A study out this month from PricewaterhouseCoopers (PwC) claims that companies or individuals who use patents for the purpose of suing others for infringement — also known as “patent trolls” — are growing more prolific. While monetary awards from patent lawsuits are decreasing overall, awards to trolls are going up.
The Electronic Frontier Foundation describes a patent troll as someone who is not in the business of using their patents to make products, but instead makes money by suing (or threatening to sue) anyone they accuse of ripping them off. According to PwC, patent infringement payouts to trolls are three times higher than those of companies that actually manufacture the products they’ve patented. Apparently, 67 percent of all patent lawsuits are now also filed by trolls, up from 28 percent just five years ago.
Michael Smith, a patent attorney in Eastern Texas — last year’s patent lawsuit capital of America — says there’s a simple explanation for the inflated numbers. Instead of plaintiffs being able to sue multiple defendants all in one case, a 2011 change in regulations requires them to now be sued individually.
“A study I saw a few months back said that the overall amount of patent litigation really hasn't changed, but the change in the law makes it look like there are many times more because of the new way of counting,” Smith told VICE News.
Is there any legitimate reason to own a patent that you don’t use?
Yet the numbers only tell a tiny fraction of the story. Because there is little agreement on what defines a “troll” in the first place. Smith says there is no way to know what the figures really mean. Also referred to as “sharks,” patent trolls are now best known for operating in the tech world but they’ve been around since the days of Henry Ford. In polite terms, a troll is known as a “non-practicing entity” (NPE) — they don’t make their patented things but license them out to others.
There is nothing inherently “troll-like” about NPEs, but as Professor Michael Mazzeo of Northwestern University pointed out last year, “the types of business models, patent enforcement, and licensing practices that are considered to constitute ‘trolling,’ as opposed to more socially acceptable forms of monetizing patent rights, vary widely in public opinion.”
But not all NPEs are trolls, and not all trolls are NPEs. It boils down to: If you hold a patent, do you also have to manufacture that product? Is there any legitimate reason to own a patent that you don’t use? For the most part, tech giants like Apple, IBM, Microsoft, et al, say no. Matthew Vella couldn’t disagree more.
Vella is the CEO of Acacia Research, one of the best-known NPEs and a publicly traded “patent licensing” firm with a billion dollars in revenue since its inception in 2000. There are certainly nuisance lawsuits being filed by bad actors, he says. But Vella insists it’s unfair to tar everyone in the legitimate patent licensing business with the same brush.
“To say 67 percent of patent lawsuits are ‘trolls’? It’s crazy to cast such a wide net,” he told VICE News. “They’re including clients of ours in that data: universities, companies like Palm and Boston Scientific. Are these ‘trolls?’ The numbers don’t stand up to scrutiny; there are plenty of legitimate lawsuits brought against companies that are knowingly misappropriating patents.”
'For Apple to come along and say, "We don’t recognize anyone who isn’t manufacturing their own products?" That’s insane.'
Right now, a patent is valid for 20 years. With certain exceptions, they generally aren’t worth much in the early stages. But when Facebook, for example, goes from being used by four guys in a dorm to 71 percent of all online American adults, Mark Zuckerberg’s patents become big money. And they can be sold like property; an inventor that needs cash can sell a patent. The buyer can be a technology company, or an NPE.
But Vella says the big technology players like Google — a proponent of an “open” approach to otherwise patentable ideas — are now trying to “reform” the patent system to their economic advantage, allowing protection from being sued for using technology they haven’t paid for.
Vella maintains that tech companies have taken a legitimate grievance — the nuisance lawsuit, which he does admit can be problematic — and are purposely confusing the issue to rally public support and to “stop inventors from getting their fair due.”
“For a Google or an Apple to come along and say, ‘We don’t recognize anyone who isn’t manufacturing their own products?’ That’s insane,” Vella said. “Google was nowhere near a smartphone eight years ago. Now all a sudden you’ve got all kinds of technology in Android, and they should have to pay royalties or license fees to the people who invented those things.”
Vella says there’s a very simple economic model at work here: For big tech firms it’s better to ask for forgiveness when infringing on a patent than to ask for permission. He says this is why investment in research and development has dropped so much over recent years — that using other people’s ideas without paying for them has essentially become a subsidized research source for multinational companies that can perfectly well afford to compensate their actual creators.
'We have a system that works for the pharmaceutical industry, but it doesn’t make sense for software.'
People have realized they can monetize patent rights, and they are simply taking advantage of what is rightfully theirs, says Ithaca, New York patent attorney Chris Michaels. He sees nothing inherently negative about this.
“Of all the wrongs in the world, the fact that inventors, or people who have paid those inventors for the rights to their patent, are getting paid for their ideas, probably isn’t the worst thing,” Michaels told VICE News. “The so-called patent trolls are getting their patent rights from somewhere, right? So, they make an inventor wealthy, but they’re evil because they’re then going after others who are using their technology?”
Naturally, there’s another side to all of this.
Julie Samuels is the executive director of Engine, a San Francisco-based public policy non-profit advocating on behalf of tech startups. A former senior staff attorney at the Electronic Frontier Foundation, where she held the Mark Cuban Chair to Eliminate Stupid Patents, Samuels has filed briefs with the Supreme Court and testified before Congress on these issues.
She criticizes the current US patent system as woefully “one-size-fits-all,” which means that pharmaceutical inventions, for example, are treated exactly the same way as software inventions.
“I personally think that’s at the core of our problem,” Samuels told VICE News. “What we have, largely, is a system that works for the pharmaceutical industry, because the pharmaceutical lobby has a lot of money, and has been really prolific. But it doesn’t make sense for software.”
'In 2007, Google only had 38 patents. Today, it’s got 51,000.'
Here’s why: An exclusive market allows a drug company to make its money back on something that might have cost hundreds of millions of dollars to develop, before the generic version eventually decimates their sales. Bringing a drug to market is also a tremendously long process, so 20 years makes sense. Software moves much faster, and can be developed without large capital expenditures. Samuels believes five years of patent protection would be more appropriate.
There are other differences, too. Samuels says 20 to 30 patents can be found in the typical drug compound. The typical smartphone, however, contains around 250,000 patented components. She contends that no company — not Apple, not Google, not Microsoft — can possibly know that they might have inadvertently duplicated something patented by someone else.
Further, the sheer complexity of technology patents makes it relatively easy for trolls to accuse smaller defendants of violations they haven’t committed. The “huge payouts” people hear of are actually quite rare. Rather than suing one large company in the hopes of a multimillion-dollar jackpot, a patent-owning troll will usually go after a large number of easy targets hoping for many $10,000-$30,000 out-of-court settlements with small businesses that can’t afford the money or the time to defend themselves before a judge.
Samuels continued: “What we’ve seen, particularly in the software space, is that patents aren’t incentivizing innovation. Instead, they’re having a chilling effect because no one wants to be sued. Public domain is very much in the public interest.”
To that end, there is a camp that thinks patents should be done away with altogether. This is not some sort of lunatic fringe group hunkered down in end-times bunkers. No, the notion of abolishing the patent was advanced by none other than the Federal Reserve Bank of St. Louis.
“While weak patent systems may mildly increase innovation with limited side-effects, strong patent systems retard innovation with many negative side-effects,” found a 2012 paper titled, “The Case Against Patents.”
According to research by Fed economists Michele Boldrin and David K. Levine, the “initial eruption” of innovation that leads to the birth of an entirely new industry does not come from patent protection. The demand for strong patent protection “comes from old and stagnant industries and firms, not from new and innovative ones,” and industries only begin to seek the legal protection of patents when their growth potential has withered away.
Boldrin and Levine pointed out that the Wright brothers simply made a small improvement to flight technology that already existed, kept it secret until they could get their ideas patented, then used the protection afforded by those patents to hold off competition and stifle aerospace innovation until their 20-year lifespan was up.
The “best solution,” they asserted, “is to abolish patents entirely.” Boldrin and Levine use open source software as a modern-day example of how collaboration thrives and ideas improve without intellectual property laws.
* * *
In 1990, Microsoft had a grand total of five patents. When they developed and introduced Windows 95, they had all of 77. After that, something changed. In 2009, Microsoft was awarded its 10,000th patent, and today, the software colossus owns well over 40,000. What happened?
The short answer is, we live in a different world now. Vera Ranieri, a staff attorney at the Electronic Frontier Foundation, says many companies (Microsoft for one) did not accumulate patents when they were young. Same thing with Google, which Ranieri says actually didn’t consider patents necessary until well after it became an industry goliath. In 2007, Google only had 38 of them. Today, it’s got 51,000. Ranieri says a company of Google’s size simply has no choice but to do what it must to defend its products, not because it wants to prevent others from using and developing their technology.
When was the last time you heard conservatives advocating for more government, and those on the liberal end of the spectrum seeking less?
“Many of these companies, they're not trying to get a ‘free ride,’” Ranieri told VICE News. “All inventors ‘ride’ other people's innovations in order to create innovations of their own. No doubt there was a ‘Facebook’ before Facebook (do people remember Friendster or MySpace?) This is the nature of invention.”
Conversely, Ranieri said many patents used by trolls, especially those in software, are never actually turned into real products. Therefore, the companies getting sued are the ones actually doing the heavy lifting of developing, testing, and marketing. Thus, she said, the “inventor” avoided the difficult, expensive, and time-consuming work of actually making the thing, “yet still wants to receive royalties from those who actually make the investment.”
If nothing else, the state of the US patent system has turned everything a little askew. When was the last time you heard conservatives advocating for more government, and those on the more liberal end of the spectrum seeking less? As usual, there is no consensus on what needs to be done. Just that something has to change.
However broken the patent system may or may not be, one thing is still largely intact: man’s time-tested ability to blame the other guy.
As top patent litigator Matthew Powers told VICE News, “The standard line in the business is, ‘The definition of a troll is anyone who’s suing me.’”
Follow Justin Rohrlich on Twitter: @JustinRohrlich
Image via Flickr