How the Patent Wars Are Hurting High-Tech

Patents are as American as mom and apple pie. Maybe more so. Mom and apple pie aren't mentioned in the Constitution. 

Patents are such a fundamental part of American economic culture that the Founding Fathers saw fit to address them in the Constitution. But in the software industry, patents may be doing more harm than good -- stifling innovation, hijacking the bottom line, and siphoning shareholder value.

We the people establish the patent system
"The Congress shall have 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."
--Article I, Section 8, U.S. Constitution 

Up until 1980, the U.S. Patent and Trademark Office thought of software like language, i.e., you could copyright the code, but not patent the whole idea. The U.S. Supreme Court supported this view. In the 1981 case of Diamond v. Diehr, the court reversed its thinking, ruling that software patents could now cover the whole software invention, not just the code used to make the invention function.

Diamond v. Diehr led directly to State Street v. Signature, a 1998 federal appeals court case that allowed the possibility of patenting "business methods." A term as wide open and generic as it sounds, business methods can describe applications as wide ranging as financial data processing methods, computing techniques, online bookselling, and online auctions.

State Street v. Signature broke down the door that Diamond v. Diehr nudged open, and a flood of software patents followed.

Even software engineers don't like software patents
"I worked on a whole bunch of patents in my career," Silicon Valley programmer Stephan Brunner recently told NPR, "and I have to say that every single patent is nothing but crap." Brunner includes the patents he holds in that category.

The problem? Software patents can be so broad that almost anyone who writes a program can be guilty of infringement and therefore subject to suit. This presents an obvious potential problem for any innovative, high-tech company.

Mutual assured destruction
In response, companies started amassing patent hoards, not to build anything new or to innovate with them, but to defend themselves against potential lawsuits.

It's mutual assured destruction. A company with a large patent portfolio can say, "Sue me with your patents and I'll sue you with mine." But instead of nuclear arsenals, it's patent arsenals, and companies are spending big money to build them.

A recent auction of 6,000 patents from the bankrupt Nortel Networks ended with a winning bid of $4.5 billion and went to a consortium of companies that included Apple (Nasdaq: AAPL  ) , Microsoft (Nasdaq: MSFT  ) , and Ericcson. Google's (Nasdaq: GOOG  ) mere $3 billion offer didn't cut it. But the action didn't stop there.

Google goes nuclear
Speculation grew to a fever pitch that mobile patent specialist InterDigital (Nasdaq: IDCC  ) would be bought by a larger player seeking to bolster its own patent portfolio. Hopes of an impending buyout spiked InterDigital's shares by more than 100% in the month between mid-June and July.

Then, the patent buyout to end all patent buyouts finally happened: Google bought Motorola Mobility (NYSE: MMI  ) for $12.5 billion. While Motorola does have a large mobile division, the real prize was its 17,000 granted patents, a patent treasure chest nearly three times the size of Nortel's.

To be fair, patents do have a place in the high-tech economy, particularly in the mobile industry. Qualcomm (Nasdaq: QCOM  ) , for example, may get criticized for having a "patent stranglehold" over the mobile industry, but also spends $2.5 billion annually in research and development. And Qualcomm was integral in the core development of the CDMA technologies that now form the basis of today's data networks.

A recipe for less innovation
This brings us back to the larger problem with today's patenting process in technology, i.e., companies are all too often are able to patent generic ideas without creating any of the specifics that make them commercially viable.

So now, as many new patents are being used as defensive weapons by companies that haven't innovated, many others are being used as offensive weapons by companies that simply want to stall the growth of their more successful peers. That's a recipe for less innovation, as any new technology must navigate a minefield of overly generic patents that add no real value.

And it's not just companies getting caught up in the patent melee. Microsoft co-founder Paul Allen recently filed a far-reaching lawsuit against companies including Google and eBay (Nasdaq: EBAY  ) for violating patents on overly generic ideas like "news aggregators."

The only ones getting rich are the lawyers
The money to buy these patents come out of a company's cash reserves. Will the patents keep the company lawsuit-free? Maybe. If they're as broad and unfocused as claimed, who knows whose patents will have the final word in court?

Those profiting most here are lawyers. Those profiting least are shareholders. The billions spent amassing a patent portfolio could be reinvested in the company, to develop new products and stay competitive, or be issued as a dividend.

Size really does matter
As in other spaces affected by excessive litigiousness, the current software patent system is feeding on itself and growing worse. It is what it is, but it's a shame to see good shareholder money thrown after bad.

For the big high-techs, a few billion here and there aren't going to exhaust their cash hoards. So if you have a position in one of those, stay put, Fools -- there's no need to run out and sell your shares.

But for the smaller high-techs, the kind that don't have a few billion extra lying around to get in on a big-time patent auction or hire a team of lawyers to sue for patent infringement, the ongoing patent wars are something you may need to factor in to any potential or existing position.

What's your take on the patent wars? Tell us in the comments section below.

Fool contributor John Grgurich is not currently building a patent arsenal or a nuclear arsenal, nor does he own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Microsoft, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended creating a covered collar position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (13)

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 31, 2011, at 10:34 AM, OnTheContrary wrote:

    Software patents have killed innovation in software since the early 1990s, when Microsoft, Oracle, and a handful of other lawyered up behemoths used their money and this bogus law to squeeze all their competitors out of business.

    A software patent gives its owner a legal monopoly on an idea, and as this principle inevitably spreads in the law, it will be used by the state to shut down free speech, and to award its favored clientele with the exclusive right to control all discourse with respect to certain ideas, and to make commercial use of them.

    The argument is made that a computer program is a valuable composition, and a key to the business success of a company, but as a software developer with over 30 years experience, I am here to tell you that every programmer necessarily builds on and must be free to use the accumulated ideas of countless nameless predecessors, and that at the same time any competent programmer can create working code to implement just about any software idea - and at rather trivial cost, too, compared to the ultimate value of the program, or to the legal costs involved with filing for and defending patents.

    Copyright protection was sufficient to protect commercial interests in software for the first 20+ years of its existence, and it is perfectly adequate now.

    Software patents are welfare for lawyers and the props that keep dysfunctional parasitical monopolists like Microsoft in business, by protecting them from innovative competition.

  • Report this Comment On August 31, 2011, at 10:37 AM, XMFGrgurich wrote:

    The author responds:

    OnTheContrary, you're preaching to the choir, at least as far as my thinking goes. Thanks for the thoughtful, thorough comment.

  • Report this Comment On August 31, 2011, at 10:40 AM, xwallster wrote:

    This situation is likely to get worse before it gets better. Implications for smaller tech companies are huge and negative - implications for biotech huge but currently unseen. What a mess. See http://lminfernaloptimist.blogspot.com/2010/02/it-biotech-an... for longer comment.

  • Report this Comment On August 31, 2011, at 10:55 AM, drbldr wrote:

    A lot of the patents owned by the bigger companies were actually developed by individuals or smaller companies and then assigned (sold) to the bigger companies. This is absolutely a method for smaller engineers to earn a living. The promise that their hard work will be protected is vital and motivates those innovators to continue their efforts. Without patent protection, why would anyone spend big money on new developments when they could simply wait until someone else designed it for them?

  • Report this Comment On August 31, 2011, at 11:48 AM, H3D wrote:

    You say

    "It's mutual assured destruction. A company with a large patent portfolio can say, "Sue me with your patents and I'll sue you with mine." But instead of nuclear arsenals, it's patent arsenals, and companies are spending big money to build them."

    This is the second time I've seen this analogy in as many weeks, and it's as wrong this time as last time.

    If the US fires 4000 nuclear warheads at Korea and Korea fires 2500 nuclear warheads at the US, the US does not make a net profit of 1500 warheads and Korea isn't around to pay the legal costs.

    At most, patent battles have a degree of uncertainty. Either side could lose. But that is a million miles away from mutually assured destruction.

  • Report this Comment On August 31, 2011, at 1:15 PM, sheldonross wrote:

    H3D,

    Actually you're wrong. In the software patent world, software patents often are for ridiculously broad ideas. All it takes is 1 of these patents to get an injunction against an entire product line or indeed business.

    If a large company like MS were to completely unload a patent suit against a similarly large company, the result would likely be a complete shutdown of both businesses for a minimum of 3 years. This is regardless of who ultimately prevails.

    On a side note, I have personally seen the destructive anti-innovation bent of this. I good friend of mine worked for a company called Xionetic. He and many others lost their jobs when they were sued (almost) out of existence due to a patent they inadvertently infringed upon.

    http://www.rfcexpress.com/lawsuits/patent-lawsuits/texas-eas...

  • Report this Comment On August 31, 2011, at 5:43 PM, PeteRatSF wrote:

    Good article. I agree with OnTheContrary that copyright law sufficiently protects developers against someone directly copying their original code/work. Allowing patents on that material as well is overreaching.

    Not to mention, there's the whole patent trolling issue (often as an entire business model). When companies are buying up patents solely for the purpose of later suing other companies that actually develop successful products incorporating those patents -- and this is perfectly legal behavior -- we've strayed so far from the spirit of the law that we've entered the realm of absurdity. I don't think that's the case with the companies mentioned in the article, but it is part of the business climate that they're dealing with.

  • Report this Comment On September 02, 2011, at 5:25 PM, mlockerman wrote:

    The trick is defining that line between the proper use of patents and "patent trolling". Very difficult unfortunately. I'm tempted to suggest that patents can't be sold. That would certainly prevent trolling. It's not ideal either though.

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