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Setting the Record Straight: Patent Trolls vs. Progress


Written by: Bob Zeidman
Zeidman Consulting
Software Analysis and Forensic Engineering
Posted: May 1, 2012 @ 12:09 pm Tell A Friend!

On April 12 an op-ed was published in the Wall Street Journal entitled Patent Trolls vs. Progress by Andy Kessler, a former hedge-fund manager. I would like to correct some inaccuracies. Mr. Kessler attributes Microsoft’s recent purchase of AOL’s patents and Google’s purchase of Motorola Mobility (presumably for its patents) as protection against non-practicing entities (“NPEs”) also disparagingly known as “patent trolls.”

First, no portfolio of patents will ever protect against an NPE. This is because an NPE, by definition, does not produce a product. In a patent litigation between two companies, the typical scenario is that company A owns a patent and attempts to license that patent to company B that it believes is infringing. Company B can pay a fee to company A or it can refuse to pay. Or company A may attempt to get an injunction against company B to prevent it from selling its product that incorporates the invention described by the patent.  If company A wants an injunction or requests a fee that company B refuses to pay, then company A will almost certainly take company B to court. At that point, company B takes some combination of three possible countermeasures. Company B can attempt to show that the patent is invalid. Company B can attempt to show that its product does not infringe the patent. Company B can countersue company A for infringement of some patent of its own. Typically after months of threats, legal maneuvers, and negotiations, the companies will settle on some payment from one company to the other. The cases rarely go to court. Now suppose that company A is an NPE. Company B’s third option of countersuing is not an option because company A produces no product and thus cannot infringe on any patent. Thus buying patents provides zero defense against an NPE, contrary to what Mr. Kessler asserts.

Mr. Kessler reaches back seven years to 2005 for the case of NTP v. Research-In-Motion, the famous case against the Blackberry manufacturer, for his justification and concern about NPEs, but in recent years it is the major players in high tech have been suing each other over patents. The companies in the news for patent sales, patent purchases, and patent lawsuits are not NPEs but the high tech goliaths including Google, Apple, Microsoft, Motorola, Oracle, Facebook, AOL, and Yahoo among others. Purchasing patent portfolios can be used defensively against other companies and just as easily these patent purchases can be used, and are being used, as offensive weapons against competitors. Patent trolls are simply the bogeymen used by large companies to convince politicians to “reform” patent laws.

Mr. Kessler argues that the extension of the patent term to 20 years, enacted in 1995 to make U.S. patent law consistent with the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), is a problem because “in technology things move a lot faster.” I do not understand the reasoning behind this complaint. If technology moves so fast, then a patent becomes worthless long before the term is over. What does it matter if a patent is valid for five years or 50 years if the patent is worthless after five years?

Mr. Kessler states the “we have to stop allowing juries to establish the value of patents… the market… [should] determine value. ” In fact, the market does determine value. The majority of patent lawsuits are settled before reaching court, and both parties determine a fair value based on free market principles. A negotiation between two parties is a great example of such free market principles where each party determines the value of the patent with respect to its own interests, free from other considerations. For cases that reach a jury, the jurists are provided information by economists and accountants who determine the value of a patent based on the market value of the products that embody the patented inventions. Of course we can argue about whether their models and calculations are correct, but our entire justice system is based on juries determining values and awarding damages and so if Mr. Kessler believes that juries are incapable of determining value, then he is implying that our entire legal system—at least the civil system—is flawed. If that is true, then it is the legal system as a whole that needs to be revised.

Perhaps the most disturbing recommendation is to require patent holders to manufacture or sell products. This requirement would fundamentally damage the patent system. Patents allow small, cash-strapped inventors to create something new and protect that invention from large corporations that have the money and resources to kill it or steal it before the inventor can get funding or market share. I know this from experience. Years ago I created a software tool that I sold to a large company that enabled that company to sell their expensive hardware to customers in the communications industry. Each software package, that sold for about $25,000, enabled this company to sell their multimillion dollar equipment to communications companies that otherwise would never have been customers. The arrangement seemed good to me, but the large company made it clear that they did not like being beholden to me, so after several years of buying my software, they created their own. My sales immediately went to zero—in other words I became a non-practicing entity. Fortunately I had patented my invention and so I had more leverage than the large company expected. Had Mr. Kessler’s recommendation been in effect, I would have had no recourse against that large company.

According to Kessler, James Madison was the man behind Article 1, Section 8, Clause 8 of the U.S. Constitution, giving Congress the power “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Historical documents suggest that Thomas Jefferson and Charles Pinckney also lobbied for this clause. In any case, this section of the Constitution has been the justification for our patent system for over 200 years. Mr. Kessler believes that Mr. Madison did not understand what he was doing or, at best, did not foresee the expense that patent litigation would involve in the 21st century. In fact, the founding fathers knew exactly what they were doing when writing the intellectual property clause into the U.S. Constitution. They were protecting the individual from the overwhelming power of large entities. They were enacting the very principles of American society for which we fought the Revolutionary War. Since 1790 the U.S. patent system has contributed to America becoming the most innovative society in the history of the world. Fundamentally changing the system in the ways suggested by Mr. Kessler would stifle that innovation.

About the Author

Bob Zeidman is the president of Zeidman Consulting, a premiere contract research and development firm in Silicon Valley and president of Software Analysis and Forensic Engineering Corporation, the leading provider of software intellectual property analysis tools. Bob is considered a pioneer in the fields of analyzing and synthesizing software source code, having created the SynthOS™ program for synthesizing operating systems and the CodeSuite® program for detecting software intellectual property theft. He has written four engineering texts — The Software IP Detective’s Handbook, Verilog Designer's Library, Introduction to Verilog, and Designing with FPGAs and CPLDs — in addition to numerous articles and papers. He teaches engineering and business courses at conferences throughout the world. Bob also holds a number of patents and earned two bachelor's degrees, in physics and electrical engineering, from Cornell University and a master's degree in electrical engineering from Stanford University.

14 comments
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  1. Nice post, Bob. I’d also add that the CAFC has really cracked down on evidence needed to establish a reasonable royalty, which is the flagship of patent damages. Proving a RR to a jury remains under the tight watch of CAFC case law and, if the jury goes too far, a post-trial motion or stipulation is inevitable.

    The “jury” problem is really just a red-herring.

  2. Mr. Zeidman I would like to say that I respect your ability to write software and I appreciate the fact that you like to be paid very well to do it. And not to defend the WSJ piece there are a few things you raise which are of a little concern.

    I have a question, is your argument against requiring patent holders to make or sell a product in order to have or enforce a patent that you yourself did in fact make and sell a product and a patent helped you out? Because if not then I’m not understanding your argument. You appear to state that requiring NPE’s to practice the invention is the worst thing ever but then use an example of you yourself practicing an invention to argue against it.

    Or is your argument simply that after you stopped making actual sales then, in your mind, you suddenly become an NPE? Because I don’t think that anyone who is proposing requiring NPE’s to make or sell a product is referring to people who actually make a product and are offering it for sale but can’t find buyers. In other words, perhaps your argument is directed towards a straw man and if so perhaps you could direct your arguments to the issue at hand.

    In addition, are you in favor of revising our entire civil legal system?

    Finally, since you are a history buff could you provide us with examples of individuals that were protected from the overwhelming power of large entities in the first 40 years of the patent system? Or did you perhaps make that part up on the fly?

  3. Mr. Smith,

    I’m not sure I understand your reasoning, but let me address what I think you’re saying. First, after my business stopped, I became a non-practising entity. You are suggesting that of course there would be an exception for those who used to sell products. How about those that created a product but couldn’t sell it? How about someone who started to create a product but ran out of funds to complete it? How about someone who wrote up a specification but did not have the resources to go further? Or someone who turned that specification into a patent? Where do you draw the line? In fact, I sold my patent to an NPE that has never created a product and so everyone who suggests that the patent holder must have created a product would have killed my ability to do that.

    When I said that the Founding Fathers were “protecting the individual from the overwhelming power of large entities,” I thought the reference was apparent, but apparently too subtle for you. The Revolutionary War was fought to protect individuals from a remote, powerful monarchy. The whole idea was that of self-governance and individual rights. Look it up sometime; the U.S. government is a fascinating, wonderful system that you should try to familiarize yourself with.

  4. Mr. Smith said: ” I don’t think that anyone who is proposing requiring NPE’s to make or sell a product is referring to people who actually make a product and are offering it for sale but can’t find buyers.” Mr. Smith, would you also excuse from “troll” status inventors who can’t find the capital to make the product?
    How about inventors who can’t afford to hire manufacturing experts for mass production of his product?
    Do these guys get a pass too?

    If so, then there really is no such thing as a troll, because those are the things that keep “inventors” from being practicing entities.

    If not, then what you are saying is that those inventors who spend somebody’s money to manufacture an inventory that they can’t sell are favored over those have the wisdom to say “that is not where my strengths are; I will leave manufacturing and sales to someone else.”

    Seems like a waste to me.

  5. “Mr. Smith” should realize that part of the law of patents has to do with making patents “property” and thus alienable.

    Unless “Mr. Smith” has a problem with property in general, patents in general, or the American concept of alienability, I suspect that the questions were not posted with the intent to actually understand the way the system actually does (or even is supposed to) work.

  6. I agree with the statement…”Perhaps the most disturbing recommendation is to require patent holders to manufacture or sell products. This requirement would fundamentally damage the patent system.”

    In a system where a patent only gives the right to exclude others from making, selling etc, how can we have a requirement for the patent holder to sell the products?

  7. Craig H. -

    I believe you are right. Just because I can’t afford to open a new wind turbine manufacturing plant out of pocket would not seem to warrant the conclusion that my *invention* is any less valuable than anyone else’s.

    I think you have put your finger right on the crux of the *problem*

    Dasvedanya-
    SD~

  8. Stan,

    The problem as I see it is that the general costs related to patents are too high and that prevents people from buying as much of my delicious Kool Aid as they want to. Thus, people generally become anti-patent because they have less coin to buy my delectable beverages.

    It’s the only sane reason why anyone would be anti-patent (othr than of course, the main ingredient in my Kool Aid, but that’s our llittle secret).

  9. Roger that BD-

    If I thought my cash outlay to acquire a patent might be completely wasted during a Soup Nazi type of “No patent for you!’ regime, I probably wouldn’t have bothered to try to innovate in the first or second place.

    (See private message per ingredients)

    SD~

  10. BD #8

    I’m not convinced that the (high) costs relating to patents is “the only sane reason why anyone would be anti-patent”

    In the first instance I think many people are anti-patent for reasons similar to why many people are pro-patent, namely self-interest!
    Ie. IPR is a good thing when it is my IPR being asserted, but it is a bad thing when someone else is trying to assert their IPR over me.

    Costs only come into the picture once you start to engage with IPR.

  11. I agree Roland, but only somewhat and for a different rational (my post at 8 was a bit tongue in cheek)..

    One can be unhappy that someone else has IPR (intellectual property rights?) that covers what you want to do, but still very much believe in IPR and desire a strong and vibrant IPR system.

    Likewise, there can be those who don’t care at all about IPR, as long as the side they represent wins. This is most often evident by those large multiunational corporations that at the same time engage in IPR and seek to diminish its worth by any and all means (the use of the word “troll,” for example, the influence peddling evident in legislation for a second example, the fallacious cloak of harmonization for a third example).

    Costs do not come into the picture only once you start to engage in IPR. Costs (especially) drive those who view the concpet of IP as just another tool to maximize the bottom line. Believe me, I have been there – at one point in time, I WAS there. Recognizing when someone is “gaming” the system is critical for understanding what it takes to optimize the system. Recognizing that there is more than one flavor of “anti-patent” is critical to deflating the agenda of the anti-patent forces. Make no mistake, forces are actively seeking to wreck the patent system, and the reasons why some of those forces are doing so would appal others. The adage of “the enemy of my enemy is my friend” rarely works in the long haul.

  12. Although I recognize the inefficiency problem that the patent troll business model creates within the economy, nevertheless the NPE model is profitable, effective, and a legal exercise of IP rights. The problem is a systemic one; when NPEs win, on average, two to three times the damage awards that practicing entities reap from patent litigation, you can’t blame them for suing as much as possible.
    http://www.youtube.com/watch?v=LkQELhZeDYQ

  13. “both parties determine a fair value based on free market principles”

    you are wrong Bob. If troll sues small company – how do you expect they will be on “free market” ? Troll says the price because the court is too expensive for small company. And troll is very well funded troll.

    Recent case of Kaspersky Lab against troll IPAT showed just that.

  14. Janis,

    Kaspersky had revenue of $612 million in 2011 (see http://www.kaspersky.com/about/news/business/2012/Kaspersky_Lab_continues_rapid_growth_with_revenues_up_14_in_2011). How do you define “small company”?

    -Bob

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