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.