The Growing Conflict: Patents v. Products

Apple vs. HTC; Oracle vs. Google; Microsoft vs. Motorola; Nokia vs. Apple…. Where will the patent meltdown end? This didn’t happen with PCs. Why now?

These companies are not patent trolls. They are world class operating companies that should be competing in the marketplace with high-quality feature-rich products. Yes, they have accumulated huge patent portfolios, but that was supposed to be for defensive purposes — in case they were attacked by aggressive patent holders.

Something in the air is putting all those patents to work. There is plenty of pontification about “defending our intellectual property.” But real customers want products, not skeins and tangles of patents.

There are an estimated 100,000 “function points” in Windows XP. Each function is theoretically patentable if it is new and not obvious to the “person having ordinary skill in the art.” In short, our permissive patent law makes it easy to get a patent in a technology where putting a fully functional product together is an enormous undertaking. It’s not just 100,000 functions, it’s making them all work together without glitches – and doing so in a way that the user doesn’t have to deal with all this mind-numbing complexity. Individual functions have to be combined into higher-level functions and features, which need to be combined into real products for real people.

But this complexity means that products can be held hostage to patents — even a single patent. The patent may be a brilliant invention – or it may be just a notch above the ordinary. Either way, it has the power to wreak havoc on a complex product.

In 1991, Bill Gates wrote in an internal memo: “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”

Indeed, the software industry matured without conflict over patents, as did the semiconductor industry. There wasn’t much interest in getting patents when the technology was changing so fast – especially compared to the slow processes of the patent system. In the case of software, the 1966 President’s Commission on the Patent System recommended against patents for computer programs, and a handful of Supreme Court decisions seemed to limit them to traditional physical processes such as curing rubber.

Patents as weapons business model

But patents are not just for protection against copying. Under the permissive regime of the specialized Court of Appeals for the Federal Circuit, patents became a powerful weapon that could be used for a variety of offensive and defensive purposes. Once patents take hold in a sector, there is no stopping it.

You can’t opt out of the patent system if your competitors are getting patents. At the very least, you need patents for the benefits of mutually assured destruction: sue me and I’ll sue you. Or its more explicit variation, non-assertion agreements: I promise not to sue you if you promise not to sue me. Or, most explicitly, cross-licensing. Let’s license each other, so we don’t have to even think about suing. Meanwhile, our portfolios will keep out the upstarts, or startups, or whatever they might be called.

The problem is, these strategies don’t work against trolls. Trolls started surfacing only about a decade ago, just when cross-licensing seemed to solve the problem of too many patents.

Patents were not worth much when there was money to be made in products, and the value of patents seemed to be diluted by large numbers. So patents liberated from failed companies could be snapped up by speculators – specialists who didn’t waste time and money creating real products, and therefore had no need for cross-licenses. They could exploit investments made by others by appearing out of nowhere and demanding money.

Where did patent trolls come from?

It’s not hard to hide in a fog. Large volumes of patents with fuzzy boundaries and of questionable validity made it easy. If engineers and developers spent their time trying to read, interpret, evaluate, avoid patents and/or negotiate licenses, nobody would get any work done. Products would not get made. Who was going to pay lawyers $300/hour to look for patent-defeating prior art and interpret ambiguous claims? The only rational solution has been to ignore patents, until and unless they cause problems.

Not only does the troll model work for “non-practicing entities” (the polite term for trolls), it also works for failed companies. In essence, patent portfolios reward failure, because failed companies or companies exiting a market are free to assert patents against those still in it. This is why VCs like patents – because they can cushion the loss of investment in a failed startup.

It’s hard to sell management on the strategic value of patents if you are constantly being sued by trolls. Operating companies are each facing dozens of lawsuits from companies in the patent licensing business. If your patent department has invested millions of dollars in creating portfolios of thousands of patents, naturally you would like to show some net benefit. So why hold back?

Why not use these costly portfolios to attack rival platforms — especially the successful ones?

Using patent portfolios to attack rival platforms

So we are now entering a new and unprecedented phase of patent practice: the use of patent portfolios to attack rival platforms. Everybody remembers the shakedown of RIM, which paid $612 million to a non-practicing entity to avoid a shutdown of the entire Blackberry network.

Today, it is the successful new platforms, Apple’s iPhone and Google’s Android, that offer the biggest and most attractive targets. But it is no coincidence that Google, the company behind the ascendant, wildly successful Android platform is not suing anyone.

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