Wrote this article for PC.com magazine in Malaysia back in October 2011. I feel passionately about the topic of patents and patent trolls and pitched to have this article in the magazine. Thankfully, the editor agreed 😉 The actual title of the published article was just Patent Wars, but I really liked my proposed title so here it is.
Originally, patents were meant to spur innovation by protecting against unauthorised copies. Today they’re at the centre of multi-million dollar lawsuits and strategic acquisitions by both technology conglomerates and small companies alike. It’s pretty common nowadays to expect a patent violation claim to follow on the heels of a wildly successful product and conveniently, these are only filed after the alleged patent violator has already made huge profits.
Speaking at a Salesforce.com’s annual Dreamforce conference in September 2011, Google’s Executive Chairman and former CEO Eric Schmidt, voiced his concern on the current state of the patent wars, “With the device revolution coming, I fear patents will slow it down”. In his view, patents issued in the 1990s and 2000s were overly broad and are now the main reason for the constant stream of court cases for alleged patent violations.
Eric Schmidt – “With the device revolution coming, I fear patents will slow it down”
Schmidt has a point. If companies could shift their resources from being used to defend against patent litigation and transfer them towards R&D, technological advancements could come much faster. There’s a problem though, non-practicing entities aka patent trolls, and they don’t look like they’re going away any time soon. These companies Many individuals and obscure companies have tried to profit from registering various vague sounding patents that cover a wide range of areas with the intention of pursuing litigation against companies that seem to run afoul of the patent.
This often leads to a handsome settlement if the alleged patent violator is unable, unwilling or can’t afford to fight out the case in the court of law. There’s a strong sense that the only people benefiting from the patent wars are patent trolls and IP lawyers. Of course, genuine patent violations do occur but by and large, the courts are increasingly filled with patent violation claims based on wordings so vague that we might one day see a patent on things like “breathing” or “reading materials via an electronic or print medium” being issued.
Vague patent wordings = relatively easy money for patent trolls
In one recent example, Ohio-based Impulse Technology filed a complaint in July 2011 alleging that Microsoft’s Kinect controller infringes on seven (!) of its technology patents. One patent covers a “wide variety of games where the movement of a player is tracked in three dimensions…and certain exercise games where the motion of the player is tracked to effect movement of a virtual avatar, and the exertion of the user is monitored, including where the tracking of the player is done by the use of a camera”.
The patent troll company is seeking a “permanent injunction” to block the import and sale of Microsoft’s Kinect, and it is also suing Electronic Arts, Konami and Sega for developing Xbox 360 games that utilize Kinect and infringe on its patents. Impulse is seeking damages, treble damages, interest, and attorney fees from Microsoft as well. Since they actually applied for the patents as far back as 1999 and claim to have previously informed Microsoft of the patent violation, Impulse may end up getting a settlement of some kind thanks in large part to the vague wording of their patents.
Keeping with the theme of wildly successful products being targeted by patent trolls, Rovio, maker of a tiny game you may have heard of called Angry Birds, was sued in July 2011 by US NPE Lodsys for patent violations. The alleged violation? Methods for purchasing new levels in a game. Lodsys even manages to sound victimised when they posted in the company blog that, “Lodsys is just trying to get value for assets that it owns, just like each and every company selling products or services is, trying to do business and make a profit”.
According to Florian Mueller, who tracks patent disputes in the US and the EU, “Lodsys is trying to abuse the patent system in a way that could ultimately destroy the entire mobile apps economy”. Fortunately for Rovio (and just about every other iPhone developer with an in-app level purchasing system), Apple has moved to shield them stating, “Apple is undisputedly licensed to these patents and the App Makers are protected by that license”. The actual email sent by Apple’s Senior Vice President Bruce Sewell to Lodsys’s CEO Mark Small is worth a read, if only for the entertainment value of seeing Apple give a smackdown to Lodsys for trying to bully their App Makers.
Rising cost of patents
“The cost to the defendants has soared,” says patent expert James Bessen from Boston University’s law school. “Outside of chemicals and pharmaceuticals, where the patent system works well, the costs of litigation have quadrupled” since the late 1980s and he estimates that unnecessary patent litigation represents a 10 to 20 percent “tax” on innovation.
Google has been at the centre of several high profile patent-related acquisitions in the past couple of years, the most high profile being their most recent acquisition of Motorola Mobility for an astonishing USD$12.5 billion, Google’s most expensive acquisition ever. CEO Larry Page explains, “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”
There’s a lot of money at stake in the patent wars. Despite Microsoft’s poor (some would say negligible) market position in the mobile OS industry, it’s said to be earning close to USD$150 million from its Android licensing deal with HTC alone. On top of that, a September 2011 patent agreement with Acer and Viewsonic means that Microsoft can sooth its Windows Mobile pains with money from its Android cash cows.
Motorola Mobility’s portfolio of 17k patents is a valuable war chest for Google to use to defend itself from mounting attacks from Microsoft, Apple and Oracle. At stake is Google’s Android platform, the leading mobile operating system for smartphones, which would suffer a severe blow if Google ever had to pay a license fee for each Android device. A study by research firm Gartner showed that 46.8 million Android smartphones were sold in Q2 2011, a significant increase over last year’s 10.7 million sales figures.
In July 2011, Google lost out on Nortel’s hotly contested lucrative patent portfolio after a consortium of competitors comprising Apple, Microsoft, Sony and RIM made a winning bid of USD$4.5 billion for them, a figure far in excess of Google’s opening bid of USD$900 million. In the face of this setback Google moved swiftly to complete a business deal for 1,023 patents from IBM (who themselves have a massive bunker of patents) for an undisclosed fee. A second similar deal was completed in September 2011 bring the total number of patents acquired from IBM to just over 2,000 in the space of a few months.
A patent litigation analytics start up called Lex Machina recently published the results of their mobile handset litigation study which found that lawsuits involving mobile handsets were up an estimated 25 percent each year since 2006. In August 2011 alone, 294 patent lawsuits were recorded of which 8 percent were mobile related. Strangely, a vast majority of patent infringement lawsuits are filed in one particular location in the US – the Eastern District of Texas. It is by far the most popular court for such lawsuits, even leading at least one company to set up an office in the district to ensure their case could be tried there.
Why East Texas in particular? Apparently, the court there is notoriously “patent holder friendly”, adjudicates cases very quickly (so patent holders can get a fast decision), has a “rocket docket” – a set of local rules for patent cases which help reduce uncertainties in the litigation process, and the judges generally don’t dispose (or throw out) cases early.
A 2010 study by Stanford Law Professor and patent expert Mark Lemley seems to invalidate that belief though, ranking East Texas sixth in favourable resolutions on the merits of patentees (40.3 percent). The Northern District of Texas ranked first.
China’s top telecommunication equipment manufacturing giants, Huawei Technologies Co Ltd and ZTE Corp have been aggressively building their patent portfolio over the past few years. According to the World Intellectual Property Organisation, ZTE made 1,863 different international patent applications in 2010, the second highest total that year. Huawei was the fourth highest in 2010 with 1,528 patent applications and was the most active filer in 2009.
Based on figures from the Thomson Reuters Derwent World Patents Index, China was the third highest filer of patents in 2010 with 313,854 registered patents, a 12 percent rise since 2009. The surge in patent applications in China has led to a lucrative business for patent lawyers in the country.
This could well represent a major shift of intent to move from a copy driven reverse-engineering-based industry to an IP driven innovation-based industry. China is targeting 2.5 percent of its GDP to come from R&D by 2020 and has moved to push that agenda through patent subsidies and enforcing IPs more strictly. Could this be the beginning of a new dawn for a country more famed for its “genuine copies” than for its innovation?
A light at the end of the tunnel or a false dawn?
On 8 September 2011, long awaited US patent reforms took major step forward through the passing of the America Invents Act by the US Senate. Senator Patrick Leahy called the approval a “historic legislation” and President Obama went on record to praise that action and vowed to sign the bill. Tech giant IBM was positive about the Act as well saying it “will deliver the most updates and important updates to the US patent system in nearly 60 years.”
Among the major changes was a shift to a “first-to-file” system (used by most other countries except the US), a streamlined patent application process, and allows for the US Patent and Trademark Office (USPTO) to charge and retain set fees for all applications. There’s also a new third-party challenge system that could stop some patents from being approved in the first place, which would go a long way towards fixing the problem of vaguely worded patents.
Unfortunately for the companies constantly in the firing line of patent trolls, there was little in the bill to deal with that problem. The present (and many say broken) system of determining damages will remain unchanged once the bill passes.
IBM may have found the perfect solution though. The company has filed a patent (application number 20100332285) for a “computerised system for providing an IP framework, including a storage component, a user interface, and a reporting module”. Additionally, the application notes that IBM’s new technology “defines the decision process and plan of action to identify, create, and protect IP for defensive purposes”.
What’s interesting about this particular patent application is that, if granted, IBM would effectively possess a patent on using computer technology to capitalise on its IP portfolio, defend itself against patent-infringement claims, and influence patent policy. It could be the world’s first meta-patent. IBM’s chief patent counsel Manny Schecter shed some light on their actions explaining that the patent wasn’t meant to be a defense system against patent trolls. He said, “It is a component business model for managing and leveraging patents”.
For companies who aren’t IBM and don’t have such a meta-patent, there might be a light at the end of the tunnel. The courts seem to be reducing the sums awarded for patent litigation, which mean there’s less financial incentive for patent trolls to operate. Duke Law professor and former administrator of the office of external affairs at the patent office Arti Raj said, “The court for patent appeals has done a very good job in the last few years of trying to make sure that damages correspond to the actual value of the product sued over”.
One hopes that along with the America Invents Act this would be the beginning of the end for silly lawsuits asking for silly amounts of money.