Minutes of the 8 Nov Meeting: Patent Trolls: Evil or Necessary Evil

 

About 13 people attended tonight’s meeting. Josh Zapin facilitated and Jeremy Kohler recorded the minutes.

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MEETING SPONSORS

Applied Trust (www.appliedtrust.com) provides refreshments, Copy Diva (www.copydiva.com) provides the audio-visual equipment, NCAR (www.ncar.ucar.edu) provides the facility, ONEWARE (www.oneware.com) sponsors the podcast, and ReturnPath (www.returnpath.net) sponsors the minutes.

Thanks also to Brian at covervillemedia.com for creating the podcast.

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ANNOUNCEMENTS

Chris Chalack at Bolder Professional Placements in Broomfield has lots of positions open. Chrisc@bp2recruiting.com

jn1infocus@yahoo.com is looking for work in the area of patents.

Scott Mcright is an architect/program manager looking for work, with a background in engineering. scott@vyrep.com

bC is developing a software fitness platform for editing routines on fitness equipment. bC is interested in combining artistry, technology, music, and choreography. ltoukan@toukanconsulting.com.

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INTRODUCTION (JOSH ZAPIN)

“Patent Troll” was coined by Intel attorney Peter Detkin. Trolls sue you for patent infringement even if they have no related product They just try to get money. Trolls are also known as nonpracticing entities (NPEs). Intellectual Ventures may be the biggest troll out there. Patents give you a government-sanctioned monopoly for 20 years and encourages innovation. But perhaps there's a better way to do it. Trolls may be seen as filing nuisance lawsuits, and 30 percent of patents are not even new inventions. There are many duplicate patents out there that perhaps should never have been issued. Some NPE activity is clearly deplorable, but legitimate inventions still need to be protected.

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ABOUT THE SPEAKER

Tom Franklin is a partner at Kilpatrick Townsend (www.kiltown.com). He focuses his practice on patent prosecution, trademark prosecution, licensing, and intellectual capital management. He has more than a dozen years of experience with intellectual property. Tom is experienced in intellectual property audits, due diligence, and strategic planning processes. Through an IP Asset Management plan, he tailors strategy to business goals, competitive pressures, and funding constraints to leverage intangible assets with intellectual property. He uses IP protection to maintain the dominance of large companies or assist smaller enterprises who are vying to dominate. Prior to entering the field of law, Tom spent nine years working in industry, and he brings a wide range of technical skill to his clients. Tom is a member of the Colorado Bar, the American Bar Association, and the Davinci Institute, a Futurist think tank.  Tom can be reached at tfranklin@kiltown.com or 720-258-6588.

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TOM FRANKLIN

Overview:

Why Was Patent System Created
Troll vs Nonpracticing Entity
Nonpracticing Entity’s View of the Patent System
Entrenched Incumbent's Fear of Competition
Progress on Frivolous Patent Suits
What Are the Solutions?

Entrenched Incumbent (EI): A company that isn’t doing much innovation and fears the smaller innovative companies.

Is collaboration a good idea? Of course it is. Back during the industrial revolution, no one wanted to collaborate. Everyone used trade secret law to protected their innovation. It was easy to keep secrets back then. You could carve out a company town in the forest with your secret process and no one would find out about it. But today, collaboration is the platform on which we develop our products. The patent system was an innovation that drew out the best ideas in exchange for a 20-year monopoly–government encouraged collaboration. Thanks to that system, you could now operate in the open, hire anybody, and let employees move around. So this encouraged a lot of innovation through cross-pollination. A lot of software people don't like the patent system, but we do need it.

What is a patent troll? Is a troll anybody that has bought a patent for profit?  There’s a wide spectrum here, starting from the unworthy troll who never sells anything to more worthy patent holders. The most unworthy buys patents in order to buy the ability to sue people. But how about someone who buys a patent who had prior sales. Say I make antivirus software and I buy a patent covering backup software. So I've had sales in the industry. Am I really a troll? How about an inventor who invented something and just never sold anything, never built a company. Is that person a troll? Like Marconi, for example? Or how about if I sold a few of these things and I just couldn't get funding. Those potential funders let us go bankrupt. We failed, but we still want to prevent others from using our idea. Does that make me a patent troll?  What if I am a successful going concern with no sales of this particular item. I'm still selling stuff, but I'm preventing others from doing the bit that I gave up. Am I a troll, like Intel and Microsoft who protect patents on stuff they don't make any more? Finally, the most worthy one on the spectrum is the person who is actually using the patent to market a product. All but this last type have been considered trolls, so the term “troll” is not particularly useful or meaningful.

Universities, for example, are nonpracticing entities (NPEs) that protect their technologies even if they aren’t licensed. Are universities trolls?

Q: Why is there so much negativity?
A: Who’s driving this view, you ask? Well, next slide.

The patent system encourages innovation. Full disclosure is quid pro quo for limited exclusivity. I might approach Google with an idea, Google says it’s not interested, then maybe later you sue Google for using it and Google calls you a troll.

Only the patent system can allow an upstart to challenge an entrenched incumbent(EI). So you come with a 10x improvement and patent it all. Then you're protected from the EI. You are a now a competitor.

Some NPEs believe that there's a conspiracy among 10 large tech companies who are trying dismantle the patent system. If you are large and entrenched and on top, you don't like the patent system because it allows startups to compete with you. Qualcomm had breakthrough technology that made mobile phones actually usable. The phone monopolies were selling these ‘cutting-edge’ mobile phones the size of bricks, and Qualcomm had the fix. It approached these EIs and there wasn’t interest. The phone monopoly quenched innovation inthe telephone market. So they could care less about a 10x improvement in phone capacity. They were on top and happy selling its bricks. Qualcomm could not get any traction. So Qualcomm patented it all up and started making its own smaller, better, cheaper phones and finding other markets overseas. Now every phone uses Qualcomm’s CDMA technology. If the EI had its way, our cell phones would still be bricks. But we have other things that are still “bricks”–have you used Microsoft Office? That’s a piece of garbage that would go away as soon as it had any real competition.

Q: If I invent the next big widget, and patent it, what if the EI uses patent litigation as a weapon?
A: That’s why, by the time you pop up on the EI’s radar screen, you better have a war chest of your own patents in place.

Remember when Iomega and SyQuest were competing. They started suing each other, and SyQuest ran out of money first. Iomega bought SyQuest and had monopoly pricing again. So the best thing is to plan for success in a heavily patented industry like software. Software EIs are huge patent filers even though they might want to dismantle the patent system. They file the patents as a backup.

Q: Why isn’t there a new group of attorneys out there to work on this stuff for the small players?
A: Oh, but there is. Attorneys are doing stuff on contingency or being hired by investors. They buy your patent and/or cut you a deal to split the royalties. We might call them trolls, but they are working for the little guy.

Typically if you are facing down a large company, they can not beat-up a start up with patent litigation, you’re also up against larger marketing budgets, price undercutting, etc. So now you’re about to go under. So you hire an attorney to be your CEO and defend the patent since the large company has effectively forced you out of the marketplace.

MS DOS 5.5 had a dreamy compression utility made by Stac. Microsoft licensed it to include it with DOS 5.5. Then 6.0 came out with Microsoft’s own version of the same feature, and it wasn’t licensed. Stac sued Microsoft for patent infringement and eventually won after many years. It got a $100 million judgment. That easily paid the lawyer fees. The Microsoft bought Stac for $120 million. After that, Microsoft grew up and changed its business plan and became one of the biggest patent filers.

Q: What about open source?
A: That’s only copyright issues and most open source licenses are silent on patent issues. You could use open source and still get sued for patent infringement.  The promise of everyone sharing their open source code is dead now because of the cloud. Now you can put your stuff on the cloud without giving anyone access to the code.

Q: Why is software special? What about copyright of text? Is software text?
A: It isn't. The courts have said there’s nothing different about software with regard to patents. Patents are applicable to software just like anything else “under the sun made by man.”

You have a copyright on the code in terms how it is written. But if you write it differently to do the same thing functionally, you can avoid any copyright issues, but still infringe another’s patent on the functionality. So with software you use both types of protection.

One thing that for sure has happened is that the troll isn't making as much money any more. Remember the Blackberry litigation? NTP vs RIM. NTP tried to get RIM to license its e-mail system patent. RIM said software patents are garbage and we’re going to kill NTP. But through patents, NTP was close to being able to shut down Blackberry with an injunction that would shut down their phones. This scenario isn’t possible now. The courts aren’t allowing these kinds of injunctions for NPEs.

So injunctions are off the table. That cut the value of a patent to a troll in half. But trolls are smart, so they choose favorable venue. They go to Texas were juries give large settlements. Litigation is an industry in Texas, and the flavor of the day is patent litigation. But now the courts are stopping this too. They are telling the trolls to that their targets can remove the litigation out of Texas and do your litigation where patentees are not treated so favorably. So getting a venue change is easier now.

Method claims are more difficult to enforce. Just do a step or two of a claim in Canada or split steps between multiple entities. That made patents less valuable, too.

Joinder rules are stricter. So I've been sued. Well there's 1,300 claims with hundreds of defendants. That's a million dollars to defend in legal fees at least per litigant with little incremental cost to the troll for each defendant. So then the patent troll says, hey, just give me one million and it's over–don't pay the lawyers. So that's nuisance value for patent suits. Well, the America Invents Act (AIA), recently signed into law, made that harder to join unrelated defendants in the same court case. Of course the trolls filed all their suits with large numbers of defendants before the AIA  law went into effect. They are smart.  

Apportionment of damages common: Problem is you can’t roll out a tech product that doesn't infringe on thousands of patents. How do I deal with that? I can't pay royalties out to thousands of people. All these people had wanted 100% of the profits on the product. Courts said we’re going to apportion damages. So each of the thousand people get a fraction of the profit per product, instead of everything. This also greatly lowers the value of a patent for patent trolls.

If we can get transaction costs down low enough, then perhaps you can get insurance protection for the risk of patent troll litigation. If this were an insurable risk, we wouldn't care about the trolls.

Indemnification of risk: With proper indemnification, the ones benefiting most from producing a technology would be incentivize to fight patent battles.  Companies have to force their vendors to stand behind their product to push the infringement risk to the proper place in the value chain. Trolls have realized people aren’t standing behind their product and sue at the end point of the value chain to impose this risk on where it is likely to be settled without a fight. For example, someone tried to sue app developers in the Apple App Store, but Apple stood behind them and took care of it–otherwise it was were going to lose its developers.  Apple indemnified their customers in effect, but all companies should stand behind what they produce.

There could be legislative solutions, but you have to be careful not to throw out the patent system for fear of affecting the more ‘worthy’ NPEs. For example, you can say "no patent trolls allowed"—but they are part of the system that is so crucial to allow upstarts to challenge EIs. It’s going to be small tweaks that will help solve this.

Q: So companies are buying hoards of patents. Do the new laws help?

A: Traditionally, patents were the way to break into a new space. But with software, during the boom, it was about having eyeballs viewing your stuff, not patents. That's where the dot com revenue came from. Now that's over. Just a few real dot coms out there now—many have merged or gone out of business. The market is maturing and consolidating. So now you’re getting these entrenched incumbents, like Google. But to become the next incumbent, you have to use patents to get there like Qualcomm.

So what is the solution?

Transaction costs of patent infringement are coming down. This means trolls are getting only around $400,000 per case instead of $5 million or more that was typical a few years ago. Maybe even lower after the AIA. At some point, that's going to become much more manageable for companies.

We could have sane licensing models. Modest amounts, minimal paperwork. Like getting copyright licenses for music. Just pay a small fee and play whatever you want at your bar. These models could be sane for patents if you get the transaction costs down. You pay a licensing fee and you're out of trouble.

Q: Isn't it up to the jury to decide this stuff and figure out patent infringement?
A: Yes, a lot of people don't know what all this patent stuff means, and we have to really educate the jury and interpret the claim language for them. A patent always has ambiguity since you have to describe stuff that nobody has ever seen before with no language that has evolved to make this easier. Patents being confusing to understand is a fair criticism. Juries might not understand what you’re talking about in these patents.

Q: Where is the patent office in all this?
A: The patent office isn't terribly helpful in eliminating all ambiguity or making sure that all patents issued are done so properly. The people there just aren't that skilled at the same level as the inventors since the patent office is hiring very deeply into an over-tapped applicant pool in the DC area.

Q: What about a peer review process?
A: You put your patent out there and a lot of people look at it and try to help knock out the bad patents. Nice idea, but this wasn’t working when it was tried under the Peer to Patent Pilot Program. People weren't interested in reviewing patents. So it failed. The people in the field don't have time to be policing the patent system—the people you need, with the expertise, aren’t typically idle and they just don't have the time. With the America Invents Act, it’s easier to challenge patents after they’ve been issued. You don't have to go to court–you can have the patent office take another look at it. So this could work.

Q: What about using graduate programs and university to police the system?
A: This never materialized even though it was expected that the Peer to Patent Pilot Program would motivate policing of patents that might issue. I don't know why.

Q: How is the European system with the opposition period? Who pays for the opposition process? Now are we going to have oppositions?
A: I’m not sure that it will weed out bad patents like it may have in Europe since only large companies can typically afford to have an opposition program since the challenger incurs expense.

You rarely see such knock-down drag-out litigation any more between EIs who have large patent portfolios. Instead, large companies have so many patents that it can prevent upstarts from competing.

So how do you get in? You have to plan for a battle with a big entrenched incumbent. Remember the EI is infringing on your patent, but there's little or no damage for it to collect against your small amount of sale compared to what you can collect from the EI with their large amount of infringing sales.

Netflix came out of stealth mode with a bundle of patents and it was too late for entrenched competitors. It knew it was going to have to challenge a lot of people it that space.

Q: So is it all about timing? When do you file patents?
A: Problem is you have to file them early and before you know if they are going to be successful. So you need to file as soon as possible–speculatively. A lot of startups rely on a provisional patent for a year, then they file.

So start with a list of ideas. File provisional on the best of those ideas. So you’re spending on only those best ideas to use money as judiciously as you can. You have to be able to guess which are worth filing. It’s doable. You have to plan for success. A provisional patent might cost around $3,000 in legal fees. A regular patent might cost $8,000 to $13,000 for software technology.

You can file in the U.S. and you have at least 18 months of secrecy before it publishes. In the U.S., you can keep it a secret after filing until issuance if you are not filing overseas and file the correct form.

Q: China doesn't have patent laws?
A: China is projected to become the number one market for intellectual property. China will have more patent filings than anyone soon and had more patent litigations last year than last year. China is growing in leaps and bounds here.

Q: Let’s say your patent survives opposition in the U.S.–can a patent troll get you in another country?
A: Patent protection is country-by-country and the US is the most popular country for patent trolls.  In Europe, if you don’t “work” your patent, you are required to engage in compulsory licensing. That means anyone, if they choose, can use your idea if they just pay you a reasonable license fee that makes nuisance litigation far less common.

Q: What percent of patents get litigated?
A: About 1 in 50 patents make money and litgation is generally rare. Those litigated should be far less than one percent, but that is just a guess.

Q: There are few new ideas today. How do you get your idea past all the other patents out there?
A: I don’t buy that. There are tons of new ideas. There are plenty of things to invent and improve.

The Founders were on to something when they put the patent system into the U.S. Constitution. The solution is not going to be "no software patents," and one troll even thinks there are are a small group of large software companies that have their public relations departments working to weaken the patent system. EIs are already on top of the market and fear the upstart that has a patent portfolio around a key technology that will gain them entry to the ‘club.’

If you invent something that's better, plan for success which will breed competition–minimize your risk and intend to win.

 

RMIUG Meeting: Tues, Nov 8 – Patent Trolls: Evil or Necessary Evil?

Patent trolls, a derogatory term coined by Peter Detkin, a former general counsel at Intel in 2001, refers to a person or company that enforces its patents against one or more alleged infringers in a manner considered by the target or observers as a legal tactic divorced from any effort by the patentee to gain traction for the patented product in the marketplace.  The neutral term for patent troll is a non-practicing entity (NPE), which is likely preferred by Peter Detkin now since he works for Intellectual Ventures.

The patent system was invented to avoid the use of trade secrets that can keep technology protected forever.  A bargain was made–in exchange for full disclosure of an invention, the patentee enjoys a government-sanctioned monopoly for 20 years.  That deal speeds innovation through cross-pollination between competitors’ trade secrets so that you can design-around or add further innovation to a product.  The patent system forces collaboration in a manner seen so important to the Founders that it is part of our Constitution.  Being so fundamental to our Country, patents are unlikely to go away, but perhaps a better bargain can be struck.

Continue reading RMIUG Meeting: Tues, Nov 8 – Patent Trolls: Evil or Necessary Evil?