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Why would a company rent an office in a tiny town in East Texas, put a nameplate on the door, and leave it completely empty for a year? The answer involves … a war waging right now, all across the software and tech industries

via When Patents Attack! | This American Life.

For those who are new to IP law or IP litigation, NPR’s “This American Life” (TAL) produced a podcast introducing those who are unfamiliar with patent lawsuits to the ins and outs of the industry. In effect, the podcast focused on one patent in particular that was being asserted against a variety of companies in order to force them to settle into paying large licensing fees.

SUMMARY: 

The story played out as many IP lawsuits do. Fototime was notified that it was infringing on a patent and should settle out of court. Fototime was not able to know exactly what patent it was infringing upon, but, in order to find out, it would have to end up in a court proceeding that could cost upwards of $2 million. Because it didn’t have the resources to fight this suit, and because it didn’t want to risk a business its founders spent years creating, Fototime settled for an undisclosed amount, enough to “make [it] hurt” but not enough to put it out of business.

NPR reporter Laura Sydell and TAL host Alex Blumberg decided to chase down the company suing Fototime, and that led them from Intellectual Ventures, the company that owned the patent, to a mysterious company called OASIS Research. OASIS Research operated out of an unoccupied office in a building in Marshall, Texas. The TAL crew labeled OASIS as a shell company of Intellectual Ventures, a company formed to be a “patent troll,” whose sole purpose was to assert this patent against Fototime over 130 infringers.

The patent itself was one that concerned upgrading software over the internet. According to an expert at M-Cam, 5,303 patents were issued during the prosecution of the original patent that covered the same material, and companies were already engaging in this sort of activity well before the patent was filed. It seems as though this patent never should have been issued or, at the very least, it shouldn’t have been asserted over a decade after its issuance against Fototime.

Needless to say, after trekking across the country and arriving where they started, back at Intellectual Ventures, the NPR team claimed that Intellectual Ventures was allowing OASIS Research to assert the patent while maintaining a monetary interest in the outcome of the case, making them nothing more than an accomplice to the hated “patent trolls.” Through this podcast, the TAL team told this interesting story in its attempt to demonstrate that the patent system is broken and actually discourages innovation.

ANALYSIS

Intellectual Ventures responded with a statement that it was misunderstood, and that its purpose was to protect inventors by allowing them to monetize their inventions. Techdirt condemned this response, saying that it was “almost entirely content-less” and ignored the “[d]ozens of studies on the history of the patent system that have shown that patents have a negative impact on innovation.” The problem is, rationally, both sides have a seemingly argument, but it seems Intellectual Venture’s stance is not as practical under the current patent system.

Intellectual Ventures is right about one thing. Inventors should see some benefit from their innovation. Ignore the fact that maybe the USPTO makes some mistakes in issuing over-broad or unoriginal patents. Without some sort of way for inventors to monetize their patents, there’s no incentive to invent. The problem in the system seems to be when the inventor has monetized the patent by selling it to a company like Intellectual Ventures. At this point, the patent is no longer owned by someone who is trying to make money from her invention by asserting her patent against direct competitors, allowing her to face less competition in introducing her product to her target markets. Instead, the patent is owned by a company with the vast resources that allow it to assert the patent against everyone, even those in completely disparate markets. No longer is the patent being protected so that the technology covered in the patent can be introduced to the market by its founder. Instead, it is being used as a tool to make money from anyone who utilizes similar technology but cannot afford to defend itself in the face of such deep-pocketed opposition as Intellectual Ventures.

Intellectual Ventures argues that it serves as a shopping center for innovators, where people can pick and choose from Intellectual Ventures’ patents, license them, and use them to innovate. RPX is such a company, where numerous businesses pay a licensing fee to RPX in exchange for access to every patent in its portfolio. RPX claims that it “[does] not initiate and [does] not profit from patent assertions.” Two problems arise from this kind of company, however. One is that simple economic analysis would tell you that, if RPX doesn’t assert its IP rights, there is no incentive to pay it licensing fees. The other is the interesting relationship between primary companies and shell companies such as the one between OASIS Technologies and Intellectual Ventures. By using shell companies, entities like Intellectual Ventures can publicly condemn patent trolling while retaining a financial stake in these lawsuits. This practice is unlikely to come to an end. When there’s an economic incentive to assert patents, publicly owned companies are inclined to take advantage of their opportunities for profit. In our patent system, there remains an economic advantage to holding IP and asserting it against competitors, which explains why numerous companies (almost all of whom belonged to the RPX consortium) bid against one another (and RPX itself) for over 6,000 Nortel patents earlier this summer.

One of the most interesting aspects of this podcast focuses on the lack of transparency in the system. When a company is sued for patent infringement (at least in the case of Fototime), the company cannot confirm that it is infringing on another’s patents until it commits to litigation. Companies with resources can fight the suit if it is in their interests, whereas smaller companies don’t have the resources to go to court. As a result, these smaller companies can’t figure out how they are infringing (or even if they are, in fact, infringing), and are forced to settle with cumbersome licensing agreements that have extensive implications for their business. At a time where many contend that small-business is creating the most jobs in the economy, anything inhibiting the growth of these companies, like non-transparent IP infringement claims or large licensing fees could have implications on the national economy as well.

A variety of experts have provided more in-depth analysis of the cost of patent laws on the system, especially now that the House of Representatives has passed patent reform, but the Senate has yet to approve it. NPR’s Planet Money followed up with their own analysis on estimating the true “cost” of the current patent system on innovation. Arstechnica produced their own article detailing what they think patent reform should look like. Others, like Zach Carter at the Huffington Post, assert that corruption is driving Congress to side with the patent trolls and fail to fix a broken system. In the coming months, Congress may be looking at patent reform legislation, and it will be interesting for those of us on the sidelines to watch where this legislation may take the patent system, for better or worse.