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IP, Patent

Patent Licensing Is The Answer, But What Is The Question?

If mainstream media reports the pulse of its readership, then the average American is terrified by the idea of patent licensing. Of course, they don’t report it this way, but they do talk about scary mystical creatures waiting to jump out and hold entrepreneurs for ransom, using the legal system as their gun.  Even the politically correct “Non-Practicing Entity” uses a negative adverb eliciting negative connotations about patent owners that have the nerve to own patents without simultaneously selling products.  Media accounts of patent activity too often conclude with questions on how to prevent patent owners from utilizing their patent assets. Instead, the real question is this: how do we encourage the flow of financial resources into the hands of people that create or fund the creation of inventions that will empower the future?

Patent owners come in many shapes and sizes, but even the more sophisticated “practicing” entities often use an elaborate series of holding companies that own or operate various aspects of the business while assigning patents to another holding company.  Implicitly, they all recognize the benefits of licensing, though it may appear incestuous at times.  What’s more, many companies no longer at the top of their game–not to mention others that never quite made it–are recognizing the residual value of their respective patent portfolios.  Nortel was just the beginning.  Perhaps sensing an inevitable buying spree, Kodak and InterDigital announced intentions to auction off their respective portfolios, while the bankrupt Circuit City’s very appealing DIVX portfolio sold for a cool $6 MM.  In addition, TiVo reaffirmed its commitment to licensing its battle-tested portfolio.

In the meantime, Google’s $12 B bid for Motorola shocked the collective conscience of the tech reporting world. Consensus seems to be that the deal is all (or at least mostly) about Moto’s massive patent portfolio.  Does Google have to pay a premium when it wants to acquire patents? Of course it does. But the mere drops in the proverbial bucket have led some in the media to conclude the sky is fallingThe New York Times claims that all this patent monetization activity is “diverting money for innovation from industries crucial to the economic future of the United States.” Apparently, according to “experts” relied on by NYT, Motorola investors merely suctioned $12 B out of the US economy, conferring no benefit to anyone but themselves:

“You’d much rather see Apple spend some of that $4 billion on new inventions, and Google invest that $12 billion to generate new knowledge,” said Josh Lerner, an economist at the Harvard Business School. “It’s a transfer of wealth from innovators to bondholders and stockholders who have no motivation to innovate. It’s disturbing.”

In two sentences, Lerner’s attitude ultimately explains why we reward an inventor’s labor with patent rights.  The aged knowledge represented by the thousands of issued patents exchanged in the Nortel and Motorola transactions offers little insight into the ultimate value of the bargain struck between the inventors and the rest of society.  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.

Further, a net technology taker, like Google, built an empire beginning with exclusivity on a key invention, and subsequently taking inventions belonging to others.  When the owners of those inventions step forward, looking for their compensation, Google predictably reacts with righteous indignation.  After all, just like the large check that spoils a good meal, Google prefers to dine-and-dash at the innovation buffet.

In other words, Google didn’t “generate new knowledge” to begin with.  By and large, it combined inventions owned by others and exploited them for their own gain. I’m not suggesting this arrangement is morally wrong, so long as the creators of those inventions are appropriately compensated.  After all, some people are–simply put–skilled at conceiving the new processes and components that enable the innovations of tomorrow. Others are skilled at identifying and investing in such people.  Collectively, these are the technology makers. Meanwhile, some people, and companies, are skilled at knowing how to combine abstract, individual inventions into a concrete solution.  While they may enable technology to manifest in the marketplace, doing so without compensating inventors makes them technology takers.

A portion of the money Google collects ultimately flowing to the technology makers more than likely confers a net benefit on everyone.  Since the technology makers of yesterday lay the foundation for the technology of today, chances are that they may do so again.  Along those same lines, the enablers will have a broader selection of inventions to use in developing solutions to the problems of tomorrow.  The patent system, by abstracting information from the right to use information, enables this cycle.  Those that choose to focus on the business of invention may do so, and those that choose to focus on combination and solution building may do likewise.  Others may prefer to do both, and may be equally skilled at both, but neither are required to be.  This should be a harmonious, rather than vicious, cycle.



10 thoughts on “Patent Licensing Is The Answer, But What Is The Question?

  1. You’re relying on the false premise that Google, et al., were aware of, and leveraged off of, the existing patents, which most of the time isn’t the case. Rather, they independently invented the same invention. Why should someone get compensated when they had nothing whatsoever to do with the ultimate commercial success? Isn’t that just free-riding, which provides no benefit at all to society? If you want to introduce a copying standard to patent law I’m with you, but you are suggesting people should be paid for coincidence.

    Posted by Anonymous | August 31, 2011, 12:24 pm
    • Anonymous –

      How do you know it’s a false premise? In any event, whether it is or not is immaterial. The basis of the bargain is disclosure in exchange for the right to commercialize. If companies choose not to take advantage of the bargain (whether because of lack of foresight or bad legal advice) it’s is not the patent owner’s fault.

      Sure, we could introduce a copying standard where patent documents were kept secret, and you had to prove you provided access to someone who then double-crossed you, but that would destroy the primary public benefit of full disclosure. Bottom line, if you’re going to require public disclosure of the invention (which currently happens before any final rights are determined), then actual knowledge of the disclosure cannot simultaneously operate as a requirement.

      Posted by Patrick | August 31, 2011, 12:58 pm
  2. Excellent article – well written and well reasoned. I get a kick out of the business suits, especially the Harvard elites and CEO’s, who regularly complain about the transfer of wealth to inventors – those inventors who oftimes were responsible for payving the way for technological advancement. Not suprisingly though, those same Harvard elites and CEO’s have no problems (morally or ethically) accepting the 100’s of millions of dollars as compensation for running their companies. Hummmm… let’s call the kettle black. A good study is needed about how much the average patent licensee makes – I bet it would result in a bell shaped curve – but it remains a mystery of what the average would be. And please, let’s not forget all the money the independent inventors have to shell out to the USPTO, their patent attorneys, licensing counsel and litigation counsel, with only a hope and prayer that their claims will give them their hard earned reward. So after all their expenditures, what does the patent license actually make?!?

    Posted by Bob | August 31, 2011, 2:33 pm
    • Bob,

      Thanks for reading. Inventors generally get the smallest contribution in the transaction. This is an inevitable result of a system where the inventor needs the cooperation of the licensor, and needs expensive litigators to compel the licensor’s cooperation. Sometimes, inventors even need brokers to help identify the market for litigation funding. What’s more, the inventor needs these folks far more than they need the inventor. While a slice of a watermelon is better than a whole pea, an efficient market for licensing transactions would benefit both inventors and licensors.

      Posted by Patrick | August 31, 2011, 5:19 pm
      • Is there a citation for how much each stakeholder in the patent ecosystem takes, from inventors to patent drafters to patent license professionals to patent litagators to patent brokers to patent aggregators to patent trolls, etc.?

        Posted by karmakarpalen | September 1, 2011, 10:57 pm
    • Bob,

      Good points. Jacob Schmookler did the most comprehensive analysis of the value of patents – see Invention and Economic Growth.

      Posted by dbhalling | September 1, 2011, 9:34 pm
  3. Patrick,

    “After all, some people are–simply put–skilled at conceiving the new processes and components that enable the innovations of tomorrow. Others are skilled at identifying and investing in such people.” You mean Adam Smith actually knew something? Division of labor actually is something we want to encourage?

    Posted by dbhalling | September 1, 2011, 9:29 pm


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