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Intellectual Ventures, IP, IP Asset, Patent

Myopic Patent Cynicism

In September 2011, flawed research from a handful of Boston University professors made headlines with several highly popular news organizations claiming that patent owners were somehow responsible for a net loss of billions of dollars in wealth from corporate America.  Joff Wild at IAM Magazine accurately predicted that the research would be well received and widespread, despite the fact that the authors’ ultimate point is that a given company’s stock price decreased after patent lawsuits were announced.  Sadly, Joff was absolutely right.

Cato Institute’s Regulation cover story this month is the very same  Bessen, Ford, Meurer paper, and Reason magazine’s science correspondent Ronald Bailey reported the findings on to his audience (just as Joff predicted) without criticism.  This cynical view of our patent system gains traction–in part–because it carries a simple message: company A, who only wants to offer services and things for the public to consume is being blocked, harassed or halted by entity B, who only wants to take money.  This message oozes from between the lines of so many articles and op-eds like the stench of garbage logic covered up by flowery prose.

Consider Bailey’s selection of quotes from the Bessen paper, criticizing companies “that buy up dubiousvaguely worded patents’ that can be interpreted as covering established technologies. They then ‘use them opportunistically to extract licensing fees from the real innovators.’” (emphasis added).  Bailey’s not alone, mind you.  Author Glenn Fleishmann, writing about a patent dispute involving camera straps commented that “In the patent-troll universe, very little of value is created. An idea is turned into paperwork not stuff, and the inventor may have never had an intent to make anything of worth, either.”

Of course, anyone with even basic knowledge of patents knows why both statements are horrifically flawed.  “Vaguely worded patents” generally do not exist, except when patent examiners fail in their job (to ensure that patents particularly point out and distinctly claim inventions) as required by federal law.  Further, while a patent may be difficult to understand, that alone does not mean that it’s “vague.”  Bessen’s mention of “established technologies” and “real innovators” is an allusion to the fact that inventors and patent owners often are not the first, nor the most successful, to commercialize technology they created.  Finally, Fleishmann’s ridiculous claim that patent enforcement fails to create value undermines and insults the whole point of acquiring and licensing patents: to allow technology creators to share in the wealth created from commercialization of an invention!

What cynics want the reader to forget is the fact that company A is actively engaged in commerce.  Generally speaking, companies do not market new products for the sole benevolent purpose of helping people.  True, a public benefit may result from this process, but the purpose of establishing a business is to make a profit for the business owners.  Value is created when the inventor solidifies patent rights in the invention.  Appropriation of the invention by others simply confirms the existence of value.  Even prospective licensing confirms the suspicion or belief of future value through the existence of one who wants to, but has yet to commercially use the invention.  Absent that, however, an invention of no value will not be used, and therefore will not be licensed.

The simplistic, cynical view of the patent system casts a myopic view of the near-term legal battle over patent rights, and the inefficiencies of the US legal system as a mechanism for resolving business disputes.  Cynics focus readers on a perceived roadblock to their access to some desirable product or service, successfully concealing the proverbial man-behind-the-curtain and the important function he serves.

You see, Bessen is actually partially correct about one thing: some patent owners are not “real innovators.”  In fact, some are not innovators at all.  What the Bessen’s of the world want you to ignore, however, is the fact that many of these “real innovators” are not inventors.  An innovator who proceeds without invention is a technology taker, while the inventor is a technology maker–a concept explored in my article “Patent Licensing Is The Answer, But What Is The Question?“.  In it, I explained:

The gift of knowledge, once given (or taken), cannot be undone, so the technology takers have little gratitude to share with the technology makers of yesterday.  Knowing this, the patent system serves to protect the technology makers’ respective investments, encouraging the gift of knowledge through disclosure.

The secondary patent market, aided in part by the Nathan Myhrvold‘s of the world, and patent licensing strategies, pioneered by the Jerry Hosier‘s of the world, helps transfer wealth from the takers to the makers in a couple of ways.*  First, the secondary market gives technology makers an opportunity to liquidate their patent assets quickly, albeit at a discounted rate to middlemen who may then take advantage of the rights represented by the patent to recover and profit from their investment.  Buyers that consistently bet on the right inventions are rewarded with funds that can be used to invest in new technologies, either along the same or different paths.  Second, licensing strategies allow patent owners–who may be makers themselves, or simply investors–to receive value directly from technology takers.

When this cycle operates harmoniously, valuable technology creation can be consistently rewarded based on the value received from technology adoption.  Takers can focus on innovation while simultaneously rewarding makers, incentivizing further investment in invention.  Meanwhile, makers can focus on technology creation, ensuring that takers have an endless supply of new technology to commercialize.  Otherwise, our country risks a bleak future, likened by author Mark Twain to a crab that can only move “sideways or backways.”  Unless respect for private property includes respect for patent rights, the crabwalk may very well be our future mode of transportation.

* As an aside, a fantastic Harvard Business Review article by Myrhvold explains many of the benefits to creating a robust capital market for inventions.  Also, those interested can read my re-telling of the story about Jerry Hosier’s client Jerome Lemelson and his epic battle to license his many significant inventions that had been appropriated by many of the largest corporations in the world.
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Discussion

20 thoughts on “Myopic Patent Cynicism

  1. Patrick,

    Excellent post. I believe the real problem is that many people do not understand what property rights are. As a result, they suggest that patents are monopolies. Property rights are the laws way of acknowledging the fact of creation. “But for” the creator, the property would not exist. Clearly, the creator is the one who owns the property since without them it would not exist. As you correctly point out there can be overlapping ownership rights. The right of the inventor to the invention and the right of the producer to the physical embodiment. We deal with this in copyrights all the time. The owner to the song has some rights in the movie that uses this song. Until, we restore an understanding of property rights, you will never get the so-called “free-market” people at Reason and Cato to understand your division of labor argument.

    Posted by dbhalling | January 26, 2012, 9:04 am
    • Thanks for the thoughtful comment.

      I’ve held the folks at Reason and Cato in very high esteem for their views on liberty and freedom. I was disappointed to read their implicit endorsement of anti-IP arguments and blind acceptance of the ‘patent troll’ mythology.

      Posted by Patrick | January 26, 2012, 9:44 am
  2. As we learned from the latest patent reform war, big software were the main drivers. Unfortunately, many anti-patent myths have been perpetuated – one that resonates with all software groups is the “dubious vaguely worded patents”. Indeed, without any kind of training and coming from engineering backgrounds, parsing a patent is a different world. Add to that the sheer number of software-related patents and it’s not hard to see why it resonates.

    Address their difficulty of determining whether they infringe on one of the hundreds of thousands of software patents and you’ll find much of their volume and attacks are squelched.

    Patents were created in a time before programmable machines and human language Claims made the most (only?) sense. One option is to move from human-language Claims to code-based Claims – or at least for software, hardware, Internet, digital patents. This would make it easier to determine which parts of a new software might infringe and hence kill the myth of “dubious vaguely worded patents”.

    Otherwise I fear, without changes, the patent system will only face continued attacks and a whittling down of the patent system as a whole.

    Posted by Jeff | January 26, 2012, 10:37 am
  3. Its fascinating that otherwise fanatic proponents of property rights become apoplectic discussing patents, and invent all manner of twisted logic to disparage them. Even the alleged “trolls” are nothing more than savyy businessmen using their own capital to take a risk on exploiting an asset that others have ….passed on. So its fine for a company to buy a commercial building on the open market – even when they did not build it themselves – and then charge an appropriate market rent for folks occupying space and exploiting some part of the property right. But that same company is a villain if they dare to buy a patent, and then ask a high tech company to pay for taking some part of the rights associated with such property. I suspect that like the tobacco companies, most of this “research” is shilled and just a front for the biggest IP misappropriators.

    Posted by J Nicholas Gross (@JNGross) | January 26, 2012, 11:10 am
  4. There are only three things that are required in any business. There must be people, money and an idea of what to do with the people and money. The idea may just be a patented invention, which begs the question… what is patent worth?

    Posted by Paul Morinville | January 31, 2012, 1:20 pm
  5. Patent abuse should be a major concern among patent lawyers because IP law is now reaching the greater public consciousnesses and they are seeing how much it effects them. The more the abuse the less support the public has in IP. We have already seen a major backlash take root and growing stronger. Companies that abuse copyrights and patents are severely undermining them.

    Posted by kbingh | February 10, 2012, 11:31 pm
  6. “This message oozes from between the lines of so many articles and op-eds like the stench of garbage logic covered up by flowery prose.”

    And a glorious message it is too!

    ““In the patent-troll universe, very little of value is created.”

    Actually, in the patent troll universe absolutely nothing “of value” is created. Paperwork is not, and never has been “of value” in and of itself.

    “Further, while a patent may be difficult to understand, that alone does not mean that it’s “vague.” ”

    It actually does mean that it is vague to the people that cannot understand it. They know it covers “something” but do not know what that something is. To them therefore it is “vague” at least subjectively. Whether or not it is objectively vague is of course another question. But you appear unwilling to understand what they are saying and respond to what they are saying rather than to what you wish they were saying. Or you can’t understand what they’re saying, idk which it is.

    “Finally, Fleishmann’s ridiculous claim that patent enforcement fails to create value undermines and insults the whole point of acquiring and licensing patents: to allow technology creators to share in the wealth created from commercialization of an invention!”

    In other words, it tells the truth. Guess what bro, allowing technology “creators” to share in the wealth created from commercialization of an invention is not “value” to anyone save the person getting shared with.

    “Value is created when the inventor solidifies patent rights in the invention.”

    lolwut? Value to whom? Value to the “inventor” perhaps, but nobody else. Which is the point brosensky.

    “Appropriation of the invention by others simply confirms the existence of value. ”

    /facepalm.

    Bottom line bro, as you well know, the patent system only works as advertised, when the “invention” is part of the useful arts and not some horse huey tossed in as an afterthought at the end of the 20th century because courts being tards. And all this talk of “value” and other nonsense is just that. The hits to our economy are the price we pay for early early publication (and indeed in some cases publication at all), which we do a piss poor job at getting due to the backlog and weak publication reqs. And those hits to the econ are real. And there is a very real balancing act our public has to do between those hits and getting early early publication (and in some cases publication at all). If they feel like their sht is getting ruined because of patents in general or a subset of patents then it is their perogative to instruct their leaders to take the patent grants away from that area. It really would not be the end of the world.

    Ideas are a dime a dozen in this information age in a vast vast number of areas, I submit that there is a rather easy case to be made that only in the most technical of useful arts are they still worth a more than a dam to have early publication or publication at all of. Take patents away from most other areas and we’ll still be awash in “ideas” for product/apparatus/compositions/methods having many (million?) more to spare. And maybe we can keep our billions in the stock market. Perhaps that is a deal the public ought to consider. Indeed, perhaps they can take those billions and start putting it into grants to research things the public really wants (cure for cancer, AIDS etc etc etc) although the public will probably just blow it on tanning booth sessions and hookers (aka cancer and AIDS).

    “We have already seen a major backlash take root and growing stronger. Companies that abuse copyrights and patents are severely undermining them.”

    Amen brother and here’s to letting it grow deeper roots and become very strong!

    Posted by 6 | February 23, 2012, 8:52 pm
  7. Also, you fail to tell us what would be so horrible about “risking” the dire future you say we would be risking. Let us take the risk, f it, see how it pans out. When people are qqing for innovation then we start the whole thing back up again. If it turns out they only really qq for innovation in the traditional useful arts, then perhaps we just start it back up there. And then I get to lol.

    Posted by 6 | February 23, 2012, 8:56 pm
  8. This article thoroughly fails to address the main criticism of patent trolls – in that many of the suits they file are not valid, and targets settle to avoid prolonged legal battles.

    It also does not address one of the main points of the BU Paper: “Second, by exploring publicly listed NPEs, we find that very little of this loss of wealth represents a transfer to inventors. This suggests that the loss of incentives to the defendant firms is not matched by an increase in incentives to other inventors.” This implies that NPE patent litigation has no measurable impact on future cashflows of the firm target firm or inventor of the pattent. Therefore there is no incentive to comply and stop ‘serial infringers’. It also means the only winning party here are the NPEs themselves, not the inventors they buy patents from.

    Posted by Fred | June 29, 2012, 3:45 pm
    • You are right, those points are beyond the scope of this article. The focus of this article is explaining why it is so easy to present the short-sighted, cynical view of the patent system.
      A couple of true statements about lawsuits and settlements:
      1. A lawsuit is not invalid simply because the targeted company disagrees with the allegations. In fact, I can’t think of a single patent lawsuit ever filed where an accused infringer filed an answer admitting that it infringed a patent that it also admitted was valid.

      2. A lawsuit is not invalid simply because the patent owner accepts a settlement nor simply because the target company agrees that settlement makes more economic sense than fighting despite some good-faith defenses they might raise.

      As to the second point, inventors get exactly what they bargain for, whether they are accepting employment or selling to an NPE. What would help inventors obtain a larger share, ironically, would be to lower the cost and complexity of patent enforcement so more inventors could afford to do it on their own, which is something policymakers seem loathe to do.

      Posted by Patrick | June 30, 2012, 11:45 am
      • I guess… Although I would hardly call the paper short-sighted. This article totally misses the point of the study, which my above comment describes, which is that NPEs do not add value to any entity besides themselves, including inventors. If the inventors are not getting any measurable gain from these suits, how you argue that NPEs add any value to anything and don’t just drain both sides of legal fees?

        Posted by Fred | July 3, 2012, 2:30 pm
        • First, I do not think adequacy of inventor compensation is the point of the paper. If it is, they did a piss-poor job of covering the issue. Doing so would require, at minimum, a thorough study of inventors, the actual compensation received (as opposed to inferred) and a survey on whether they were happy with their deals and/or felt incentivized by the rewards.

          Inventors do not give patents away for free, so by definition, they are compensated before the NPE is even successful. Others actively participate in the licensing revenue. For example, Acacia typically splits licensing profits (revenue after out of pocket costs and attorneys fees) with inventors 50/50.

          Posted by Patrick | July 3, 2012, 4:30 pm
          • Inventor compensation is a big part of this paper – they make an argument, with limited but significant data that shows that inventor return is negligible. Nobody has quantified this before – and nobody, including any of the articles on this website, have given numbers to refute it [i.e. showing that NPEs add value to anyone besides themselfes]. Intellectual ventures for instance, could very easily release aggregate return numbers for inventors, but they don’t – even in the face of public criticism such as the this american life story. This is not an argument that can be refuted without data. The fact that no NPEs will release any data makes me suspicious as to the result they expect…

            Posted by Fred | July 3, 2012, 5:55 pm
          • Thanks for the discussion, but your comment demonstrates your ignorance on this topic. NPEs do not simply acquire patents out of thin air. They have to buy them from somewhere, and the compensation is entirely a matter of negotiation between willing buyer and seller.

            Cash-paying NPEs add value when they acquire patents, notably, before they have earned a dime for themselves from the patents in question. A recent article I posted mentioned that Intellectual Ventures alone has paid over $400 M to individual inventors. Yet, it was recently published on Forbes that IV’s largest funds are both showing a negative rate of return. Thus, IV and its investors have yet to make a profit, and may never do so … but the inventors IV paid get to keep the cash no matter what happens.

            Risk-sharing NPEs add value when they are successful monetizing patents. Acacia reported more than $91 M in 2011 alone as “Inventor royalties and contingent legal fees expense – patents.” Their investor presentations indicate typical company / inventor / legal fee splits as 40/40/20. By those numbers, $61 M would have been paid to inventors, which is about three times Acacia’s own net income of $21 M for the same year. Even more remarkable, in years 2007-2009, Acacia would have paid close to $20 M per year to inventors while reporting a net income loss.

            The reason that NPEs do not release aggregate data on this point primarily relates to: 1) distribution of small number of verticals over a large number of NPEs (meaning that even aggregate data could potentially disrupt the privacy of the inventors with whom they are conducting business), and 2) no single trusted individual to collect and maintain the data.

            Posted by Patrick | July 5, 2012, 8:20 pm

Trackbacks/Pingbacks

  1. Pingback: CATO & Reason Demonstrate Ignorance of Property Rights - Patents | Blog of Dale B. Halling, LLC - Intellectual Property & Patent Innovation, Attorney - Powered by Clvr.Tv - February 3, 2012

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