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Patents in the Real World

Written by: Henry R. Nothhaft
Veteran Entrepreneur & former CEO of Tessera, Inc.
Co-author of Great Again: Revitalizing America’s Entrepreneurial Leadership
Posted: October 10, 2010 @ 7:58 am
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Patenting, like politics and religion, tends to bring out the true believer in some people.

Simply mentioning the word “patent” at a technology gathering, for example, is likely to produce an absolutist harangue from someone about why intellectual property is either the single greatest innovation enhancer in human history, or conversely, the most perverse economic evil ever devised by man. For some people, it’s all black and white when it comes to patents.

Even a seemingly-inarguable fact like the 2008 Berkeley Patent Survey’s finding that most entrepreneurs find patents helpful in attracting financing for their startups can lead some anti-patent activists to suggest that perhaps entrepreneurs aren’t capable of accurately assessing their own experience with patents and are instead simply the victims of a collective delusion.

So I propose to dispense with the usual histrionic theorizing about patents and instead look at the very practical role they have played in my 35-year career as a high-tech entrepreneur, investor and CEO. I had a front-row seat, after all, to some of the most exciting innovations of the post-World War II era, including the invention of interactive computer networks, voice mail and multiplexed voice-data communications, the Internet, mobile telephony and smartphones, software as a service, and new semiconductor miniaturization technologies that enable the creation of ever-smaller cameras, cellphones and other electronic devices. And patents certainly played a greater or lesser role in the development of all of these new industries.

But looking back, what strikes me is the surprisingly-variable role that patents played in the growth and success of the half-dozen trailblazing startup companies that I helped lead. For these startups, which collectively created more than 2,500 jobs, I raised approximately $1 billion from strategic and venture investors (who ended up with $3 billion in returns). And in the majority of cases, owning patents proved to be crucial to the funding and commercial success of my startup.

But this wasn’t always the case. In several startups, patents were almost completely irrelevant to either the financing or the ultimate fate of the company. Understanding why this was so may offer some insights into both the value and the limitations of patenting.

My first C-level job was at Telenet, the world’s first packet-switched communications network and the first to offer email service, called Telemail. The company was the brainchild of Dr. Larry Roberts, the Defense Advanced Projects Research Agency (DARPA) researcher who in the late 1960s had designed and led the project to build the world’s first interactive computer network, called ARPANET. While still at DARPA, Roberts approached AT&T about taking over the network that would eventually become today’s Internet.

“I tried to get AT&T to take over the network, but they refused,” Roberts recalls. “This was a major decision on their part, and it was a disaster for them. I told them I’d give them the whole network, and they could charge DARPA for it while they built it up for commercial use. They had this big committee of executives consider the idea, but they eventually came back and said, ‘It’s not compatible with our telephone networks or our philosophy.’”

This is not the first time, of course, AT&T discounted the possibilities of new technology. A few years earlier, a similar high-level AT&T committee had studied the commercial potential of cellphones and concluded there would never be enough users to build a real business from it.

So Roberts launched his own carrier, which he called Telenet, in 1973. The startup received funding from the then newly-emerging venture capital industry — the only other startup that received venture funding that year was Federal Express — and executed a successful IPO a few years later. It was acquired by GTE in 1979 and became the data division of Sprint.

Interestingly, patents played absolutely no role in either the rollout of packet-switched communications networks or in the success of Telenet. Roberts explains why:

“We had already invented packet switching technology back at DARPA, so it wasn’t patentable by Telenet,” he notes. “Also, our X.25 packet-switching protocol had been adopted as a standard, so patents would have actually slowed its adoption. Finally, patents just weren’t important to the investors. We intended to commercialize this exciting new packet-switching technology, and the plan was simply to move fast and build acceptance as a data carrier.”

So there you have it. The first major public data network — built around packet-switching technology created in government research labs — did not require patents for its success.

Patents played a more important, albeit still mixed, role during my first CEO position as the head of David Systems, a venture-backed company that pioneered the convergence of voice and data. We developed a proprietary technology that enabled the transmission of voice, data and Ethernet over a single twisted pair of wires, which was quite revolutionary in its day. And our patents on that technology definitely helped to attract investors. But those patents could not produce commercial success when the marketplace ultimately chose a different (10BaseT) version of Ethernet. We eventually sold David Systems to Chipcom for a modest price.

My next venture was Concentric Networks, the first nationwide Internet service provider with a guaranteed latency backbone, where I was CEO from 1995 to 2000. I raised Concentric’s $10 million first round of venture financing from Goldman Sachs and Kleiner Perkins, with the famed Sun Microsystems founder Vinod Khosla the lead investor. And I led the company’s explosive growth to 1,600 employees, a $350 million revenue run rate, and a successful IPO in 1997 that raised $70 million. The 6th fastest-growing public company in America in 1999, Concentric won the Best ISP Award and the Most Innovative ISP Award at the Interop trade show that year. In 2000, we were acquired by Nextlink (now XO Communications) — whose CEO at the time, Dan Akerson, is now the CEO at General Motors — in a transaction valued at $2.5 billion. I served as vice chairman of the board for a year after the merger.

Concentric is an interesting case when it comes to patents. As an ISP, we obviously saw ourselves as a service business and therefore didn’t patent as heavily as startups did in other tech sectors. Nonetheless, one Concentric patent for our “clustered hosting architecture” proved to be vital, not only in maintaining our market advantage and preventing rivals from copying our advanced technology, but also in our marketing strategy. As all of our PR at the time noted, “Concentric is the only solution awarded a U.S. patent for its Web clustered hosting architecture — a unique platform designed to deliver superior performance, reliability and security. We’re not just ‘one of the crowd’ of hosting providers competing on low price and traditional solutions.”

Another important point: Our “Concentric Host” offering produced much higher gross margins than our other non-patented service offerings.

My next job after Concentric was as chairman and CEO of Endforce (formerly SmartPipes), a network security software startup, where I was involved as CEO and then non-executive Chairman from 2001 to 2005. Endforce was a pure software play, and although we applied for and received several patents and certainly touted these as part of our story to investors — the most prominent of whom was John Doerr, who financed Google and Amazon, among other iconic companies — I don’t believe in this case that patents were especially material either to the firm’s success or to anyone’s decision to invest in the company.

Danger, however, was a different story entirely when it came to the critical importance of intellectual property to the ultimate fate of the company. Danger was cofounded in 2000 by Joe Britt, Matt Hershenson and Andy Rubin, the latter of whom also went on to develop the Android operating system for Google’s new smartphone platform. We developed a highly-regarded smartphone, branded the T-Mobile Sidekick and the HipTop in different markets, that uniquely combined software as a service with online messaging and social networking services. It was especially popular among teens and young adults, and our integration of social networking with MySpace, the hot social network of the day, was way ahead of the curve at the time.

Shortly after I took over as CEO at Danger in 2002, however, investors grew concerned about the intensifying competition in smartphones generally and mobile email especially. So they demanded an independent legal opinion on the validity of our patents and the non-infringing nature of our technology before they would commit $36 million in Series D round financing.

That legal opinion cost us $100,000 and the diversion of significant engineering resources, both of which could have been put to use hiring more employees or intensifying our R&D efforts. But it did serve to mitigate the concerns of investors, who needed assurance that Danger had a sustainable advantage in this increasingly-crowded and competitive space.

But how reliable is that assurance when the patent office itself, as the ultimate guarantor of the validity of any patent, is crippled by a years-long backlog of unexamined applications and forced to use obsolete searching and examination tools? Danger was about to find out.

One of Danger’s key patents related to the swivel hinge of our iconic T-Mobile Sidekick cellphone. We applied for that patent in 2000 right after the company was founded, but it took seven long years before we finally got it approved by the USPTO. During that time, however, a very similar patent covering much the same sort of technology was issued to another company, and this other patent was eventually acquired by Wireless Agents, a patent holding company, which then sued us for infringement in 2007.

Suffice it to say that the whole situation was a mess that ended up costing us $3 million in legal and settlement costs. And the irony is that, in my opinion, neither Danger nor Wireless Agents should have ever received its patents because, as we later discovered, a major Japanese consumer electronics firm had filed for and then abandoned a patent on similar technology before either of us had. The U.S. patent office simply lacked the technological and human resources to uncover the Japanese prior art.

And therein lies a valuable lesson in the uses of intellectual property. Patents can often give a startup an edge in attracting investment and succeeding in the market. But an underfunded and dysfunctional patent office can also erase that edge — and even create a whole new genre of risk for any business whose funding or success hinges upon the validity of its patents.

In the end, however, our portfolio of 100 issued and pending patents proved to be a powerful (though by no means only) incentive for Microsoft to acquire Danger. Microsoft had tried for some time to improve its position in the smartphone market, and Danger provided them with a wildly-popular smartphone that had won numerous “product of the year” awards, had 1.3 million paying subscribers, and a revenue run rate of $100 million. Our user base was just as committed to Danger’s Sidekick in its day as Apple’s customers are today to the iPhone.

In acquiring Danger for $500 million in 2008, therefore, Microsoft got our revolutionary technology and virtually all of Danger’s key engineers, who had so brilliantly designed and executed that technology. But Microsoft also acquired one of the most thoroughly-vetted patent portfolios in the high-tech industry — no small matter for a company like Microsoft that spends upwards of $75 million a year defending itself against patent infringement suits.

Among the “tribal elders” of Silicon Valley, I have a reputation as a “fundable CEO” who can raise significant amounts of money for a startup. But I also have a fair amount of experience investing in and serving on the boards of startups other than my own. And here, too, my experience suggests that patents are sometimes of very great value to investors.

I served as an outside director of VMX, for example, an early voice mail company that had merged with a private voice mail firm, Opcom, founded by my old friend David Ladd. I can tell you that patents played a key role in the success of the newly-merged VMX, generating 10 percent of the firm’s revenues and most of its profits from patent licensing. VMX’s intellectual property was also a big draw for Octel, which in 1994 purchased VMX for $150 million.

Another startup whose board I served on was Ocular Networks, which made next-generation optical gear. Although Ocular did not have a large business, its optical networking technology was regarded as among the most advanced in the industry. And the patents filed on  that technology are what enabled Ocular to attract $10 million in venture funding. They also played no small role in the company’s exit. When Ocular was purchased by Tellabs in 2002 for $355 million, it was the largest venture-backed M&A exit of the year.

Looking back over my career, then, I can say that patents have often — but certainly not always — been a critical factor in either the financing or ultimate success (or both) of the startups with which I’ve been involved. All of my companies have been acquired — by Chipcom, Sophos, Nextel, and Microsoft — and in most, the intellectual property played either an important or an extremely important role in the deal.

It is also clear that during my career, patents have over time become increasingly important to startups — a trend reflected in the three-fold increase in patent applications over the last 20 years. Some argue that this surge in patenting reflects not an increase in innovation but rather merely the birth of a patent arms race. But this argument has been soundly refuted by economic researchers, who have proven that patents are a good proxy for innovation activity.

Besides, we know from history that America has witnessed similar upsurges in patenting in  the past. The mid-19th century years of the industrial revolution, the early years of the 20th century when the auto and aircraft industries were launched, the post-war boom years when the aerospace, semiconductor and early computer industries were being born — each of these eras witnessed a doubling or tripling of patent applications and grants over a 10-20 year period.

Clearly, whenever the U.S. has undergone an industrial renaissance during which new technology led to the creation of new industries and the reshaping of existing ones, patenting levels have risen dramatically. This is precisely the sort of economy-transforming renaissance that I have been privileged to be a part of during my career.

And the reason why patents become more important during times of great change is obvious once you look at the issue from the practical standpoint of the entrepreneur or investor. In every meeting I’ve had over the last 35 years with potential investors in one of my startups, one of the first questions asked — after “What is your product or service and why do you believe there’s a market for it?” — is “What is your sustainable competitive advantage?”

If you can’t answer that question convincingly, you don’t get the money. It’s that simple.

To be sure, patents are not the only keys to a sustainable competitive advantage. Many times a first-mover advantage will prove more valuable, as is true of many of today’s Web 2.0 software and social media startups. Other times, your advantage will lie in the unprecedented cost-effectiveness, user friendliness, or practical use-value of your new product or service.

But in most real-life business situations — at least as I have experienced them — your sustainable advantage will come from a combination of factors, including an early to market lead, best of breed implementation and execution, or strong patenting and trade secrets practices.

Bottom line, entrepreneurs should never treat patents as objects of worship or of disdain. They are simply one useful component of the successful startup’s toolkit — one that often but not always helps to create a sustainable advantage and assure your investors of a healthy return.

That said, however, it’s worth noting that in some industries a bullet-proof patent is as absolutely essential to success as oxygen is to human life.

Take the biotech startup Innate Immune, founded by world-famous Stanford immunologist Sam Strober and led by CEO Steve Perlman, the former director of clinical research at Genentech. Innate Immune has developed a radically new treatment for lupus, a devastating disease for which little help is currently available. But seven years after filing for a patent application, the USPTO has still not gotten through its backlog to approve it.

Without a patent to assure investors of market exclusivity, one after another round of venture and strategic investment has fallen through. Today Innate Immune survives on friend and family money while its new treatment languishes on the shelf.

It’s a shame, but you can’t blame the investors. Does anyone expect an investor to pony up the huge sums needed to commercialize a new medical treatment and gain FDA approval for it without at least the promise of market exclusivity and a healthy return that patents provide?

Of course not. That’s life in the real world.

And the real world is where we should try to keep our discussion of patents.

About the Author

Henry R. Nothhaft is a veteran entrepreneur and serial tech start-up CEO who has presided over the creation of 6,000 jobs and the return of billions of dollars to investors. Most recently Nothhaft was CEO of the semiconductor technology miniaturization firm Tessera, a post he left to speak out on issues of patent reform, job creation and economic development in the United States. He is the co-author, with David Kline, of the Harvard Business Press book Great Again: Revitalizing America’s Entrepreneurial Leadership.

24 comments
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  1. I was going to write this yesterday but got distracted.

    Anyway, I thougt this article was a great read. One of the things I think that many anti-patent advocates lack is something called “perspective.” Perspective comes from a breadth of real-word experience — not from the ivory tower or anecdotal evidence. This article, however, exudes perspective.

    Intellectual property is not a “one size fits all” proposition. Depending upon the market, the investors, the technology, the competition, intellectual may have great value or little value or something in between. The fact that intellectual property may not have value in certain instances does not mean that intellectual property has no value in all instances.

    One thing I do know, from my own experience, is that experienced CEOs who have taken multiple companies through financing put a considerable value on intellectual property.

  2. Henry,

    I echo JV’s comments. You wrote a really good article from “real world” experience. Even though I’m a patent attorney, patents are just one part of a start-up’s value package. If you pay attention only to the patents, and not the other package, you may come up short. Similarly, if you skimp on protecting your technology with patents, you may likewise let others “steal” your technology from under you, especially if those others are much larger competitors.

  3. Key Points: “Patents have often — but certainly not always — been a critical factor in either the financing or ultimate success (or both) of the startups” Nothhaft was invlolved with and in most of the companies that were acquired, the “intellectual property played either an important or an extremely important role in the deal.”
    Bottom line: Patents do matter to start-ups and, if start-ups are an important part of our nation’s economy, patents do matter to our nation.

  4. @JV
    “Perspective comes from a breadth of real-word experience — not from the ivory tower or anecdotal evidence”
    True, but there are lots of positions to experience, and even if you’ve been in a lot of them, you may still lack the complete picture.

    For example, all of Nothhaft’s companies were acquired. While this very well may have been good for him and the company buying his companies, large amounts of consolidation are often bad for markets, particularly regarding innovation and efficiency. Stronger IP and greater consolidation have a good degree of correlation. Perhaps a more unsettling trend is that IP seems to only breed stronger IP despite technological progress almost universally reducing the costs of producing IP, as well as distribution and production of the products which are protected by IP.

    Another example listed, Innate Immune, may be having trouble getting VC funding because they can’t get a patent to ensure a period of exclusivity to their treatment. I’m fairly sure, however, that the biotech market is not nearly saturated yet, so the patent system is probably preventing them from getting minor shares with existing unsaturated related markets while attempting to get a major share in their lupus treatment market through a first mover’s advantage and perhaps other methods. Worse yet, there may be another patented method that can be used in conjunction with their method for much better results, but licensing may not be favorable, resulting in patients not getting the best treatment available. That scenario at least presents some socially desirable outcomes such as a larger portion of the population getting treatment, especially since competitive markets tend to greatly lower costs and increase efficiency.

    It may turn out that we would still be better off with patents in various fields, but not acknowledging a more complete alternative only shows that not having patents is a negative thing for a firm in a market that has patents, not that patents are in and of themselves socially beneficial. The former is pretty much self-evident, although the degree of utility of patents to said firms may be debated from field to field.

  5. >> only shows that not having patents is a negative thing for a firm in a market that has patents, not that patents are in and of themselves socially beneficial.

    Well, of course. It’s kind of like saying that armies are only useful in a world full of other nations that have armies but are in and of themselves not beneficial?

    While I think @JV’s comment is nuanced and very two-sided — a trait often lacking in many discussions of patenting — I do think that he has perhaps underestimated the positive role patents have played throughout U.S. history in stimulating the invention and development of new technologies, new treatments, and new industries.

    As others have pointed out — indeed, as Hank and I ourselves pointed out here http://ipwatchdog.com/2010/06/01/was-thomas-edison-a-patent-troll/id=10829/ — the U.S. patent system was unique in the world when it was first created because it stimulated the masses of ordinary people without access to wealth to get involved in invention. Patents (and patent licensing) gave people without wealth a means to make a full-time career out of invention. And owing to our much-higher per capita patenting rates an the efficiency of our market for trading patent rights, this in turn led to America becoming the most technologically-advanced and economical;ly-successful nation on earth.

    So I do think there is inherently-positive value in a democratized patent system. But @JV is probably right that, as a practical matter, patents have even more value in markets where other patents exist.

  6. @David Kline
    “Well, of course. It’s kind of like saying that armies are only useful in a world full of other nations that have armies but are in and of themselves not beneficial?”
    A world where other nations don’t have armies is not plausible. A world where others don’t have patents would actually include most of human history.

    I wouldn’t say that patents are inherently positive even if they are democratic (by which, I assume you mean reasonably attainable by ordinary citizens without discrimination. If you mean something else, please clarify). The benefits to society of the patent system must outweigh the costs of it, and ideally, by as much as reasonably possible. The only ways to improve that are to (1) increase the benefits and/or (2) decrease the costs. This kind of system takes more than just fairness, but constant evaluation and adaptation as the rest of the environment changes and as we get more and better evidence. Successful companies need to do these things, and so does any patent system that has any hope of being useful. However, to do that, flaws need to be addressed and fixed, and the first step is acknowledging the flaws. When you see a patent system as inherently positive, it seems that you’d be much more likely to not address the flaws, or not address them as much. Furthermore, the problems that would be addressed would often be those that concern patent seekers, but not those of competitors (and market competition) or the public.

  7. Sorry, Bobby, I misread what your name was.

    But I totally agree with everything you said. Especially this:

    “This kind of system takes more than just fairness, but constant evaluation and adaptation as the rest of the environment changes and as we get more and better evidence.”

    And I would like to clarify that when I said patents were inherently “positive,” what I should have said is that they have *historically* played a positive role in this country.

    And that has been true in part because every so often the courts and legislators have recalibrated the compact between patent holders and society, and have fixed problems that have arisen in the system.

    That the three-fold increase in patent applications (concurrent with fee diversion) should have caused severe stresses in the system is not surprising.

  8. I think it’s fair to say that there are a lot of issues that need to be ironed out. For example, very little has been done on the matter of interoperability, which is very important to competition in high tech industries. Various standards organizations like IEEE and ISO require members to identify patents and licenses under RAND terms, but that doesn’t stop patent ambushes and ‘reasonable’ terms are not always so reasonable for small firms, which is where a lot of innovation comes from.

    The increased ability for networking has led to new forms of innovation, such as amateur professionalism, user innovation, and free and open source development. Great degrees of progress can occur in these areas not only when there is a thriving, profitable market, but in emerging markets that won’t provide serious returns for years to come. 3D printing would be a good example, and a good share the firms involved are not only not seeking patents for their innovation, but have extensive documentation of everything involved from hardware schematics to source code under a public license of some sort. Ensuring that patents don’t stifle this kind of environment is of great concern, but little seems to have been done to address it.

    There are also lots of areas with high rates of turnover and change, and a multitude of firms producing a multitude of functionally different product with relatively low costs for initial production. This raises serious problems with adequate prior art and obviousness that our current system isn’t well equipped to handle, as well as serious questions about the ideal term and scope of patents in different fields. I think that sub-20 year terms might be limited by some international treaties, which could unfortunately tie our hands at addressing such issues.

    Yet another concern is pharmaceuticals. Getting great medicines is important, but getting them out to lots of people is important as well, so we should carefully evaluate options that may result in a more favorable trade-off, like perhaps mandatory licensing to generics under a reasonable, statutory, capped royalty. FDA approval is a big burden, and the process itself may benefit from reforms that still give us safe medicine, but quicker and at a lower cost. Another problem within pharmaceuticals is the costs of derivative drugs with limited benefits. Even derivatives with significant benefits that could have been trivially accomplished in early research present a problem worth addressing. Take Claritin and Clarinex, which doesn’t even try to convince the consumer of a major difference, and the timing of the releases of Clarinex suggests that it was effectively an attempt to just get a sort of extension on a Claritin’s patents. The cost of getting a new drug to the market is estimated to be about a billion, and there is the time wasted by the USPTO and FDA in dealing with a redundant drug. This waste is an even bigger concern if taxpayer’s money was used in the trial process.

    Our patent system may be able to deliver progress even if these issues aren’t properly addressed, but I think fixing them would certainly be greatly beneficial at increasing the efficiency of our patent system.

  9. Good post. You raise a number of important points there.

    But to my mind, when I look at the most critical roadblocks to innovation in this country and the key reasons for the decline in America’s innovation leadership and living standards, the most important patent-related problem has got to be the backlog and dysfunction at the patent office. It is serious blocking startup formation and growth, and impeding the commercialization of who knows how many new products, services, and medical treatments.

    Combine USPTO dysfunction with the loss of the IPO market and burdensome tax and regulatory burdens on startups, and you’ve got a real crisis in innovation.

    It’s clear that only small independent companies — startups growing to the point where they go public — create the kinds of breakthrough innovations that lead to the development of whole new industries and millions of new jobs. Semiconductors, PCs, software, the Internet, and virtually every single other major new industry of the last hundred years have all been created by startups who became independent public companies.

    Hank notes that his startups were eventually all acquired. I’m sure he’ll tell you that had Danger grown its success in a pre-Sarbanes-Oxley environment, there would have been a much greater chance that it would have opted for an IPO rather than an M&A. As it was, it filed for an IPO in 2007 and spent $3 million just getting Sarbox compliant. What happened to its popular social-netorking smartphone once it was acquired by Microsoft — getting calcified until it was released as Redmond’s DOA “Kin” phone that was pulled from the market after only 48 days — is a metaphor for what’s wrong with a startup environment in which M&As are just about the only exit.

    M&As may be fine for founders and investors, but society pays a big price in tyerms of new job and industry creation when we have a crippled IPO market (92% of job creation, of course, takes place after an IPO).

    Not that I disagree with anything you daid, Bobby. I’m just pointing to issues that concern more even more.

  10. The backlog is certainly a problem, as a longer waiting period means that actions will be taken with uncertainty, and this uncertainty is disproportionately harmful to startups, both in regards to patent protection and patent threats. More examiners can relieve the problem to a certain extent, although I would say that is in many ways treating a symptom instead of the cause. The ‘war chests’ of the mega-corporations are often filled with applications, largely low quality ones at that, that aren’t really needed except for the fact that their competitors have similar war chests. Somehow altering this behavior to at least reduce the number of unimportant patents in what Gene refers to as the C-list would waste a lot less of everyone’s time and money. Improving the prior art issue for both applicants and the USPTO could also be very helpful. Using the Danger example, effectively the same patent was independently sought at least three times, which indicates a big problem with prior art and perhaps that the standard for obviousness may be too low. Had Danger and the other company known about this prior art, they probably wouldn’t have sought this patent and that would be at least two less patents clogging up the system, as well as having significantly less legal costs to Danger. Really improving the situation with prior art could very well take drastic overhauls (which will undoubtedly upset those who have trouble adapting), especially since more and more markets are becoming global and greater telecommunication has allowed smaller companies the ability to pop up and compete.

    I would also agree that excessive regulation can stifle innovation, especially if that regulation is harmful to startups, or even worse, disproportionately harmful to startups. Startups and small businesses are able to grow and adapt in ways that large corporations can’t. Large corporations have had the advantage of making certain things scale better through established networks and the resources to engage in expensive endeavors, but I would say that proliferation of broadband and various devices that can connect to the internet almost anywhere, as well as more extensive services by companies like UPS, have in many cases lowered the barrier to entry in these grand endeavors, allowing startups and small businesses to play an even more significant role, at least if the other factors are right.

  11. With regard to the “low quality” patents mentioned above, let me cite to something attributed to Edison: “To get a great idea, have a lot of ideas.” I’ve also read quotes by other prolific inventors stating something similar.

    I raise this point is that from my experience, it is very difficult to tell a low quality patent from a high quality patent at the time of drafting, prosecution, or even issuance. I’ve seen some patents that I wouldn’t think twice about if I were reading them as prior art — however, these patents have generated 7 and 8 figure sums for their inventors. I’ve also seen some very interesting and seemingly valuable patents that may never generate a dime for their inventors.

    My belief is that at the time of filing, the future of most ideas/technology is highly speculative and any attempt to weed out important ideas from so-called “low quality” ideas is folly. For example, who would have thought Spencer Silver’s patent to “ACRYLATE COPOLYMER MICROSPHERES,” U.S. Patent No. 3,691,140, would have generated the Post-It Note empire for 3M?

    Getting back to the initial quote, IP-savvy corporations try to create a culture of innovation within their workforce. You don’t create this culture, however, by being overly-restrictive in the applications you file. Creating an invention disclosure and working with a patent attorney for the first time can be a daunting task for many. Now imagine the enthusiasm by this same inventor for creating additional invention disclosures if the first invention disclosure was rejected for being directed to a silly idea – (e.g., a glue that really isn’t that sticky). Nobody like to be rejected, so if you keep rejecting potential inventions as not being directed to “high quality” ideas, and you’ll turn off those inventors to the idea of patenting their inventions or coming up with new ideas in the first place.

    As an anecdote, I’ve been told, in private, by inside counsel that a particulate idea wasn’t worth patenting but they wanted an application prepared anyway because they wanted to encourage more ideas from a particular work group in their company. I was at the very beginning of my career at the time, but that 30 second conversation has stuck with me.

    Granted, there is a value to having a “war chest” of patents. However, the greater value to filing more patents than less is the higher likelihood that one of your patents will be a game-changing patent that can redefine your business and/or the industry.

  12. @JV
    Edison has often said things to that effect, although Tesla basically said that Edison wasted 90% of his labor by not properly applying proper theory and calculation. Brainstorming can be useful, but I don’t think the USPTO is the proper venue for such an activity.

    I’m not saying that only what is immediately seen as blockbuster ideas should get patents. In fact, it’s got more to do with obviousness than utility (the glue for post-its was seen as lacking in the latter, not the former), and there are a lot of ideas that aren’t anywhere near innovative, so reducing the escalation of MAD would be favorable. James Gosling recently noted that after Sun got sued for what they felt was an obvious patent, they were seeking patents for defensive purposes, and made a unofficial contest out of how low they could set the bar and still get a patent, which apparently was very, very low.

    As for the morale issue, I think that could reasonably be addressed within an organization, and with a much tighter feedback loop. If the company rewards employees who produce useful ideas, they can do so directly, quickly, and in a much more meaningful way. Some ideas may be very useful in the limited circumstances of an organization, or even just a group within an organization, but not that useful elsewhere. Some useful ideas may not even be patentable subject matter but still useful to the organization. While the true value of an idea may not be immediately realized, I doubt that basic reviewing of the idea will take anywhere as long as it takes the USPTO, and the originator of the idea can simply receive a bonus or a share from the money saved or made from that idea during a certain period of time. Now, some of these ideas could be used for patent applications, but wasting everyone’s time is not productive. The hundred clearly junk patents a company files can slow down the approval for the single game changer.

  13. “Tesla basically said that Edison wasted 90% of his labor by not properly applying proper theory and calculation.” They were rivals — do you think he would talk about Edison in glowing terms?

    “made a unofficial contest out of how low they could set the bar and still get a patent, which apparently was very, very low”
    You don’t work with the Patent Office much (if at all) I assume. I have a couple hundred active patent applications I’m prosecuting right now. To get anything out of the USPTO is like pulling teeth.

    As for obvious patents, the term “hindsight is 20/20″ comes to mind. Many things look easy once someone pointed out how it was done, and it is easy to reconstruct how they got from point A to point D (i.e., by using points C and D).

    “wasting everyone’s time is not productive.”
    Whose time is wasted? Applicants pay for an examination — they don’t get those for free. The vast majority of patents never get asserted or even licensed. Moreover, most companies don’t to product clearance searches (i.e., a search of issued patents to see if they might be infringing) before introducing a new product. The average businessman is blissfully unaware of patents.

    Eliminating 9 out of every 10 patents on the basis that they are junk merely means that the USPTO’s budget will be reduced by 90%. Reduce the number of patent applications and the USPTO will simply reduce capacity (i.e., by laying off examiners). There are deeper issues to address at the USPTO before the backlog will be brought down.

    Also, getting back to my point as to the predictability of technology, I wish anybody the best of luck in guessing whether or not a particular invention disclosure is going to make a company money or not. Sometimes simple, mundane ideas become the standard that everybody uses for decades whereas revolutionary new technoloy may be superceded by even more revolutionary new technology within a year.

  14. “They were rivals — do you think he would talk about Edison in glowing terms?”
    They are saying the same thing about how Edison worked, which was essentially brute force. Tesla was almost certainly brighter than Edison, and I think the statement puts . Besides, if brute force were the way to get progress, then innovation would come from those capable of brute force instead of a proper analysis, but there’s generally a consensus that dollar for dollar, small companies are more efficient. It’s also strange that Tesla goes largely unmentioned by patent folks, while Edison is brought up continually. Tesla had some eccentricities, but he didn’t fund the development of the electric chair to show the danger in his rival’s form of electricity because he couldn’t compete on technical means.

    “Whose time is wasted?”
    Basically everyone involved, since nothing productive is being done. The patent examiners, who can only examine so many applications a year. The patent lawyers, who could be spending their time on other applications. The listed inventors could probably spend their time more effectively on actually creating new ideas. If a lawsuit is brought over such a patent, then the courts and the lawyers of both sides could spend their time better.

    “The vast majority of patents never get asserted or even licensed”
    Then it seems that the vast majority of patents are dead weight.

    “You don’t work with the Patent Office much (if at all) I assume. I have a couple hundred active patent applications I’m prosecuting right now. To get anything out of the USPTO is like pulling teeth.”
    Apparently, it was quite easy for Sun employees at the time. Gosling claimed his application was very obvious, but he wasn’t even the winner. Perhaps they weren’t getting all of those literally joke patents through, instead relying on getting perhaps 1 out 10 horribly obvious patents through, but they got some through nonetheless.

    “Reduce the number of patent applications and the USPTO will simply reduce capacity (i.e., by laying off examiners)”
    I’m not intimately familiar with the economics of applying for a patent, but I seem to recall a good share of the costs coming after the application. If we are dropping mostly the applications that don’t result in patents, which in turn result in further funding of the USPTO, then you are getting more money per application if patent quality is higher. More money per application would theoretically result in more examiners per application and less backlog, with no loss in innovation. I suppose at some point, basic administrative costs start to throw things off, though.

    “As for obvious patents, the term “hindsight is 20/20? comes to mind. Many things look easy once someone pointed out how it was done, and it is easy to reconstruct how they got from point A to point D (i.e., by using points C and D).”
    Yes, but some things are obvious before someone pointed out how it was done, and those are what is the concern.

  15. Bobby — for all that you’ve written, you’ve danced around my major point — which is that predicting the where technology will be 5, 10, 15 years down the road (and thus, predicting what patents are going to be valuable or not) is an extremely difficult process.

    If you can prove you’ve got the talent to identify technology that will be valuable 5 or 10 years down the road, let me know. We can make a killing on the stock market and/or by buying patents on the open market. If you really have this talent, making couple hundred million between us is definitely doable. This offer, however, is not really genuine because you cannot take me up on it.

    There are a great number of unasserted/unlicensed patents because many of those patents went down a dead-end technological evolutionary path. If the inventors had the vision to see that this technology wasn’t going to go anywhere, they likely wouldn’t waste their time.

    FYI — the alleged fact that there are some inventors who don’t take the process seriously should not be indictment against the entire system. Analysis by anecdotal stories is poor analysis.

    “I’m not intimately familiar with the economics of applying for a patent.”
    Not very complicated, which means that I can assume you have no familiarity with the patent system.

    “If we are dropping mostly the applications that don’t result in patents …”
    Ask for a job at IBM or Samsung (i.e., some of the top corporate filers). If you can accurately predict what applications won’t result in patents, I’m sure they will give you a 7-figure salary for all the money you will save them. At this point, I think we have long taken a departure from reality, but then again, your comments have led the way.

    ” Yes, but some things are obvious before someone pointed out how it was done, and those are what is the concern.”
    Then become a patent examiner. They are hiring and the pay is quite good. My guess, however, is that once you’ve faced with the limitation of not being able to rely upon prior art that doesn’t predate the filing date of the application, you’ll find things a lot tougher than you could ever imagine.

  16. I’m not claiming that I can predict winners and losers. I’m saying that there are many obvious and incremental changes that could avoid being filed for. These corporations know that it is an incremental change, and they seek the patent anyway, generally because their competitors are doing so, which makes not having such patents a liability. The number of patents they apply for is virtually a quota that they aren’t going to miss by much. While the rate of technological progress can in many cases be predicted to an incredible extent, almost entirely independent of the environment in which said progress happens, accurately predicting the number of ideas that an individual firm will produce is nearly impossible because it might come from many small ideas or a few big ideas.

  17. “I’m saying that there are many obvious and incremental changes that could avoid being filed for.”

    If it is so obvious, become an inventor yourself. Given time and experience, you may be even write the applications yourself (not recommended but possible) to save attrney fees. After awhile you can start licensing all of your obvious, yet patentable inventions and earn millions upon millions of dollars. if it was that friggen easy, then that is what you should be doing.

    You’ll have to excuse my tone because too often I hear somebody, without any experience in patent law, exclaim that something is obvious without knowing in the slightest what they are talking about. As a first hurdle, if they are unfamiliar with patents (as you ‘obviously’ are) I can assume with 6 signma confidence that you don’t understand the difference between the claimed invention and what is disclosed in the specification. As such, you don’t even know what you are talking about when you say that XYZ patent is obvious because you don’t know what is being claimed. I’ve read the anti-patent propaganda on slashdot.org to know that the average software geek, when looking at a patent, really has no idea what the invention is about. They look at the drawings, read the abstract, and assume that the patent is on something that was already done years ago. What they don’t realize is that most of what they read is a discussion of old technology, which is needed to the flesh out the invention and provide context to what has been invented. Some patent attrneys do a good job of highlight what is new, but oftentimes, it is buried in the specification and it takes some work to figure it out.

    As another point, there are very few “revolutionary” ideas and/or patents out there. The expression the “devil is in the detail” when it comes to technology. Too often, patents on revolutionary ideas don’t yield much because it can take decades before a technology to be refined enough (i.e., those incremental changes) to be really valuable. Often times, those incremental changes take something from “nice idea, but what can I use it for?” to “wow … that is a near application of ABC principle.”

    “The number of patents they apply for is virtually a quota that they aren’t going to miss by much.”
    If it is a quota is that because their budget only permits so many applicaions to be filed. Even the top filers cull the herd before filing.

  18. “If it is so obvious, become an inventor yourself’
    I don’t find that appealing. Being filthy rich isn’t a concern to me, and I don’t think I would feel good about myself gaining wealth through means that I find unethical.

    Now, there are lots of mistakes made by those harshly examining patents. The difference between the filing and issue date, the difference between the abstract and the particular claimed invention, and how specific what is covered is. That said, the fact that many misinterpret patents doesn’t mean that there aren’t lots of low quality patents or that even that the patents that they think are bad for the wrong reasons still aren’t bad patents. Bad patents do exist, and they are harmful to society in multiple ways. Not all bad patents are bad because they are obvious, some are bad because their area of coverage is too broad, and some are bad because the claimed inventor was not the first to have the idea.

    “As another point, there are very few “revolutionary” ideas and/or patents out there. The expression the “devil is in the detail” when it comes to technology. Too often, patents on revolutionary ideas don’t yield much because it can take decades before a technology to be refined enough (i.e., those incremental changes) to be really valuable. Often times, those incremental changes take something from “nice idea, but what can I use it for?” to “wow … that is a near application of ABC principle.””
    That’s actually a pretty strong argument against patents. Competition already breeds evolutionary ideas, and even Giles Rich, who practically saw patentable subject matter in the way his morning breakfast was arranged, has said that run of the mill improvements shouldn’t be patented because they will occur anyway don’t need the patent system to motivate them. As we understand the nature of innovation better, it seems more and more that innovation is generally the result of networks more than brilliant individuals and small, elite groups. This difference is notable throughout the entirety of human history, as civilizations that engaged in trade with other groups gained knowledge advanced much further and faster than those with little to no contact with other groups.

    “If it is a quota is that because their budget only permits so many applicaions to be filed. Even the top filers cull the herd before filing.”
    That would suggest that IBM has some idea of the chances a patent has, and if we can somehow encourage them to apply a bit more scrutiny, we can cut down the number of patent applications with a minimal impact on innovation.

  19. “I don’t find that appealing. Being filthy rich isn’t a concern to me, and I don’t think I would feel good about myself gaining wealth through means that I find unethical.”
    Ahhh, to be young and naive again. Let me tell you, there are few things in this world that people do to make money that somebody hasn’t considered to be unethical. The US patent system has been around for 200 years and finds direct support from the US Constitution. If you have a problem with the patent system, take it up with the Founding Fathers.

    “That’s actually a pretty strong argument against patents. Competition already breeds evolutionary ideas, and even Giles Rich, who practically saw patentable subject matter in the way his morning breakfast was arranged, has said that run of the mill improvements shouldn’t be patented because they will occur anyway don’t need the patent system to motivate them.”

    Really, why does every country of any significance have a patent system? There are countries that have monarchies, democracies, and all sorts of forms of government managing their countries a myriad of different ways, yet they all have patent systems. What does that tell you? You would think that if your argument had any merit that some country, looking to be the safe haven for innovators everywhere, would have abolished their patent system.

    There is a BIG difference between breeding evolutionary ideas and raising those evolutionary ideas and then bringing those evolutionary ideas to market. In a world without patents, evolutionary ideas die after being hatched. Who wants to raise chickens when anybody bigger and stronger than you can come along at any time and take your chickens without paying for them? In a communist society that may be OK, but I thought we put communism, as a viable means of distributing wealth, out to pasture a long time ago.

    “This difference is notable throughout the entirety of human history, as civilizations that engaged in trade with other groups gained knowledge advanced much further and faster than those with little to no contact with other groups.”
    Aka “cross pollination” of ideas. The major idea behind the US patent system is to foster the publication of those ideas . Most inventors tend to be very secretive about their ideas. In a world without patents, inventors will be less likely to share their evolutionary or revolutionary ideas at in initial stage because if they haven’t yet commercialized their idea so as to get a true first-mover advantage, which often-times takes years. However, with a patent system in place, all kinds of ideas (revolutionary and evolutionary) can be talked about by the inventor(s) without fear that somebody else will take their idea. If there is one thing I know about inventors is that most have a very strong attached to THEIR idea and nothing riles than up more than somebody else taking their idea and claiming it as their own.

    You seem awfully altruistic with other people’s ideas. Then again, you aren’t giving anything away that you’ve worked for. You just want to live off the fruits of somebody else’s labor. My guess is that you are part of Generation Y, who grew up in the age of free music, free movies, free software, etc. As such, by nature, you are offended by paying for somebody else’s intellectual property when it easy just to take it. The fact that technology has allowed for intellectual property to be easily stolen doesn’t make it right.

  20. “doesn’t make it right”

    One should eschew the dangling pronoun.

    JV:
    Just ribbing you there. Actually you are doing a good job of going toe to toe with Bobby.
    Are you an inventor in your real world life?
    It sounds like you’ve been there and done that.

    People who have never tried to bring even the simplest of product to market have no idea of what it really takes in the real world. It’s all fun and games as long as the other person is doing it and you are just riding along on the coat tails.

  21. @JV
    “The US patent system has been around for 200 years and finds direct support from the US Constitution. If you have a problem with the patent system, take it up with the Founding Fathers.”
    The Constitution mentions patents directly, but it makes no requirement and is the most limited of the clauses in section 8. Having more restrictions built in than declarations of war expresses a good degree of skepticism.

    “You would think that if your argument had any merit that some country, looking to be the safe haven for innovators everywhere, would have abolished their patent system.”
    The problem is that the powerful like to do anything they can to keep power. American literacy did grow largely from ‘piracy’ of English and other European books and inventions disseminating quickly and cheaply, but as power became more consolidated, laws and treaties were push to continue to consolidate that power. Now, if you don’t have patents and/or don’t enforce IP, you are subject to unfavorable trade relations from most of the Western world, which turns out to be far more influential than IP laws.

    “In a world without patents, evolutionary ideas die after being hatched.”
    We have evolutionary ideas that survive, and they aren’t supposed to be eligible for patents. Ideas that have a small cost for initial creation are easy to get a return on investment on, that is an obvious, evolutionary idea. Where patents are supposed to step in is in fostering the ideas that have a high cost for initial creation and are difficult to quickly get a return on investment on, which would be more likely to be a revolutionary idea, although where one draws the line is subjective. If society progresses, the cost of creating new ideas should drop, meaning that a patent system that does anything short of making society regress should theoretically bring us to the point where virtually all ideas have a low enough production cost to not need patents.

    “Who wants to raise chickens when anybody bigger and stronger than you can come along at any time and take your chickens without paying for them?”
    There is no taking. There is copying. Even children can comprehend the difference. If someone copies my chickens, I am only going to be harmed by the fact that they can compete in chicken production, thus lowering the market value of my chickens. However, while the theft in your example is looked down upon, the competition in my example is the basis of modern economics.

    “As such, by nature, you are offended by paying for somebody else’s intellectual property when it easy just to take it. The fact that technology has allowed for intellectual property to be easily stolen doesn’t make it right.”
    You know, it’s funny, seeing as Disney, one of our largest holders of IP in the world, made tons of money off of works that were in the public domain, which are ideas that are ‘legally stolen’. Of course, when it came time for their IP to expire, they lobbied Congress for change that brought the public domain back another 20 years despite no possibility of retroactive extension creating more works. If anybody has a sense of entitlement, it’s the IP giants. And again, the use of the term ‘stolen’ implies a flawed understanding of reality.

  22. A point I have yet to make, as I keep forgetting. I must say that in the couple hundred of years since the US has had a patent system, you can easily see how innovation has lagged here as opposed to the rest of the world. Historically speaking, it is easy to see how the U.S. patent system has certainly stunted the growth of our economy and innovation as a result of the patent system. We certainly should join the rest of the enlightened world and ban patents and intellectual property altogether.

    “There is no taking. There is copying. Even children can comprehend the difference. If someone copies my chickens, I am only going to be harmed by the fact that they can compete in chicken production, thus lowering the market value of my chickens. However, while the theft in your example is looked down upon, the competition in my example is the basis of modern economics.”

    Let’s see, the big conglomerate plans on giving away the chickens that you’ve stolen from the chicken farmer as part of a plan to sell full-functioning farms to individuals. The conglomerate tells people that once they’ve bought the farms, the conglomerate will supply the buyers with pigs, goats, cows, sheep, etc., that they pilfered from somebody else. As the farmer buying the farm, you are happy. The conglomerate selling the farms are happy. However, the person who actually raised those chickens from eggs isn’t happy because they were going to sell their chickens for money. However, since the big conglomerate is giving away the chickens for free, all their good work goes to nothing. You are nothing but the farmer who wants the chickens for free.

    Competition doesn’t mean dick when hard work goes unrewarded. This is a concept that even children can comprehend – you do something valuable, you should be rewarded.

    “The problem is that the powerful like to do anything they can to keep power.”
    Patents and other forms of intellectual property allows just a single person to compete with the powerful. Try being an inventor in a world without patent rights and try to take a valuable idea to market. There is absolutely no way you could compete with the big dogs. Once they notice the value of your product, there is no way you can out R&D, produce, and market that product. You’ll be nothing more than a footnote in history … if history is even that kind. Today, a single inventor can take on the likes of Microsoft, Apple, Sony, whomever and be rewarded for their contribution. Take away patents, and they get nothing.

    “is the most limited of the clauses in section 8.”
    Really??? You think the patent clause is particularly limiting? You aren’t much of a constitutional scholar.

    ” You know, it’s funny, seeing as Disney, one of our largest holders of IP in the world, made tons of money off of works that were in the public domain, which are ideas that are ‘legally stolen’.”
    Ah no. If it is in the PUBLIC domain, it isn’t stolen. So long it is in the public domain, you can use these works as well. Feel free to do whatever you want with the Mona Lisa, the works of Michelangelo, Rembrandt, the brothers Grimm. They are all in the public domain. Of course, you don’t want to worry your little head about actually creating something new – you just want free reign to use profit from the sweat of somebody else’s labor.

    ” We have evolutionary ideas that survive, and they aren’t supposed to be eligible for patents.”
    And where did you get this statement from, the anti-patent manifesto because there is no such prohibition in the US patent laws against evolutionary ideas.

    “The fact is that one new idea leads to another, that to a third, and so on through a course of time until someone, with whom no one of these ideas was original, combines all together, and produces what is justly called a new invention.” – Thomas Jefferson, Director of the 1st U.S. Patent Board -

    ” Where patents are supposed to step in is in fostering the ideas that have a high cost for initial creation.”
    No – the intended bargain is disclosure by the inventor for rights to invention. There is no “startup cost” test written into the patent laws – wholly unworkable. The “race to the Patent Office” breeds more and faster innovation. Who wants to spend the time developing the next great idea (or even moderately good idea) when you are going to be rewarded for it? You may work on it in your spare time, but it isn’t going to be a priority. However, if you were going to be rewarded for being first, and as a result of that reward, you knew other people were also trying to get the same reward, you work harder and faster – this promotes innovation.

    “If society progresses, the cost of creating new ideas should drop, meaning that a patent system that does anything short of making society regress should theoretically bring us to the point where virtually all ideas have a low enough production cost to not need patents.”
    Ahh utopia, the communists thought they created it. Anyway, let me know when we get there. Hopefully, I’ll be around when that happens, but I don’t think I have another couple hundred years in me.

  23. “Are you an inventor in your real world life?
    It sounds like you’ve been there and done that.”

    No, I’ve been in this business long enough to know many entreprenuers and their passion has rubbed off on me. I also have a strong business background (besides the engineering and legal background) so I also understand the business-side of intellectual property.

    Although I could be an inventor, inventing is hard. Being a patent attorney, you soon find out that EVERYBODY you talk to has an idea that they would like to get a patent on. Most of them, however, have no idea how to go about getting a patent. Moreover, those that are motivated enough to actually get a patent have enough savvy to bring a product to market. Still further, most of the ideas I here have absolutely no chance of making money. Being an inventor is a big gamble. So many ideas don’t pan out, and you can spend a lot of time/money spinning your wheels. It is somewhat like drug research, there are a lot of deadends before you find something promising.

    There are those that say everything (or most everything) is obvious. However, I don’t see them out filing for patents. There may be a lot of unethical things in the world, but filing for a patent, which means disclosing something that can improve society, as a whole, is not unethical.

    I’ve said this before and I’ll say it again, the common man loves patents because they see it as a type of lottery ticket — it can take an average person and elevate them beyond their dreams. As a result, I very much doubt if there will ever be a public outcry to abolish patents. That being said, all the words I have contributed to ths blog really doesn’t mean much as our discussions are academic because the status quo isn’t going to change in my lifetime.

  24. Thanks so much for this candid and even-handed account of your personal experience as to the necessity and helpfulness of patenting innovations. As you note in this article, most people discussing patents are either rabidly for or rabidly against them in (seemingly) nearly all circumstances. It’s refreshing to hear from an expert who has a more nuanced view. A hat tip, also, for noting that inefficiency at the USPTO can adversely affect the value of a patent obtained; it is, indeed, a continuum, obliging all parties involved to act with diligence. Kudos.
    http://www.fastcompany.com/1693197/why-apple-could-pay-more-than-625m-for-cover-flow-patent-infringement