Torrent of legal suits between tech firms reflects a system running amok and threatens to stifle ideas
By Richard Waters 04:45 AM May 16, 2012
Judith Masthoff, a Dutch researcher in artificial intelligence, was a doctoral student in the mid-1990s when she came up with her first invention.
The outline of the idea – a way of “enabling a user to fetch a specific information item from a set of information items” – hardly hinted at the starring role her brainwave would play in the legal battles sweeping through the technology industry.
Ms Masthoff still remembers the excitement she felt writing her patent application, one of the first in the software field for Philips, the Dutch electronics company to which she assigned the work. Providing a form of personalisation, it was an early attempt to help users make sense of the flood of online information, a critical issue for many websites.
But she lost track of it as her career moved on and only recently discovered that her application had eventually been approved in 2001.
The idea – now known as US patent number 6,216,133 – has been on a long journey since then. It was sold to the subsidiary of an American company that deals in intellectual property before finding its way, late last year, to its current owner: Facebook.
It is now playing a prominent role in the social network’s first big legal fight. It is the oldest of 10 patents the company used last month to mount a legal action against Yahoo! – a counterstroke against a patent infringement suit brought by the Internet search and media company this year.
COLOSSAL WASTE OF MONEY
Depending on your point of view, Facebook’s ability to co-opt old ideas such as this to defend itself against an assault on the legal foundations of its business could be a sign that, in an economy increasingly based on ideas, an efficient market in intellectual property is at work.
Alternatively, it indicates that the system is running amok, threatening to suffocate the innovation that makes breakthrough ideas such as Facebook’s social network possible in the first place.
With suits flying among some of the best-known tech names, companies such as Facebook, Apple, Google and Microsoft have been forced to spend heavily in the past year or so to arm themselves legally, in turn pushing up prices for patents such as Ms Masthoff’s as they change hands.
In the smartphone business alone – centre of much of the action – US$15 billion (S$18.8 billion) to US$20 billion has been spent buying patents, with legal bills reaching US$500 million on a “conservative estimate”, says Professor Mark Lemley of Stanford Law School.
It is hard to find anyone in the industry or in legal circles prepared to argue this is anything other than a colossal waste of money.
“It’s highly inefficient and antithetical to what patents are meant to achieve,” says Mr David Martin, chairman of M-Cam, a US patent analysis company. Lawsuits such as those brought by Yahoo! are “a de facto utility charge on someone else’s business success”, he adds.
Worse, the rising costs faced by companies arming themselves against legal attack could hamper innovation. Those that cannot pay this new “tax” risk being in effect barred from competing in the most promising new areas, such as smartphones.
WORTH MORE DEAD THAN ALIVE
Patent battles in tech – and the costs of building a strong intellectual property position – are not new. In recent years, executives have complained about the emergence of “trolls”, companies set up specifically to buy patents and mount opportunistic lawsuits against successful groups.
But proof of dramatic new forces at work came nearly a year ago, when patents owned by Nortel Networks, a bankrupt Canadian telecoms equipment maker, were auctioned for US$4.5 billion. The price, five times higher than initial estimates, showed Nortel was worth more dead than alive.
Having lost out in this case – and been left in a weak patent position compared with Apple and Microsoft, which were among the auction’s winners – Google agreed six weeks later to pay US$12.5 billion for Motorola Mobility, mainly to get its hands on the telecoms group’s intellectual property.
Behind these deals lay a rash of suits over smartphones, as Apple, Samsung, Microsoft and others angled for advantage in the sector’s biggest new market since the advent of the personal computer. Along with a spate of other transactions leading to Microsoft’s US$1.1billion purchase of patents from AOL last month, they reflect “a perfect storm” in tech patent circles, says Mr Ron Laurie of Inflexion Point, which advises on patent sales.
On one side are cash-rich companies, including Apple, Google and Microsoft, with the wherewithal and incentive to pay large amounts for legal protection.
On the other is a group of former stars forced to turn prized intangible assets into cash. They include bankrupt companies such as Nortel and Eastman Kodak, whose digital imaging patents are expected to end up being among its most valuable holdings, as well as struggling concerns such as Motorola and AOL, both of which came under pressure from activist shareholders to jump on the patent-sale bandwagon.
Companies in decline could yet shed their reluctance to take legal action against those once considered potential partners.
Yahoo! went as far as preparing a lawsuit against Google in 2006 over its core search technology, according to someone familiar with the initiative, but called it off after senior managers shrank from the business risks. Now, as Yahoo’s position in the search market falls further, a new management group with little to lose has landed a blow against Facebook in the Masthoff case.
ONE VIEW: MARKET AT WORK
There are various explanations for the escalation in both lawsuits and patent sales. To some, they are the by-product of an inevitable shift in the tech world, with intellectual property assuming its rightful central place in an economy revolving around ideas.
According to this view, the more active market for patents is bringing much-needed liquidity to intellectual property, helping it find its way to those best able to extract value.
When Microsoft immediately resold part of its new AOL patent holding to Facebook last month for US$550 million, recycling dotcom-era ideas into the hands of the latest internet company to transfix Wall Street, it seemed a fitting confirmation of how industry leadership has been transferred.
Supporters of this view argue that aggressive legal actions and high prices are often symptoms of a market – albeit an imperfect one – at work.
A wave of start-ups has been launched on the idea that the “ideas economy” needs a stronger infrastructure and new approaches to make the market work better. It includes Intellectual Ventures, which aims to foster invention by separating the creation and patenting of ideas from their commercialisation; and RPX, which buys patents for defensive purposes on behalf of its customers.
Critics, however, claim such businesses lubricate a system that encourages litigation and forces companies to buy protection against opportunistic lawsuits.
NEW MARKETS SYNDROME
A second view holds that the outbreak of legal hostilities simply reflects the inevitable upheaval from the emergence of big new markets.
The smartphone patent wars have become the clearest example of this, pitting companies from the computing and mobile communications worlds against each other for the first time. More than 250,000 patents, often overlapping, are potentially brought into play by smartphones drawing on technologies from several parts of the industry, according to RPX.
uch legal battles were seen with the emergence of the telegraph and the radio – and even mechanical farm equipment – as companies stake claims to the new markets. Eventually a stalemate is reached, and rivals conclude there is more to be gained from cross-licensing their ideas.
Whether that pattern will hold in smartphones – or in areas such as social networking and online advertising – has yet to be seen. “Maybe this time it isn’t a usual cycle,” says Prof Doug Lichtman of University of California, Los Angeles. “Patents are much more front and centre: People realise they can be sold and traded, they are much more visible.”
Another sign that a deeper change is occurring has been the rise in patent litigation in industries far removed from the latest hot tech markets, says Prof Meurer. Even relatively stable businesses such as food, cars and mining seem to be facing a secular increase in lawsuits, he adds.
That leads to a third explanation for the change in the patent world: That a systemic shift has taken place. The sheer number of lawsuits being filed, and the large amounts of money being thrown around to buy protection, suggest “there is something fundamentally broken here”, says Prof Lemley.
According to this view, long-running weaknesses in the approval process – making it too easy to obtain recognition for marginal or unoriginal ideas – lie at the heart of the problem, along with court decisions that have handed the advantage to plaintiffs.
If so, it could take years to fix: The US’s first legislation in this area in more than half a century, enacted last year, was widely seen as having brought only marginal improvement. It brought US filing procedures more into line with international practice, but limited the ability to bring nuisance lawsuits only modestly.
SPILLING INTO ONLINE WORLD
The cycle of lawsuits, meanwhile, is unlikely to abate: Rather, it shows every sign of being about to spill from the smartphone industry into the broader online world.
If Yahoo succeeds in extracting patent royalties from Facebook, for instance, it would almost certainly make similar claims against other Internet companies, particularly newcomers such as Twitter that lack significant patent holdings, according to one experienced litigator.
Others warn Facebook could soon face bigger legal challenges of its own. Amazon’s ownership of a seminal social networking patent predating Facebook’s own intellectual property in the area could leave the social network facing a lawsuit over its core business, says Mr Martin.
Amazon itself has risked a legal morass by branching beyond e-readers into mobile devices, such as the Kindle Fire, with a broader range of uses, another legal expert says. Lawyers will be rubbing their hands at the prospect.
For the inventors whose ideas set the whole system in motion, meanwhile, all of this conjures up a certain air of unreality.
“I’m interested in people using my ideas,” says Ms Masthoff, echoing the age-old cry of inventors everywhere – before adding, with resignation: “But then, of course, companies also have to protect their businesses.” The Financial Times Limited
Richard Waters heads the Financial Times’ San Francisco bureau.
A Patent is just the registration of an idea that has little value unless it is brought to the markets to complete a product, where it’s instrinsic value is fully realised, then to protect your market share, it is a very valuable holding to exert your legal rights to prevent other’s from copying your ideas thru proper licensing, not as a barrier for innovations. Therefore not every Patent is valuable unless it is brought to the markets, by registration of an idea to prevent competition is the most stupid way to waste money, and existing laws cannot differentiate the value of Patents, combined with complexity of different markets, make patent laws very in-efficient for innovations.
A Patent has great value when it can derive an income from a potential market thru licensing and cross agreements, but if the market has passed, where will the value comes from? So there will always be a lifetime for patents, and after expiration the value is almost nil. Even Patents is subject to the laws of Demand and Supply eg would you buy an oldie song from the 60s, and collect royalties even though the licence has already expired? I would if there is a potential to make an income, but if there is no demand, I will stay far from it.
At times, unless the income justifies, I might just CC the license instead of patent.
A Creative Commons license is one of several copyright licenses that allow the distribution of copyrighted works. The licenses differ by several combinations that condition the terms of distribution. They were initially released on December 16, 2002 by Creative Commons, a U.S. non-profit corporation founded in 2001.
As of July 2011, Creative Commons licenses have been “ported” over 50 different jurisdictions worldwide. No new ports are being started as preparations for version 4.0 of the license suite begin.
– Contributed by Oogle.