moderation in comparison, Yin agreed with Perlman that the Office was underfunded, pointing out that Congress had for years used the Patent Office as a source of revenue instead of funding it to adequately perform its duty under the Constitution. And he agreed that the current proposals before Congress are not really reform. But he also argued that what the Office needs is not reform, but simply better internal management and a sense of business sense.

There followed a rather sharp debate on particular provisions in the proposed legislation, from which it mostly emerged that there are at least two versions of the proposals, one passed by the Senate, and one under consideration in the House. A conference will likely produce yet a third version. Yin warned that given all the things occupying the Congress this year, it's entirely possible that once again no bill will emerge from the process.

The big issue of the evening came from a discussion of the treatment of so-called "non-practicing entities" (NPEs)—organizations that hold patents and assert them, but do not conduct a business that applies the patents. Most often, the NPEs people think about are patent trolls, the panelists said. But Yin explained that it is extremely hard to target trolls with legislation—even if Congress had the will to do so—because it is difficult to hamper trolls without also hamstringing other kinds of NPEs: universities and research organizations, for example.

Yin went on to point out that patent trolls were "a creation of the industry's own greed." He said that years ago, most patents held by large corporations were bundled and licensed at quite reasonable royalties, because the holders feared that they would be charged under anti-trust legislation if they gave any hint of using their patents to restrict competition. But as conservative administrations lost interest in anti-trust issues, this changed. Yin traced the beginning of the change to Texas Instruments, which began by asserting a pool of DRAM patents against Japanese memory manufacturers, in effect turning their patent portfolio into a revenue source. Once people came to see patents as potential cash flows, Yin argued, the door was open for trolls: investors who would purchase patents simply to assert them in order to get royalties.

At that point Simon dropped a bomb. "This is something we should definitely fix," the Intel counsel said. "Right now there's $35 billion out there trying to buy patents and form them into pools. And I can tell you that there is much more money coming in soon."

Even more dire, Simon said that recently one of the experts on his team had been approached with a job offer from an investment bank. The bank is putting together a team to pool patents and create financial derivatives based on the pools.

This would, in effect, create a mechanism by which speculators could bet on the future cash flow from patents. Because more aggressive litigation would be expected to increase the flow, it is likely that a patent derivatives market would significantly further increase the assertion of patents by NPEs, and hence further increase the risk of innovation for real technology companies. Further, if huge pools of cash appear looking for patents to buy, the demand could substantially distort the intellectual property market in at least two ways.

First, the demand could make patents sufficiently valuable that they become all by themselves an exit strategy for a start-up company—just get going, get patents, make a reasonable show of reducing them to practice, and then dissolve the company and sell the patents into investment pools. Second, one suspects that patent factories—organizations created just to spin off large volumes of patents with potential value in litigation—would spring up to satisfy the demand. While both of these changes would provide jobs for engineers, neither seems like a positive step on the way to economic recovery.