I love the stuff that ya’ll email me (or comment) after I write a post that challenge my thinking. While occasionally the notes are hostile (which is mostly just entertaining), they are usually really thought provoking even when I disagree. And, when they give me a new way to think about something, they are really satisfying. For all of you out there that read this blog – you guys are great – thanks for helping me think!
Last week I got an interesting proposal to deal with the problem of patent trolls. Here it is.
“It seems to me as though the solution to patent trolls is a pricing issue.
If patents were to get progressively more expensive over time, a patent holder would have to weigh the financial return of a patent against the cost of maintaining it. For example:
Year 1 — $1,000
Year 2 — $10,000
Year 3 — $100,000
Year 4 — $1,000,000
Year 5 — $10,000,000
Year 6 — $100,000,000
Year 7 — $1,000,000,000
The model above protects really valuable patents and sets patents that aren’t valuable free. Pharma could live with the fee schedule above, and software companies which have patents that are really core to a business would be protected for 4-5 years, an eternity on the Internet.”
What do you think? What’s the fundamental flaw in this?
I have a number of friends who are patent attorneys. Some have strong negative feelings about software patents that mirror mine while others keep me entertained by arguing both sides of the situation with themselves while I sit around and listen. One of my friends – let’s call him Sawyer – has very strong negative opinions as he’s spent most of his time recently defending his clients against software patent suits including an increasing number from
patent trolls (non-practicing entities). He spends a lot of time in East Marshall, Texas and has figured out where all the best restaurants are. While East Marshall isn’t quite as nice as an invisible, mysterious island in the middle of the Pacific Ocean, it clearly has a number of similar characteristics. Sawyer has decided that he can’t write publicly about his thoughts and experiences so I’ve agreed to channel his experience into my own parallel universe. Look for more missives from him (and better references from me with regard to Lost as I finally learn what really has been going on.) In the mean time here’s his reaction to the New York Times profile last week on Intellectual Ventures.
Last week there was an article in the New York Times profiling Nathan Myhrvold and his company Intellectual Ventures ("IV"). I suppose since it’s a profile, the article is by nature one-sided, but given how I broke into a cold sweat upon reading it, I was a little surprised at how unbalanced the presentation was on the merits. Mr. Myhrvold is characterized as a savior of inventors while his detractors are those big scary companies who want to infringe patents without compensation to the little guys.
What is the underlying premise of IV as a net positive for innovation and the U.S. economy? The traditional defense is that patents incentivize innovation. That has to mean innovation in a particular field, e.g., "software patents incentivize innovation in software." Let me underscore this point: there is no positive evidence for software patents improving or increasing innovation in software. None. I could make the same statement for pretty much any other field except biotech (which has its own problems that can be explored another time). There are a variety of articles setting forth why patents actually hurt innovation in software particularly, (e.g., the famous Bessen and Maskin working paper on the subject). Note that raw empirical data is hard to come by either way by nature of how the patent system operates, but the lack of positive evidence is telling.
Perhaps Mr. Myrhvold recognizes this, because in the article he says “I’m trying to get inventions that kind of respect as an economic entity.” (Emphasis added). IV apparently incentivizes innovation on…inventions? "Inventions" are actually a term of art in patent law, they are the things for which one can legally be granted patent rights. IV, therefore, seems to admit that it wants to enforce patent rights so that we can…have more patents. Mr. Myhrvold wants to create an entire economic category based on payments to entitles that don’t build, produce, sell, etc, any products, or create anything of value (i.e., that don’t innovate, at least in any useful way that advances human progress), in exchange for not being sued on exclusionary patent rights.
Let’s internalize that for a second. IV has collected over a billion dollars so that it can get more patents. They make no products. They apparently don’t funnel ideas to anyone else who makes products. Heck, the only useful thing I’ve seen out of IV is that mosquito-killing laser that Mr. Myhrvold showed off at TED this year. They collect massive amounts of money for their investors, and funnel much of it into buying and developing more patents. When I talked to a headhunter recently, in the midst of the worst market for legal jobs ever, she told me that the one employer who was always hiring people with experience in patents was IV. So, anecdotally, they hire a lot of lawyers. They set up a lot of shell companies. They sue people, or threaten to sue people, for massive license fees.
Now think about where this money would go otherwise. Microsoft, Apple, and Google, not to mention other large technology companies, have sizable legal departments with teams of attorneys focused full-time on managing the 50+ software patent cases they each are a defendant on. My guess is that they individually spend hundreds of millions of dollars defending and settling such suits per year. Most of the suits are backed by investment funds (here’s an example of one) through shell entities. Many of these funds are backed (with no transparency) by traditional investment banks and hedge funds. What we have, then, is a net outflow, on a yearly basis, of at least several hundred million dollars, from technology companies who "make stuff" and unquestionably innovate, to speculators and investors who don’t. I don’t think that baseline fact is something anyone would question. IV dresses that up in the clothing of "invention," but they’re really just out to capitalize on a broken patent system like every other non-practicing entity ("NPE" as we call them – they hate being called trolls). What kinds of cool products and technologies would that money be used to develop? We’ll never know, I suppose. At the very least we can presume that the pace of innovation in technology is being slowed by this net outflow of capital to non-innovating parties.
One thing I haven’t mentioned is that it isn’t just big companies who get sued. Startups, especially in software, are constantly targetted by patent suits, especially by pseudo-competitors who want to kill more innovative upstarts. How many great companies have been sunk by the costs of patent litigation? Think about it this way – if Facebook had been sued on a social networking patent within a year of its existence, would it be around today? It’s doubtful.
Finally, I think it’s important to address the moral point that’s always in the background when NPE’s talk about their business – having a patent doesn’t mean that you really invented anything, or that the person you’re suing would actually infringe in a rational world (the U.S. Constitution also only allows Congress to grant patents for "promoting progress," not for moral reasons). Patents are legal documents, highly opaque, and the meaning of patent claims rarely, if ever, rationally corresponds to a real world product. Patents are granted through a pseudo-adversarial administrative procedure where highly trained lawyers do their best to push extremely broad claims with extremely sparse/vague disclosure through overworked and underpaid patent examiners. That’s the name of the game. As much as companies like IV want to turn patent enforcement into a moral issue, it isn’t. Patent lawyers are paid to get broad patents, not capture the essence of a real "invention." And alleged infringers, in every case I’ve been involved in at least, don’t flagrantly violate patents. They’re caught unaware, and even when they are aware, have the impossible task of figuring out if they would infringe. It’s really a difficult Catch-22, but the patentees enjoy it, because it allows them to call defendants the "bad guys" while taking the moral high ground.
After not seeing the word patent in my daily information routine for a few weeks, I saw it twice today – first in an article titled Turning Patents Into ‘Invention Capital’ (in the NY Times) and then in Region Sustains Robust Patent Production in the WSJ. Both stirred me up early this morning, but for different reasons.
If you are interested in patents, I encourage you to read Turning Patents Into ‘Invention Capital’ as I’m very interested in your reaction. I’d love to hear what you think in the comments (anonymous is fine if you are concerned about attribution on this one.) I have an opinion and this article didn’t add anything to my thoughts (which is partly why I’m looking for yours as I’m curious what others think.) So I hit Ctrl-W and went to the next tab in Chrome.
The title of Region Sustains Robust Patent Production was fine (and yes it refers to Silicon Valley), but the first sentence in the article made me nuts:
“The economic slump has yet to damp innovation in Silicon Valley, at least not by one widely followed measure: patent production.”
It’s a short article that basically states that Silicon Valley received a similar percentage of utility patents granted in the US in 2009 that it did in 2008 and 2007.
“Silicon Valley denizens received 13,231, or 7.9%, of the total 167,350 "utility" patents granted in the U.S. in 2009, according to IFI Patent Intelligence, a unit of Wolters Kluwer Health that analyzes patent data from the U.S. Patent and Trademark Office. That is on par with Silicon Valley’s share of patents nationwide in 2008 and 2007, according to IFI.”
Other than the factual statement, there is no possible way the conclusion made in the first paragraph can be extracted from this data. The primary flaw here is that patents take many years to be granted. The number of patents granted in 2009 has nothing to do with the innovation activity in 2009!
Now, I don’t believe that patent activity correlates to innovation. While this might have been true in the 1970’s, there are so many factors in today’s broken patent system that undermine this. The article even points one out in the list sentence:
“Like many tech firms, Cisco offers some financial incentives to employees who file and receive patents, he (Tony Bates, SVP at Cisco) says.”
The “pay to file” dynamic is a mechanism that undermines the integrity of the patent system. Here’s the issue: assume I am a huge company that pays my engineers on average $100k / year. I offer $1k for every patent filing they make during work time. So, as an engineer, you can increase your compensation by 1% for every patent you file (forget about whether it actually gets granted). As the large company, I’ve got a huge legal machine in place to file the patents – all you need to do as an engineer is going through a prescribed process, write up a bunch of stuff that gets dropped into the patent application, and come to a few meetings to review the patent application. Is that worth an additional 1% of your comp regardless of the quality of the application? Sure!
Regardless of whether you think patents are useful, this is just such a crummy indication of “innovation”.
I had a very interesting meeting yesterday with an MIT Professor who I’ve known for a long time. He is anti-software patent, as am I. However, he suggested something I hadn’t really spent much time thinking about, namely that patents slow down innovation. Some very credible folks have been talking about this for a little while, including James Bessen and Michael Meurer in their excellent book Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk.
In my conversation Friday, I heard a very interesting example. Regularly, patent advocates tell me how important patents are for the biotech and life science industries. However, there apparently is academic research in the works that shows that patents actually slow down innovation in biotech. The specific example we discussed was that there is increasing evidence that when a professor or company gets a patent in the field of genetics research, other researchers simply stop doing work in that specific area. As a result, the number of researchers on a particular topic decreases, especially if the patent is broad. It’s not hard to theorize that this results in less innovation around this area over time.
I’m just starting to read some papers about this stuff, including those by MIT Professor Fiona Murray. If you are interested, Stuart Macdonald’s paper When means become ends: considering the impact of patent strategy on innovation frames the discussion nicely. And Stephan Kinsella’s excellent essay Reducing the Cost of IP Law absolutely nails this.
I’m still obsessed with my mission to “abolish software patents” especially after receiving yet another email from a new startup that claims to be a “Patent Insurance Company.” A number of these have popped up recently in the past few years, including several that are funded by VCs. Their pitch is that you pay them an annual fee, license any patents you have to them, and they will “protect you” against any patent litigation. Whenever I hear this pitch, all I can think about is Al Capone walking the streets of Chicago going door to door offering “protection” to all of the local businessmen if they will pay his vig every week.