Could Patent Trolls Save Innovation?

Stuart Freen is a J.D. candidate at Osgoode Hall Law School and is taking the Patent Law course.

Non-practicing entities (NPEs) are rarely depicted in a positive light. Particularly in the IT sector, NPEs or “patent trolls” as they are often called are characterized as opportunistic extortionists, amassing large and strategic patent portfolios without actually conducting any research or development of their own. The trolls lie in wait for key moments when they can leap out from the shadows and demand exorbitant licensing fees from honest, hardworking companies under the threat of patent infringement litigation. Yet, if Nathan Myhrvold and his company Intellectual Ventures have their way, this characterization could change. Rather than serving as an impediment to research and innovation, NPEs might just be their saviour.The media has not been kind to NPEs, as evidenced by press coverage of cases like the RIM/NTP litigation (which culminated in RIM settling for just over USD $600 million). Corporations like RIM, Microsoft and IBM who actually develop products are often portrayed as the new home of the modern inventor, whereas NPEs are seen as bottom-feeders buying up IP from ailing start-ups at bargain-basement prices, only to aggressively enforce them later for millions. It has been argued that the patent system is broken, and NPEs and massive cross-licensing deals between IT companies are the symptoms.

In a recent Harvard Business Review article, Myhrvold argues that this characterization of NPEs is wrong. A former Chief Technology Officer at Microsoft, Myhrvold co-founded Intellectual Ventures, a USD $5 billion investment firm with a portfolio of over 30,000 patents. He suggests that the key to fostering invention will actually be increasing the commoditization of patents and divorcing research from development. Providing a true free market for inventions will result in an influx of private funding for applied research.

Central to this transformation will be a new class of so-called “invention capital funds” modelled after investment capital funds. Myhrvold argues that research currently operates under a charity model. Most research, he says, is ultimately publicly funded. While private corporations currently invest a great deal of money in product development, actual research is seen as risky and businesses have difficulty commercializing discoveries which lie outside of their core business plans. Universities, too, often have a hard time managing their IP. Myhrvold argues that what the market needs is a new class of business entities dedicated to purchasing and licensing inventions. These firms will bridge the gap between inventors and investors, providing private funding for research while generating good long-term gains for investors.

Under Myhrvold’s model, inventors will be funded by NPEs like Intellectual Ventures, who will in turn shop bundles of patents to corporations focussed on product development. NPEs will also serve a valuable role by purchasing and amalgamating the good ideas from failed start-ups and universities. Invention capital funds will be funded by long-term investors who have the patience to wait for an invention to mature from its early stages to its full commercial realization. Much like start-up companies, though most patents will be unprofitable the ones that do succeed will more than make up for the rest. By investing in large, diversified patent portfolios, NPEs will be able to ensure long-term growth.

Myhrvold’s argument, that it is not actually the patent system but rather the IT industry that is broken, is a compelling one. The reason large IT corporations are frequently involved in patent litigation and engage in broad cross-licensing agreements is because they actually do frequently infringe on one another’s patents. Introducing a sophisticated middle-man to broker patents would provide new incentives for innovation and encourage strictly research-based ventures. It could also work to identify fertile areas of research and bring together the right components for technological advancements. For product developers, it would provide a stable licensing regime and reduce the risks associated with innovation and patent litigation. It may turn out that NPEs are not a symptom of the ailing patent system; they will one day be the cure.

One Comment
  1. Indeed, the rise of a secondary market for patents stemming from the activities of “Patent Trolls” is starting to garner much support for the very fact that it could drive innovation. However, the proposition rests on assumptions which are perhaps, overly optimistic expectations of these “patent trolls”. The mechanics of having a middle-man in the patent system could very well work, but the reality is that, patent trolls are just what they are: trolls.

    As between operating companies, leveraging power is more or less the same in that cross-licensing can occur, hence reducing and possibly minimizing the amount of royalty fees that have to be paid. NPEs, by their very nature, are at an advantage here: With no products or services on the market, there is nothing an operating company can do to bring a counter-claim of patent infringement. What this results in is the ability of NPEs to hold up licensing fees and possibly charging way more than is justified. The ultimate bearers of higher licensing fees are no doubt the consumers themselves. This may well override the benefits that are to be gained from increased innovation driving down downstream prices.

    The proposition is also premised on another assumption – perfect knowledge. Perfect knowledge in the sense that all operating companies know exactly who the NPEs are and what the NPEs are offering. However, the reality is that there is no such thing as perfect knowledge, especially not so where NPEs are concerned. The presence and activities of NPEs are usually hard to detect, leaving operating companies with little information to work with.

    Can “patent trolls” provide a stable licensing regime for product developers? Sure – just as long as these “patent trolls” don’t carry out what they’re known for: claiming high licensing fees and springing surprise litigations.

    They may have led to the discovery or realization of a new system of having a middle-man that could very well work, but to depend solely on these “patent trolls” to drive innovation is barking up the wrong tree, for they come with their unwanted belongings too. Perhaps, what was envisioned was a company like the RPX, which promises member companies receipt of the patents it buys up without fear of facing litigation. In return, it charges annual membership fees. In that case, the question becomes: what becomes of companies who do not sign up? Surely, it cannot be the case that they be protected from litigation from “patent trolls” too, for the membership will become worthless. It is unrealistic for RPX not to file suits against any non-member company. To me, this seems to be another variant of the “patent troll”.

    This leads me to my final point – if membership fees were not charged, how can such a system be run? With no ‘guaranteed customer base’ and no certainty that the patents it holds would be bought, won’t this new NPE have to, at some point or another, resort to litigation to get companies to buy its patent? Also, for such a system to work optimally requires that all companies divorce research and development . If not, how do we, at the end of the day, guarantee that companies will buy its researched patents and allow investors to reap their benefits?

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