For the Good of Tech: Fix Our Broken Patent System Now!

I have this long-held belief that our patent system is broken. Maybe even unfixable. These days, there's a growing Greek chorus pointing out the same problems.

Software code is often used as an offensive weapon (in every sense of "offensive"), or as a shield against patent attacks. But I don't think you should be able to patent an algorithm or a problem-solving idea, any more than you can patent the phrase "More tacos, please" or the idea of brushing your teeth exactly twice a day.

I'm not alone
With great pleasure, I just found a celebrity guru who sees these things almost exactly my way. Longtime Internet billionaire and outspoken media guru Mark Cuban is shouting this message from the rooftops: "If you want to see more jobs created -- change patent laws. … One of the hidden job killers in our economy today is the explosion of patent litigation."

Cuban invokes the example of Google (Nasdaq: GOOG  ) trying to spend $900 million on a defensive patent basket from the defunct Nortel, only to be outbid by a consortium that includes unlikely allies Apple (Nasdaq: AAPL  ) and Microsoft (Nasdaq: MSFT  ) , for the entirely unreasonable sum of $4.5 billion. "That is money that for could have gone to job creation," he says. Instead, it goes toward building "mutually assured destruction" systems of patent threats against anyone insolent enough to one another.

And that is just one small example of a huge and growing trend. Patent trolls have always been around, but a growing corpus of successful litigation campaigns based on random patent collections has only inflated the threat they pose.

It's easy money, you know? I think it's made worse by the fact that pure patent trolls can't be countersued because they don't actually make anything. So it's bulletproof little gunships versus the world's greatest innovators -- protected only by large handouts that make the accusers go away. And it's all based on our deficient patent system.

In Cuban's words: "These aren’t operating companies that are trying to protect their business. These are companies that aggregate patents and raise capital for the sole purpose of suing companies and extorting money from them."

And that's what sets the trolls apart from real businesses trying to advance the art and science of modern technology for something other than lining the pockets of its backers. Some technologies go to work; others just lawyer up.

Examples of trolldom
I realize I'm walking a fine line together with Cuban here. Universal Display (Nasdaq: PANL  ) , for example, builds its business on a collection of patents -- some developed in-house, others acquired, and a few relicensed from places like Princeton University. The company depends on royalties and license agreements from Samsung and LG Display for its livelihood. But the company is spending lots of money on further research, works hard to commercialize its OLED technologies, and rarely goes to the courtroom.

That crosses Universal Display off my troll list. The company isn't just collecting patents to go after lucrative licensing deals or settlements -- Universal Display is actively doing something with the technology.

Then there's the gray area. VirnetX Holding (AMEX: VHC  ) claims to have essential patents for 4G wireless network security and is not shy about asserting that claim in court filings. The company can't seem to be awarded a fresh patent without throwing it into a new or existing lawsuit.

With about a dozen full-time employees (I'm not sure whether that headcount includes its eight named executive officers) and a research budget of about $2 million a year, VirnetX doesn't strike me as a likely factory of technology with real-world value. If that tech really is a vital part of every 4G network, then how come it received no domestic revenue before Microsoft was forced to license it?

Sure, the company gained a $200 million licensing deal with Microsoft last year, shooting the stock right into the stratosphere. But I can't be alone in doubting VirnetX's earnings power: What once was a six-bagger and more has collapsed this summer to a mere double and change after a 60% haircut.

Can we call VirnetX a troll? With minimal R&D efforts, ginormous legal efforts, and little evidence of license negotiations not involving a judge, I think that's fair.

Watch out!
Everyone's a target: Apple received a software lawsuit itself this week, based on booting its Mac OS X systems too quickly. Apparently, there's a patent covering boot-optimization techniques. Everyone is ganging up on Google, including not only Cupertino and Redmond but also enterprise-software giant Oracle (Nasdaq: ORCL  ) . If Larry Ellison has his way, the Android operating system could be declared illegal for infringing on Java patents he bought (yep) along with Sun Microsystems.

Unlike its attackers, Google hasn't built up a large cache of counterstrike patents. Big G did buy about 1,000 patents off IBM last week, but that's hardly enough for a nuclear counter-attack. InterDigital (Nasdaq: IDCC  ) now looks like a likely takeout target -- or should I say "human shield"?

Google calls this "a hostile, organized campaign against Android." And it's easy to do, because "a smartphone might involve as many as 250,000 (largely questionable) patent claims," says Google attorney David Drummond. I think Cuban would agree with the "questionable" part of that claim.

What can we do?
This can't be good for business, American or otherwise. Cuban says that legal worries and court costs are keeping him from creating jobs, and that the problem is probably worse in bigger companies.

As Cuban says, this is a big problem for small companies but "horrific" for big ones. Would a dramatic patent overhaul make a difference to the high-tech job market, as Cuban claims, or would Google and Apple just end up sitting on even bigger piles of dormant cash without these nuisance lawsuits? Discuss in the comments section below.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Google, Apple, Microsoft, IBM, and Oracle. Motley Fool newsletter services have recommended buying shares of Microsoft, Universal Display, InterDigital, Apple, and Google. We have also recommended creating a bull call spread position in Microsoft and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


Read/Post Comments (15) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2011, at 8:07 PM, drbldr wrote:

    This article is a little short sighted. First of all, if Mark Cuban owned a pile of patents, I promise you he would be enforcing the laws and expecting to be paid to use them. The author or this article should also realize that the patent system does promote creativity and advances technology at a faster pace. This is especially true in the medical field. If only manufacturers are allowed to protect their inventions, then it would definitely slow down the advancement of all types of inventions, especially in the technology and medical fields. This whole issue with Google just happens to be reaching the heights of competition in the mobile device world. Apple, Google and Microsoft all want to own the operating systems on mobile devices. So far it appears Google is winning that race, so Apple is making moves to be more competitive. Google is simply worried about losing market share. It's just that simple. They've known the rules all along, and seem to be crying over losing the Nortel auction. Had they won, they would be applauding the patent system and feel that their beloved Android system had added protection in the future. Now they need to make some moves of their own. Regardless, taking away inventors' rights will only slow progress.

  • Report this Comment On August 09, 2011, at 8:21 PM, w6459 wrote:

    While the patent system needs to be reformed, if you think congress can wave a magic wand and fix it, you also probably still believe in the tooth fairy! I just don't see it happening. Besides, all this patent litigation is putting more lawyers back to work. Meanwhile, some of these publicly traded patent trolls have offered attractive trading opportunities if you are willing to put up with the volatility...

    Patent trolls hold legally recognized rights to their patents. Some tech companies blatantly violate these patents in their products, and are no different than Chinese companies that ignore copyright laws or manufacture counterfeit goods. Cheaters deserved to be dragged into court. And companies like Apple know they can tie up these cases for years, and avoid paying a fair price for royalties that they know they are liable for.

    As for creating more jobs (with patent reform), yeah, for overseas workers...

  • Report this Comment On August 09, 2011, at 9:45 PM, TMFZahrim wrote:

    FWIW, even Dilbert (or Scott Adams) gets it:

    http://dilbert.com/strips/comic/2011-08-06/

    Anders

  • Report this Comment On August 09, 2011, at 10:06 PM, SkippyJohnJones wrote:

    Google is oddly paranoid here. Most of the lawsuits "against Android" are against OEMs that are making handsets, not Google itself. The main suit is from Oracle, who definitely didn't buy Sun for its Java patents to go after a nascent Android OS. They bought a legitimate company with decades of knowledge and real assets in order to move aggressively into the server space for their database business.

    The Nortel bid didn't just magically jump five-fold between Google's stalking horse bid of $900 million and the final $4.5 billion tally. The bid price was a result of back and forth bids by Google and the MS/Apple consortium. Google was invited to join the consortium but passed, choosing instead to go it alone. Had they joined in, they would have had licensed rights to the patents for much less than the final bid price. Instead they are left in the cold.

    Finally, the 1000 patents they bought from IBM were reported to have been primarily search related. If true, this investment was about protecting their core business, not about nuclear war in the phone space.

    I don't like the trolling business any more than the next guy, but real patents developed by real businesses shouldn't be mixed in the same story with the VirnetX's of the world. Google would not like to see its search optimization algorithms shared with the world any more than Apple wants Samsung ripping off the iPhone and iPad.

  • Report this Comment On August 09, 2011, at 10:14 PM, MagicDiligence wrote:

    The money they are spending on patent lawsuits would have been spent in R&D developing the tech, would it not? Somebody has to pay somebody to come up with these highly technical solutions.

    Nortel's patents, and InterDigital's, are for complex processes and designs that take years to perfect.

    As for "patents" like Lodsys has, the USPTO is squarely at fault for granting crap like that.

  • Report this Comment On August 09, 2011, at 10:15 PM, H3D wrote:

    Google very reasonable wanted to pay 900million for some patents but wicked Apple and Microsoft ganged up and stole them away with 4.5billion that should have gone on job creation?

    What utter tripe.

    Apple would have been happy to pay 900million too, but wicked Google ganged up with Intel and bid 4.45 billion, but because Apple and Microsoft where willing to share with others, they could afford to go one bid further and got the patents for 4.5Billion.

    That 4.5Billion will go to pay off the creditors left when Nortel went broke, who can use it to secure jobs and create others.

    What a nasty, twisted, one sided article this is. If you are going to join Google's PR department, at least wear the shirt and wave the flag so we'll know what you are.

  • Report this Comment On August 09, 2011, at 10:53 PM, techy46 wrote:

    The name "PageRank" is a trademark of Google, and the PageRank process has been patented (U.S. Patent 6,285,999). However, the patent is assigned to Stanford University and not to Google. Google has exclusive license rights on the patent from Stanford University. The university received 1.8 million shares of Google in exchange for use of the patent; the shares were sold in 2005 for $336 million.

    It's amusing that Google entire claim to fame is based on patent they licensed to search others matter, much if which is copyrighted, so those searching can use the material with total disregard to copyright law. Android is another perfect example of violating others content, JVM, with complete disreagrd for patent law. Frankly, Google is the troll you're complaining about and not Apple, Microsoft or Oracle.

  • Report this Comment On August 10, 2011, at 12:09 AM, waterworksjeff wrote:

    Mr. Bylund,

    As you have been calling VHC a patent troll since, at least, November of last year, I feel that it is time to ask you how much you really know about VHC and to tell you some of the things that you are misrepresenting in your ignorance.

    First off, you state, " The company can't seem to be awarded a fresh patent without throwing it into a new or existing lawsuit". VHC was today awarded its NINTH US patent for 2011. Only ONE of these patents, U.S. Patent No. 7,921,211, has been added to the TWO existing suits. VHC has never initiated a new lawsuit upon the issuance of a new patent.

    Secondly, you state, "With about a dozen full-time employees... and a research budget of about $2 million a year, VirnetX doesn't strike me as a likely factory of technology with real-world value". If you were to read any of the more recent company 10Q's, you would find that; a) the company at any point in time might be "employing" as many as 250 consultants, and b) the team that developed and is continuing to develop these patents are among those eight named executive officers (that you seem to scoff at). As these gentlemen are already employed by VHC how much cost do they need to expend to justify their "research"? Please, tell me how many employees must spend how much money before we should consider them "a likely factory of technology with real-world value", I can then refine my investment research.

    To continue, you state, "If that tech really is a vital part of every 4G network, then how come it received no domestic revenue before Microsoft was forced to license it?" As you may know, being a technology expert, "true" 4G has NOT been implemented in the US, or the rest of the world for that matter. "True" 4G requires (should I capitalize that for emphasis, REQUIRES) security measures. VHC has declared their patents to be essential for the security of 4G, not vital, essential. However, since it is not required for "American 4G" (nothing more than a marketing tool) the revenue is not there, yet.

    Finally, "Can we call VirnetX a troll? With minimal R&D efforts, ginormous legal efforts, and little evidence of license negotiations not involving a judge, I think that's fair. Watch out!" R&D efforts? Addressed above (Oh, and they have over 100 patents pending). Ginormous legal efforts? VHC has retained the BEST law firm for IP defense in the country and McCool Smith is doing it on contingency (billable hours need to be cut, not boosted). Little evidence of license negotiations not involving a judge? VHC has retained WSGR for their licensing efforts, a well respected firm in Silicon Valley. As for negotiations not involving a judge? Are they supposed to have a press release every time they talk to a company about their IP? Send us a personal email? You obviously haven't even read VHC's 10Qs, what evidence are you looking for and where?

    You use the word "troll", I use the word "hack".

  • Report this Comment On August 10, 2011, at 6:49 AM, TMFZahrim wrote:

    Another supporting point of view, this time from a law professor and not a cartoonist:

    http://blogs.forbes.com/ciocentral/2011/08/09/turn-the-table...

    Key quote:

    "When the target of a patent lawsuit is a start up or new entrant the economic ramifications can be terrible – creating a tax on the technology entrepreneurs who are our best chance of revitalizing the economy. Patent law should be brought down to earth, so that it does not, on balance, divert resources away from the creation of products for customers and towards the creation of disputes for lawyers to settle."

    Anders

  • Report this Comment On August 10, 2011, at 7:21 AM, Fullstrum wrote:

    NPR's "This American Life" just did an episode on this issue. I would highly recommend anyone interested in software patents to listen to it.

    http://www.thisamericanlife.org/radio-archives/episode/441/w...

  • Report this Comment On August 10, 2011, at 9:29 AM, IBJAMMIN wrote:

    I doubt Congress will do anything do help this mess, because most of them are (were) lawyers. That's a real fact. They will protect their "industry" at the expense of logic, progress, and the good of the people as they usually do. Like we didn't have enough reasons to hate lawyers and/or Congress. There are few engineers or scientists and not enough businessmen in Congress. Too bad! I'm sure things would be quite different if there were.

  • Report this Comment On August 10, 2011, at 12:12 PM, TMFPeterV wrote:

    I was just about to add that "This American Life" did a sensational story on this topic but I see Fullstrum beat me too it. However, there was also a follow up on NPR's Planet Money:

    http://www.npr.org/blogs/money/2011/08/05/138934689/the-tues...

  • Report this Comment On August 10, 2011, at 12:59 PM, Sparkynet wrote:

    Who loses here? Certainly not Google. They charge nothing for Android. They will continue to rake in billions in mobile ad revenue no matter what OS is dominant. The consumer loses most because this all will lead to higher prices for smartphones, tablets, etc. The winners? Only the lawyers.

  • Report this Comment On August 10, 2011, at 1:11 PM, TMFBlacknGold wrote:

    The patent system may not be ideal, but this article only points out a small (but relevant) part of the patent system. There are plenty of patent applications received each day that don't have diddly squat to do with software or OSs.

    If the patent system were "fixed", I doubt it would create incentive for companies to go out and hire more employees. Most companies are already sitting on record piles of cash.

  • Report this Comment On August 15, 2011, at 8:22 AM, TMFZahrim wrote:

    This is required reading today:

    http://arstechnica.com/tech-policy/news/2011/08/are-software...

    From that article:

    "Patents are valuable for one reason and one reason only: they can be used to generate licensing revenues, often by threatening other companies with lawsuits. And this value is entirely zero-sum. Every dollar a patent holder receives in revenue reflects a dollar that some other company had to pay. And most patent licensing fees are paid by other tech companies, which represents a disincentive to innovate.

    So it's obvious that patents are good for the people who get them. The key question is whether patents have a net effect of encouraging innovation. And there's no reason to believe this is the case."

    In the case of patent auctions in bankruptcy proceedings: "... the reason the auctioned patents are valuable is usually because the winning bidder will turn around and demand licensing fees from the failed company's more-successful competitors, effectively punishing success."

    And then the big finish:

    "The function of the patent system isn't to maximize the profits of inventors. Rather, it's to provide inventors with sufficient incentives to ensure they continue innovating. In software, the protections offered by copyrights and trade secrets are already more than adequate to produce a huge amount of innovation. As a bonus, these regimes are less cumbersome and less prone to frivolous litigation than patents."

    I think this analysis is exactly right.

    Anders

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