Could Patent Trolls Save Innovation?

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.