Can This Legal Heavyweight Remake Our Broken Patent System?

When Richard Posner dismissed the dueling lawsuits between Apple (Nasdaq: AAPL  ) and Motorola Mobility (now a Google (Nasdaq: GOOG  ) subsidiary), it was hardly his first turn in the national spotlight. The esteemed judge of the Seventh Circuit's Court of Appeals has been named the most cited legal scholar of the 20th century, and The Washington Post says that he'd be a lock for Supreme Court duty if he wasn't so darn controversial.

So nobody's surprised when this legal scholar takes the podium to stretch the Apple-Motorola spotlight a bit further. But his ideas are definitely worthy of some watercooler talk.

A battle report from Captain Obvious?
Penning an op-ed for The Atlantic, Posner ponders why there are too many patents in America.
Why are patents of arguably no value to society or the industries that spawned them allowed to clog up the approval system? The worthless bulk then delays more worthy patent applications, often until they, too, lose their relevance and worth.

Questionable patents are worse than merely worthless, in Posner's eyes: "The cost of patenting and the cost of resolving disputes that may arise when competitors have patents are a social waste."

The current system is a drag on innovation across nearly any industry you'd care to mention, Posner says, with the notable exception of prescription drugs. There, it takes massive investments of time, money, and risk to develop and test new drugs while the actual production of said drugs is cheap. Here, patent protection is absolutely necessary to give pharma companies an incentive to develop new products. But that's an exception to the rule.

"Most industries could get along fine without patent protection," Posner contends. More often than not, "the cost of invention is low; or just being first confers a durable competitive advantage because consumers associate the inventing company's brand name with the product itself; or just being first gives the first company in the market a head start in reducing its costs as it becomes more experienced at producing and marketing the product; or the product will be superseded soon anyway, so there's no point to a patent monopoly that will last 20 years."

This barb seems pointed right at fast-moving markets where innovation is fast and furious, like the hardware and software that go into today's consumer electronics. By the time a new invention makes it through the three-year approval process, chances are that competitors have already copied your idea or just developed it on their own anyway. Then you have a rubber-stamped patent (still subject to expensive challenges) covering what everyone is treating as common knowledge and obvious ideas already. When the lawsuits start flying, the products they address are already ancient history.

How to fix a broken system
Posner offers up several ideas on how to improve this sorry state of affairs:

  • Reduce patent terms for industries that don't match the pharma profile.
  • Make licensing of patented inventions compulsory, like the "mechanical license" you'd need to publish a cover song.
  • Leave jury trials out of the patent system, replacing them with specialist panels from the Patent and Trademark Office.
  • Require inventors to make and/or sell something based on their patents, thus removing patent trolls from the equation.
  • Give federal judges special training on how to handle patent cases.

"There appear to be serious problems with our patent system, but almost certainly effective solutions as well," Posner concludes. "Both the problems and the possible solutions merit greater attention than they are receiving."

Did I mention that Posner is controversial?
I'd imagine that Posner's article doesn't sit well with companies that rely on patent lawsuits for their very survival. Somewhere in Seattle, Nathan Myhrvold is probably throwing lawn darts at pictures of Posner. Rambus (Nasdaq: RMBS  ) and VirnetX (AMEX: VHC) shareholders pray that the "make something" idea never bears fruit: Both companies would quickly lose all their patents unless the whole business was acquired by some hardware builder. And law-school students on the patent track might want to rethink their career choices, given Posner's imposing stature in the legal field.

Of course, Apple would still be making billions of dollars with or without iPhone patents. Our brand-new premium report on Apple spells out exactly how Apple's cash machine works. If you want a broader picture of the smartphone revolution, click below to find out why investors are so excited about this exploding trillion-dollar revolution.

Fool contributor Anders Bylund owns shares in Google but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google and Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (4)

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 July 15, 2012, at 6:02 PM, neamakri wrote:

    Last week I read that there is only one patent office. They will soon open some new regional offices to handle some backlog, which right now stands at 620,000 patent applications.

    The judge has a valid point.

  • Report this Comment On July 15, 2012, at 8:41 PM, eldoctoro wrote:

    Some good points by Posner. Could set minimum value for a patent eg...

    1) patent must be expected to generate $1 mil annually to be eligible for consideration.

    2) Pharma, pollution, energy related patents receive priority consideration.

    Strongly disagree that a company must manufacture something to request a patent in their area. The development of an explicit concept is just as valid as a work product as a new type of screw.

  • Report this Comment On July 15, 2012, at 9:05 PM, THEMATHISNEAR wrote:

    When Judge Posner has a patentable invention that is ripped off by a deeper pocket, and they drag out the proceedings for years (with full approval from his judicial brethren), THEN I'll be happy to listen to his wonderful ideas about how to fix the patent system. Until then, he's just another guy with an opinion. And you know what they say about opinions...

  • Report this Comment On July 15, 2012, at 9:56 PM, zymok wrote:

    Posner's comments make a lot of sense. Probably too much sense to ever be implemented.

  • Report this Comment On July 16, 2012, at 1:00 AM, waterworksjeff wrote:

    You jump from A) important judge writes an op-ed, to B) putting VHC into a negative light, even though you still haven't spent much time trying to understand what the company is doing (one thing you do often and not exceptionally well), to Z) selling TMF's Apple commentary for $10/year. Was there a purpose to this piece (double entendre intended)?

    Posner obviously sides with big corporations that can make billions by grabbing new innovations/patents and incorporating them into their own products without thought of the inventors.

    My question for you, are you being paid by some "big business" entity? You constantly attack those patent creators that don't have the resources to capitalize on their inventions before they are utilized/stolen by big business, and so they sue the big businesses that steal those patented ideas and refuse to pay.

    For example, you lambast VHC as a parasite on the system, yet in VHC vs. MSFT, the source code notes and correspondence between MSFT and the USPTO showed that the concept was already patented by VHC and MSFT knew this. It wasn't invented by MSFT during the three year patent process, it was a granted patent stolen by big business. Also, the technology isn't " ancient history", its included as standard in LTE-Advanced technology, just now coming into its own.

    My point, you seem to paint every entity suing "big business" for patent infrigement as a "troll" and bad for the economy, "big business", and "the American way". What is yours?

  • Report this Comment On July 16, 2012, at 4:13 PM, tjsimone wrote:

    Anders-

    Think about how much money you would have made, if you had gone long in the last 2 years, instead of bashing VHC.......

    Ever think, that maybe you just dont get it?

    TJ

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