Just in case you didn’t know how I feel: patent trolls are a tax on innovation and are evil of the highest order.  ~ A VC

In a post entitled “How Patent Trolls Are A Tax On Innovation,” venture capitalist Fred Wilson states that “after 22 years in the venture capital business and countless hours discussing this issue, I come out on the side of less patent protection in information technology, no patent protection for software and business methods, and first and foremost the elimination of patent trolls.”

Like the troll of lore who lived under a bridge and extorted money from travelers, the so-called “patent trolls” are patent holders that do not make products but only threaten other companies with patent infringement lawsuits in order to extract money. (Ironically, Peter Detkin, former assistant general counsel at Intel is credited with coining this term and he now works for Intellectual Ventures LLC, a company that has been spending millions to buy up patents for licensing.)

It’s easy to see why Wilson feels strongly against patents.  He notes that there are currently three lawsuits pending against portfolio companies of his VC firms that are being brought by so-called patent trolls.  I think anyone under such attack would rightly feel that something must be amiss.  The article certainly garnered a lot of comments, mostly from people who agree with Wilson.  But are patents really so bad?  Aren’t patents what protect the markets of thousands of companies every day?

While Wilson makes the case for trying to protect the small inventor, he shows disdain for the solo inventor who does not commercialize a given technology because he/she “does not bring nearly as much economic value (and jobs) to our society as the entrepreneur who actually takes the risk, starts the company, hires people, commercializes the technology, raises the necessary capital, and builds lasting sustainable value.”   Thus, small inventors are not trolls if they are successful in commercializing the technology, raising capital, and building a lasting ACME company.  This leaves an awful lot of grey area full of companies that try but fail at commercialization.

In a convoluted bit of logic, Wilson concludes that the small inventor “can still get economic value from his/her patent, but it must be sold to an operating company that will use the patent to defend an operating business, not a financial investor who is just going to run around suing companies with impunity.”  Therefore, patent trollism is OK as long as it is performed by the inventor and not an intermediary.

Such an approach has some merit but what of companies and research institutes that exist primarily for research purposes?  Commercialization is not their mission.  Often, people do not realize that many of the important scientific advances came out of research institutions with no intentions of making commercial products.  Mosaic, the web browser credited with popularizing the World Wide Web, was created at the National Center for Supercomputing Applications (NCSA) is a state-federal partnership to develop and deploy national-scale cyberinfrastructure that advances science and engineering. NCSA operates as a unit of the University of Illinois at Urbana-Champaign.  Are universities then patent trolls?

Mark Lemley, Professor of Law at Stanford Law School, seems to distinguish universities from trolls on the premise that universities (generally) do not lie in wait until an industry has developed around a technology and then demanding a disproportionate share of royalties based on irreversible investments.  Having run a university technology transfer office, I can assure you that these offices generally are not even aware of how a technology is developing.  This is not to slight universities, it’s just that universities can have inventions from a thousand different technology areas.  No one could keep track of every industry.  That’s not to say that universities don’t sue others for patent infringement.  [As IPBiz points out, what about the University of Rochester Cox-2 infringement case?  Or Columbia University’s co-transformation patent-extending attempt?]

Lemley also points to the fact that most university licenses give the licensee not just protection from lawsuits but also provide valuable know-how. He sums this up as “University patent owners aren’t trolls in my view when they contribute previously unknown technology to society, rather than just imposing costs on others by obtaining and asserting legal rights over inventions independently developed by others.”

Ultimately, Lemley makes the point that it doesn’t matter what the entity is but, instead, we should focus on the bad acts and the laws that make them possible. Universities should use licensing for good instead of evil.  Note, however, that university patents are generally for very early stage technology. While universities account for 1% of patents on average across all fields, they account for 12% of all patents in nanotechnology and 18% of all patents in biotechnology.  This means that the early creators are critical to the development of new technologies even though they themselves do not make products.

Apart from creating what seems to be a two-tiered system of worthy and unworthy companies, Wilson makes the his legislative reform proposal as follows:

1.  Make the plaintiff pay the defendant’s legal fees if a patent infringement case is lost. This is similar to the English law system where the loser pays. The problem with this approach is that an individual with a valid claim against a large corporation can not afford to run the risk of losing despite any perceived validity to the claim.

2.  Patents and copyright should have a “use it or lose it” clause like trademarks.  This would presumably stop trolls by insisting that the patent holder make a product.  Wilson does not say how much “use” would be needed to prevent loss.

The fundamental error in most arguments against patents is the belief that anyone can sue anyone else for patent infringement based solely on a meritless patent and immediately get an injunction.  The plaintiff is thus able to immediately hold up the accused infringer for ransom.  This argument neglects the fact a preliminary injunction is proper if the plaintiff can demonstrate that it is likely to succeed on the merits at trial and that a combination of equitable factors favors granting the injunction.

It’s no question that patents (and so-called trolls) can be a problem in certain technology areas like high-tech where a single product might have thousands of individual parts covered by multiple and often overlapping patent claims.  In such a market, it can seem like a product can never escape litigation.  But we don’t want to throw out a system that has propelled the technological economy to amazing heights for the last 200 years.  We need to remember that in 20 years — a mere blink in human history — everything that is patented today will be freely available for everyone to use.  Forever.

It is likely that Wilson’s proposals are unworkable.  Perhaps a better solution then is to provide even stricter controls over the grant of preliminary injunctions.  A preliminary injunction is a remarkable power that can stop a competitor dead.  But, like weapons of mass destruction, should only be used in extreme cases.

The Su­preme Court’s decision in eBay Inc. v. MercExchange has already changed the standard for granting injunctions in patent infringement cases, increasing the bar and making it tougher for trolls to get them.  Let’s ensure it gets applied.

In addition, the best scenario would also ensure that patents are (mostly) valid to begin with.  This could be accomplished through a two-pronged approach at the level of the patent office.

First, raise the level of quality of examination at the patent office.  Despite the fact that the PTO claims it cannot hire its way out of a backlog, I’ve never seen an organization where hiring an appropriate number of high quality employees didn’t matter.  Just ask Circuit City.

Second, provide for better post-allowance review and challenge at the PTO level.  Currently, the validity of patents is handled primarily at the district court level.  While one can challenge patents through re-examination, the fear that the limited process will still allow the patent to issue keeps many companies from using this approach.  Allowing more third-party participation along with more complete elements of discovery could prevent many lawsuits.  Preferably, this would be coupled with a system that would stay any preliminary injunctions where the PTO finds a substantial question of patentability.

Many commentators have recommended that certain classes of inventions, like software and business methods, should be given a separate type of protection.  Suggestions range from a shorter patent period, e.g., 3-5 years, to a different class of protection like Creative Commons — perhaps with compulsory licensing.  Part of the problem with this approach is that it can be difficult to tell one type of technology from another.  Also, we are currently witnessing a convergence of biotechnology, nanotechnology and computer technology where neatly dissecting one technology from another will be quite impossible.  The inventions coming out of these new fields will give rise to patent claims dealing with blended and overlapping technologies.

Clearly, one person’s patent troll is another person’s champion of patent rights.

More at TPile.  See also patent economics.  Otherwise, consider if you even need a patent.

Related:   Injunctive Relief: A Charming Betsy Boomerang

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18 Comments

  1. […] Patent Baristas wrote an interesting post today on Are Patents A Driver of Innovation or Just a Tax?Here’s a quick excerpt Just in case you didn’t know how I feel: patent trolls are a tax on innovation and are evil of the highest order.  ~ A VC In a post entitled “How Patent Trolls Are A Tax On Innovation,” venture capitalist Fred Wilson states that “after 22 years in the venture capital business and countless hours discussing this issue, I come out on the side of less patent protection in information technology, no patent protection for software and business methods, and first and foremost the elimination of pate […]

  2. knock the trolls dead with a relatively inexpensive reexamination

  3. Worse. Patents are a monopoly (the original correct meaning of any government grant) that stifles innovation. All day the anti-trust division of the DOJ wastes time harassing Microsoft and others, when the government office down the street is giving out monopolies every day.

  4. Also, it’s ridiculous a government bureaucrat decides what’s innovative or non-obvious. Government is usually the the last to adopt any technological advancement.

  5. The Rank Infringer Class has spent so much time and money painting a cute picture of a troll so all the bloggers and media will write about it. You are a first class sucker.

    MercExchange had 40+ employees and three auction Web sites operating on the Internet when eBay came to us, asking to buy our patents. We allowed them a look into all our records, all our code and patent docs. They left, promising to get back to us with a price. Then, just a few months later, they moved into infringement and told us to screw off.

    A jury spent five weeks deciding that eBay was a RANK AND WILLFUL INFRINGER – in other words, they knew they were stealing our ideas and did it anyways. Instead of admitting they stole our idea, they spent $100 million on lawyers, lobbyists and PR companies to redefine infringement.

    Their thought: if we spend enough money, we can convince anyone of anything. They were right.

    Over 77 months of litigation later, we were finally paid for their infringement.

    Too late for our company, of course – the online auction window has closed. But that was eBay’s plan all along.

    Rich infringer Fred Wilson, who invested in companies with NO intellectual property protection, is just another guy trying to rewrite the rules to make more cash. Taking the eBay model, of course.

    And YOU and other people who do not research their topics – and call a competing company a troll because eBay told you to – are an example of why the patent bar is falling apart.

    If you insist on insulting people with names like Troll, at least have an independent thought to find a real offender. And saying: “Oh, except the universities” is a sophomoric attempt to talk your way out of insults taken from you namecalling.

    This is about Thomas Jefferson, not Meg Whitman or Fred Wilson. Remember Jefferson? Nah, I didn’t think so.

    Michael Caputo
    MercExchange

  6. […] Are patents a driver of innovation or just a tax?(Patent Baristas blog) […]

  7. Michael,

    I agree with you that “troll” is used purely to elicit an emotional response from the public. I did not mean to come across as agreeing with the troll claims.

    As you point out, it is easy and, should I say a natural reaction, for defendants in patent suits to use every litigation tool against anyone perceived as getting in the way of (their) progress.

    I think the best approach is to make settling such disputes more efficient.

    Stephen

  8. We need reform that takes the patent system back to it’s roots – giving the inventor an advantage in the commercialization of her invention. See 35 USC 200 (and read the whole thing).

    The mere enforcement of rights unconnected to commercialization is the root cause of the troll problem. All they need are rights to enforce, and they’re in business, which is why trolls are a tax – on businesses, consumers, and innovators.

    Connect the ability to enforce patent rights with commercialization/bona fide attempt at commercialization. Trolls will disappear overnight.

    “But my company/client doesn’t practice all of its patents…how is it supposed to realize value from the portfolio?” This is cost of doing business.

    We speculate on where the business may go, and file patents. If it doesn’t go there, you have other options – sell the patents to someone who *is* doing business in that area – your patent is truly valuable to them. Filing patents is always speculative…if it doesn’t pan out (biz reasons, claim scope change, non-allowance, etc.) then your speculation didn’t pan out, like any other risky investment.

    IMHO, most businesses would rather pay money for patents that don’t become commercialized than the fees charged by trolls. At least they got some value in getting to the patent that didn’t go commercial (learning from the invention, for example, may have spawned other ideas).

    The only value a company receives from a troll is a negative value – the value of not getting sued for infringement.

  9. David French writes:

    “Patents and copyright should have a “use it or lose it” clause”

    This used to be the law before various revisions of the Paris Convention outlawed it. (Revisions which were heavily sponsored by US delegates).

    Actually, these revisions outlawed mandatory “local working” as a condition for the existence of a patent right. There still is a residual power permitted under the Paris Convention for countries to pass laws permitting compulsory licensing where a patent owner has failed to establish “local working”.

    EBay vs MercExchange opened the door for different remedies in terms of injunctions. Effectively, this makes de facto compulsory licensing an alternative available under US law.

    Referring to patent validity and quality, though important, is a distraction from addressing the issue as to whether every patentee, no matter how they behave, is entitled to get an order shutting down an operating industrial activity. That is the issue which should be addressed when dealing with “patent trolls”.

  10. […] succeeding in their next venture-backed firm, compared with 23 percent for those who previously Are Patents A Driver of Innovation or Just a Tax? – patentbaristas.com 02/18/2009 Just in case you didn’t know how I feel: patent trolls are a tax […]

  11. “Make the plaintiff pay the defendant’s legal fees if a patent infringement case is lost. This is similar to the English law system where the loser pays. The problem with this approach is that an individual with a valid claim against a large corporation can not afford to run the risk of losing despite any perceived validity to the claim.”

    Not true. If the individual indeed has a valid claim, an NPE/investment fund will determine that and fund a lawsuit. The problem now is that settling with NPEs is cheaper than defending bogus suits. This needs to change.

  12. Mark,

    I agree that it could help weed out weak claims but I always worry about unintended consequences.

    Rees Morrison, of Law Department Management blog, indicated that he thought that the British system of requiring the losing litigant to pay the winner’s costs would lower legal costs. However, he noted:

    “But an article in the Economist (May 28, 2005 at pgs. 57-58) undercut my supposition, at least as to fees. First, since losing brings dire consequences, litigants spend more to avoid that fate. Second, plaintiffs’ lawyers since the late 1990s have been allowed to accept clients on a conditional (contingent) basis. If they win, they can claim a success fee from the losing side, amounting to a surcharge of up to 100% of their costs, which encourages them to rack up still higher charges. Finally, many victims of injury buy insurance that protects them against paying fees should they lose. Thus, they do not heed spiraling attorney’s fees.”

  13. Patents are the drivers of innovation.Although in our present system they are the drivers of intimidations and robberies against inventors.Do to the high cost of litigation trolls are our only hope of justice in the court system.

  14. Use it or loose it clauses are inovation retartive and promotional of inventor frauding. The act of conception must guarantee the monopoly for 20years or else the incentive to invent is destroyed.Corporations with shallow pockets control the money sources and want to pay nothing for inventions, and this will give them the opertunity to conspire to wait out the inventor to steal the invention for nothing.Refusal to deal legislation is whats needed.

  15. […] Pauschal lässt sich nicht sagen, ob der Gewerbliche Rechtsschutz Innovationen verhindert, schreibt Stephen Albainy-Jenei in seinem Blog. Sicherlich gäbe es Beispiele, die zweifelsfrei zeigten, dass in gewissen Bereichen […]

  16. […] off a recent discussion about the role patents play in fostering innovation (see: Are Patents A Driver of Innovation or Just a Tax?), it is fortunate that I’ve had a chance to read Michael Gollin’s excellent book on how […]