Patents – The Rights We Love to Hate

A Misunderstood Symbol of Control, Patents are the Rodney Dangerfield of Assets: “They Can’t Get No Respect” –

Recent record prices for patent sales and shares of selected technology businesses (e.g. Nortel, Motorola, InterDigital) have turned up the volume on angry anti-patent rhetoric.

Patent owners of all shapes and sizes, including some operating companies, continue to be described in a variety of unfavorable terms, some of them unprintable.

On balance patents do much more good than harm, and the U.S. patent system, far from perfect, works well. It is responsible in part for spawning the most innovative companies in the world.

Many software developers, academic economists, CEOs and others, clinging to half-truths nurtured by myths and self-interest, believe that patents are anti-competitive, impede progress, tax consumers and line the pockets of lawyers.

“A Bull Market in Tech Patents, an article by Steve Lohr, veteran New York Times technology reporter, served to perpetuate the anti-IP myth. In it Lohr suggests that the patent gold rush has a darker side. “It is diverting money from innovation from industries crucial to the economic future of the United States.”

This is utter nonsense. Conclusions drawn in the article are likely based in part on what companies Lohr covers and analysts like Harvard professor Josh Lerner are telling him. Lerner is co-author of Innovation and Its Discontents, a strangely myopic book which I reviewed (skeptically) for Nature Biotechnology. It suggests that patents have become too strong and are destroying businesses, innovation and endangering lives.

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What is it with patents that raises the ire of otherwise intelligent people?

One reason is that patents are highly abstract, “exclusive” rights that on occasion can stop speeding products cold. 

Patents are complex to understand, difficult to validate, dangerous to monetize, frustrating to value, and expensive to acquire and enforce. 

Their performance is almost impossible to measure. Infringing a patent often is easier and much cheaper than licensing it or conducting costly R&D to design around. And then the infringer has to get caught and prosecuted. For some businesses patent infringement settlements are like a speeding ticket. They pay it if they have to and go on their merry way. They may still be ahead billions of dollars had they done the the right  thing.

I am not a particular fan of Intellectual Ventures, a NPE which has acquired more than 35,000 patents. A recent NPR broadcast, “When Patents Attack,” is dramatic radio entertainment but shoddy journalism. It was aimed at exposing the evil patent system as embodied by I.V. I am a big fan of This American Life, so their feeble expose hit home. What were they thinking?

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Often when a company believes it has the patents it needs to do business it does not. This can be painfully frustrating, and costly. It is the nature of business innovation, predating Alexander Graham Bell and Edison. Smart companies do their best prevent infringement by searching prior art and planning for the inevitable disputes. They also build a patent portfolio that can provide some leverage against operating companies. Frustration of this kind does not mean that invention rights are evil or counter to most Americans’ economic interests. The Founding Fathers thought IP rights served an important purpose, writing them into the U.S. Constitution before the right to raise and support a standing army and the right to declare war.

The fact that some companies are finally respecting patents is not only good for shareholder value, it can provide a boost to innovation. Now that the patent playing field is actually starting to level, some businesses are having trouble adapting A number of companies with abundant numbers of patents would still like to see them weakened, in general, and threats to their franchise diminished.

The pricing of the Nortel and Motorola patent portfolios got out of hand because some companies thought they could provide next generation mobile or 4G products and services without the necessary IP rights. They were wrong. Brand power is mighty, but it still is no match for the right patents. When businesses need to catch up quickly, the market extracts a pricing premium. Research in Motion paid for its IP mistakes in 2006 when it wrote a check for $612.5 million to settle an infringement suit. (Reportedly it could have settled for some $40m several years earlier.) Microsoft paid dearly in the 1990s for its mistakes, but had the luxury of time to catch up.

Google did not. Facebook, LinkedIn and Groupon with a dozen or fewer patents each, will not be far behind.

Costly as it may appear, IT companies are learning that it is often more efficient to pay a premium for proven rights that they must have than spend billions, plus years of time, on hundreds of speculative inventions and their questionable rights that may some day have value. The pharmaceutical industry is well acquainted with the need to conduct M&A along with its R&D.

Maybe there is a lesson here: A buyer really doesn’t know if it has overpaid until all of the accounting is in. For some cash-rich and credit-worthy companies, buying patents at a premium that will shape a market, slow competition or deflect litigation or a possible injunction is less lazy a decision than a prudent investment.

Those who encourage disdain for innovation rights because of some businesses’ lack planning or scruples (or both), or because independent patent holders today are better equipped to confront infringers, are doing innovation and commerce both a disservice.

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