Yesterday’s posting mentioned the concerns of the small inventor in the patent reform legislation. I still don’t understand why the small inventors think the status quo is so great. It appears their biggest fear is that the large companies have the resources to overwhelm them when it come to patent enforcement litigation. But the status quo system is one that facilitates that litigation where big companies have the upper hand in resources. Right now, patents have become another form of trade secrets, where it is really is not a patent until a court says it is. (In the case of trade secrets, this is part of the law since trade secrets are a form of tort law. In the case of patents, it as just devolved that way). One defender of the status quo even pointed to the fact that half of the patents that are litigated are upheld. I hardly think that this is a strong defense. In other words, half of the patents are thrown out in court. So, the small inventor has a 50-50 chance under the current system of losing, after spending millions of dollars. This is a system worth defending?
The point is made by independent inventors that investors will not fund bad patents. And that a post-grant review system will add to uncertainty. For example, Steven Frank, in IEEE Spectrum: Patent Reform Cacophony, argues that:
A post-grant opposition system, no matter how finely tuned, would suddenly make patents a far dicer proposition. Even if European statistics give a patent a 92 percent chance of escaping opposition, all eyes would lock onto that vulnerable 8 percent.
It only makes sense: recent studies confirm that the more valuable the patent, the more likely it will face opposition. Because investors assume they are investing in the winners—that is, in research likely to be profitable and therefore to invite patent oppositions—values placed on technology companies will probably fall as perceived risk, expense, and delay increase. Inventors, for their part, may fear that the visibility of professional investment can turn otherwise unobtrusive patents into targets.
I would argue just the opposite. Investors really have no way of knowing whether are investing in a good patent or not. They assume. And that assumption is more and more under attack. They can get an independent patent evaluation company. But until an infringement action is taken, the patent is just an assertion. The investor has to be based on weighting the risk of having an invalid patent with the possible rewards from licensing (or infringement damages). A legal system that rewards me with triple-damages and the ability to shut down a company through injunctions skews the risk/reward calculation toward the decision to invest in a bad patent (potentially low cost/high reward). That calculation is also skewed toward overly broad patents. A narrow patent has a better chance of being upheld, but have much lower licensing potential. A broad patent might be thrown out, but if it is upheld it can go after a much larger income base.
So, unless you are actively in the business of licensing and/or suing, there is little incentive to invest in patents. An investment in a CDO backed by subprime mortgages look more certain that an investment in a patent portfolio. As a result, the nascent market in securitizing patents could be still-born. Securitization would be a big step forward for independent investors, opening up a whole new avenue of financing. But unless there is more certainty on patent validity, the door to that market will remained closed.
From the point of view of the inventor, as Abril and Plant, point out in “The Patent Holder’s Dilemma: Buy, Sell or Troll,” (available by subscription only) the options are build, license or troll. The pressure, they argue, is to troll:
Imagine being a recent graduate in computer science, having invented a new and improved method for displaying browser plug-ins. With help from some generous friends and the last bit of your life savings, you are successful in patenting your invention. You’re on top of the world. Now what? You consider starting up a corporation to commercialize your innovation—except that you are hoping for an academic career, not an entrepreneurial one, and do not have the $2 million in capital funds necessary to start the business. Since the innovation necessitates being embedded in other components to go to market, you consider licensing or selling your patent to Big Tech Co.—except you don’t think you have much leverage and will probably get sold short. Exhausted by the proactive approach, you consider selling it to an attorney who promises to find and litigate any infringement suits on a contingency basis. What’s an innovator to do to reap the rewards of the patent?
The key to this argument is the part about “Since the innovation necessitates being embedded in other components to go to market.” Herein is the gist of the differences in industries. In IT industries, there are very few stand- alone patents. Embedding is the norm. So licensing is key. In some other areas, there is a greater possibility for small entrepreneur to actually make the product. The folks who have a possibility of making have a different mindset and business model from the folks who have to license or sell.
One of the other arguments used in the debate is about strengthening US manufacturing — and how the small manufacturers are put at a disadvantage. But even if you decide to make, that doesn’t mean that you are going to be contributing to the US manufacturing base. The Licensing Executive Society’s guide, The Licensing Decision, suggests that you consider make the product abroad:
If you decide to start your own business or take on a new product line based on your invention, production can be a very expensive undertaking. Many companies look to foreign manufacturing as a way to reduce costs. Countries and regions that have been active in this type of outsourcing include China, India, Pakistan, Mexico, Lain American, Asia and Eastern Europe.
Given that advice, I’m not sure that the competitiveness and US manufacture argument holds much weight.
And then, as I discussed in an earlier posting, there is the whole issue of what happens when non-US manufacturers start using our patent system against us.
All in all, I think the evidence is that the patent system is seriously flawed — and that everyone, including the independent inventor and small business, would be best served by fixing the problem. The status quo is a continuing drag on US competitiveness and innovation.