Innovation Policy Post

Since Steve Lohr’s New York Times critique on Intellectual Ventures, last month the blogosphere has lit up with discussion about back door schemes to file or threaten to file patent lawsuits. Revelations of IV’s skyrocketing lobbying expenses and political contributions as well as new strategy of licensing patents to lawsuit-happy NPEs have prompted a flurry of anti-IV sentiment.

What follows is a guide to the various articles posted since the February 18 NYT article:

• Tech Crunch: Mike Masnick focuses on the revelation that IV has over 1100 shell companies, noting “No wonder IV can pretend it doesn’t sue anyone. It can simply hide behind its shell companies.”
• Tech Flash: Todd Bishop discusses Nathan Myhrvold’s desperate attempt to combat the NYT article and save face in the court of public opinion.
• Seattle Weekly: Brian Miller compares the NYT article with Nathan Myhrvold’s long-winded response in Harvard Business Journal.
• Union Square Ventures: Venture capitalist Brad Burnham provides a point-by-point rebuttal of Myhrvold’s justification for his business model.
• The Faster Times: Fred Wilson endorses Brad Burnhams views for why Myhrvold’s views on the patent system are wrong.
• Enterprise Irregulars: An anonymous patent infringement attorney, who has been the victim of NPEs: “IV has collected over a billion dollars so that it can get more patents. They make no products. They apparently don’t funnel ideas to anyone else who makes products. Heck, the only useful thing I’ve seen out of IV is that mosquito-killing laser that Mr. Myhrvold showed off at TED this year.”
• Against Monopoly: John Bennet concludes that “It doesn't sound to me like Myhrvold has much interest in the poor inventors. Rather, he just seems to want their patents so he can make piles of money suing manufacturers.”
• Boycott Novell: “Having had some direct experience with Myhrvold’s group (and hence my desire to remain anonymous), I suggest the following. “’Patent troll’ is too simplistic and limiting. Think of IV as a combination mob protection racket + ponzi monetization scheme.”
• The Economist: This editorial takes a very skeptical view of Myhrvold’s defense, noting “Mr. Myhrvold may find that the suspicions against him of patent-trollery have a long half-life.”
• Tech Dirt: Mike Masnick again posts on Intellectual Ventures, referencing the Enterprise Irregulars post to back up his anti-IV stance.
• Dow Jones: Stuart Weinberg reveals IV’s recent licensing of patents to firms located in Marshall, TX, a haven for patent infringement lawsuits: “If IV is selling patents to more aggressive third parties, the strategy has merit, said Tom Ewing, principal consultant for Avancept, an intellectual-property consulting firm. For one, IV generates revenue from the sales. Second, if IV retains a stake in the patents, it can generate additional revenue. Third, and most important, the third parties can serve as "surrogates" to pressure potential IV licensees.”
• Law.com: Zusha Elinson notes that Verizon has sued TiVo regarding one of IV’s patents.
• Tech Flash: Eric Engleman also discusses the Verizon-TiVo battle.
• Wall Street Journal: Don Clark goes in-depth regarding IV decision to start selling patents to firms willing to file patent infringement lawsuits: “Merino says some such sales deals have a ‘back end.’ In other words, his firm can receive some revenue generated by the company that buys its patents, whether through a lawsuit or some other means. But IV does not control what the buyer does with them.”

Ever had a leaky ceiling? You can place a bucket under it and delay the inevitable, but ultimately the steady dripping is going to take its toll and that bucket is going to overflow. Eventually, the ceiling may even collapse.

The latest drip in the unraveling of secretive Intellectual Ventures came last week in the form of a Wall Street Journal article. Writer Don Clark pokes holes in Nathan Myhrvold’s claims that his “invention company” makes no profits from patent infringement lawsuits:

“[IV VP of Licensing Don] Merino says some such deals have a ‘back end.’ In other words, his firm can receive some revenue generated by the company that buys its patents, whether through a lawsuit or some other means. But IV does not control what the buyer does with them.”

IV has long bragged of its record of never having filed a patent infringement lawsuit. However, these WSJ revelations suggest that they are achieving the same end product – revenue – by licensing patents to NPEs more than willing to sue. They are simply going through the back door.

Indeed, this is not the first article to note IV’s propensity to sell patents to litigious NPEs. A recent Dow Jones article revealed that several IV shell companies licensed eight patents to two firms that happened to be headquartered in Marshall, TX—a place known for its high number of patent lawsuits.

A September Recorder article titled “Intellectual Ventures Takes Indirect Route to Court” opened the lid on IV having sold patents to a firm that used them to sue Kodak for infringement:

“With its new practice of selling off patents to third parties, litigation is much more likely. It’s similar to the ‘catch and release’ model used for some time by other patent-holding companies. That’s a friendly sounding name for a threat that goes like this: Take a license because we’re going to sell the patent on the open market—and you never know what unscrupulous and lawsuit-prone troll is going to buy it.”

As the steady drip continues, one can only wonder how long the infamous IV machine can sustain its image of benevolence.

Yesterday we talked about how the 2007 legislation would have helped deal with growing patent damage awards. We’re focusing on the 2007 legislation now as it had stronger provisions to deal with some of the worst problems.

The House bill also would have made apportionment of damages a major aspect of the new damage regime; a methodology that would work to limit the extent of damages available to patent holders. Under apportionment, a patent holder would only be awarded damages for the specific contribution which the patented innovation adds over the existing technology. The debate has often been likened to the question of whether a patent holder should be awarded damages based on their contribution to the windshield wiper versus the value of the whole car.

As the legislative history of the bill noted, such a system would prevent overcompensating patentees and avoid unreasonable royalty rates on producers. Such changes would refocus the law on patent damages to fairly awarding patentees for the actual value of their patented invention and not extraneous factors. However, the use of apportionment to limit damages was far from a universally accepted proposal. A number of Representatives voiced their criticism that it was nothing more than an untested theory. Others argued that the apportionment standard was unnecessary in light of the fact that courts today already take into account the economic contributions made by inventions.

This proposal would not necessarily preclude awarding patentees for making breakthroughs in innovations, as a separate provision of the reform legislation would have continued the viability of the entire market value rule. Under this particular doctrine, damages could also be calculated on the ‘market value’ of the patented invention where that particular innovation forms the predominant basis for market demand. So patent holders could be properly compensated if their specific invention was sufficiently significant to drive the public’s demand for that invention.

Such a difference in calculation has tremendous implications, as it would provide for a patent holder to recover damages on both patented and non-patented features of the invention. Language similar to that found in the House bill should appear in any future reform proposals, as it would fairly award patentees whose inventions form the backbone and foundation of particular technological fields.

The 2007 House bill was not perfect. For example, language codifying the factors traditionally relevant in determining a reasonable royalty rate is an unnecessary proposal. Since 1970, the federal district court opinion in Georgia Pacific has been relied upon for delineating the factors, which may be considered in this endeavor. The House bill in its goal of providing clear and concrete guidance, would have statutorily mandated the consideration of a number of factors, but also would have included a catch all provision whereby courts could use any evidence and factors that were relevant. In essence, such language would likely have little real effect, as the catch all provision would be akin to the inherent flexibility offered by the Georgia Pacific test.

In his introductory remarks accompanying the Senate bill, S. 1145, Senator Patrick Leahy (D-VT) noted that patent reforms were necessary in order to promote “fair and equitable remedies” that current “litigation has not reliably produced.” For the most part, the Senate bill’s provisions were substantively similar to those in the counterpart House bill. For example, proposals to make judges gatekeepers of evidence in damages calculations, the adoption of the entire market value rule, and the use of an apportionment standard were all present in the Senate bill. However, there was criticism as to whether the Senate’s proposals would resolve uncertainty with damages, as well as pressure from anti-reform interests. Ultimately, this criticism and conflict over other provisions stalled any action before the conclusion of the 110^th Congress.

Read on for more information on proposals from the 111^th Congress...

There has been much discussion and escalating controversy in recent years about patent damage awards for infringement. With each iteration of proposed patent law reforms, Congress has become increasingly aware of the impact patent damages have in modern business. This is particularly true in light of the role NPE’s (patent trolls) play in the system and the steadily increasing rate of the average damage award. A recent PriceWaterhouseCoopers study found the annual median damages award has ranges from $2.2 to $10.6 million and, more notably, damages awards for NPEs have averaged more than double those for practicing entities – meaning those that actually create - since 1995.

In this post, we look into the most previously proposed patent damage reforms, and reasons for the failure to pass. In understanding its shortcomings, we hope to provide insight into supporting new reforms, which have better chances of passing.

Bills have been introduced to reform the patent system in the current and two previous Congresses. In the 109^th Congress, the primary bills were H.R. 2795. S. 3818, and H.R. 5096. The stronger bi-partisan, bi-cameral reform push occurred during the 110^th Congress, in 2007, with H.R. 1908 and S. 1145. In the current Congress, patent reform has advanced in the form of H.R. 1260 and S. 515. Unfortunately, these efforts have been watered down over time as various interests have lined up to protect the status quo (including the patent bar itself, which, as Supreme Court Chief Justice Roberts observed, profits from our over-expansive patent system).

Read on for more about proposals from the 110^th Congress...

We couldn’t help but chuckle at The Huffington Post’s post on ridiculous patents the PTO has granted recently. It’s just good old-fashioned fun to vote on whether the “apparatus for waking a sleeping driver by electric shock” or “doll urn” is the more absurd idea for a patent (although in our view, the “tricycle mower” is an inspired concept—teaching your kids how to ride a bike while mowing your lawn? (Where do we sign up?!)

Still, it’s important to remember that for every ridiculous but harmless patent the PTO grants, two or three dangerous ones slip through the cracks as well. These are the types of overly broad patents that lead to years of litigation, destroy small businesses, and crush the spirit of our next generation of innovators.

We have put forward the argument that the broken patent system does more than suppress innovation; it’s draining our economy as well. And who better than one of the most respected financial/business publications in the industry to back us up on this point?

The Economist recently came out with an editorial blasting the current patent system, labeling it as an out-of-date model that has discouraged big ideas and brought any momentum towards economic progress to a screeching halt. It particularly condemned the PTO’s lax standards for patent applications:

“To be eligible for a patent, an invention must not just be novel, but also useful and non-obvious. Anything that relies on natural phenomena, abstract ideas or the laws of nature does not qualify. The USPTO has taken to requiring a working prototype of anything that purportedly breaches the laws of physics. […] An end to frivolous patents for business processes will be a blessing to online commerce.”

Now we just need Congress to offer that blessing. It’s up to legislators and the PTO to take these suggestions to heart and put an end to the downward spiral our patent system is mired in. And if it means we have to mow the lawn after we teach our kids to ride a bike—well, that’s a sacrifice we’re willing to live with.

In today’s New York Times, Steve Lohr has a write up and a blog post about the highly controversial ‘Intellectual Ventures.’ Due to their intensively secretive nature and unusual business models (Lohr reports: “Intellectual Ventures, a secretive $5 billion investment firm has scooped up 30,000 patents, inspire admiration and angst,” as a result “Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage”), IV has long sparked deep suspicion.

It is no secret that IV has been substantially growing its patent portfolio for the past few years. However, one new nugget about a different kind of growth jumped out from Lohr’s story:

Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008 and 2010 — Intellectual Ventures executives, led by Mr. Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.

While we’ve never seen this previously reported, it should come as no big surprise. Over the last several years, Congress has taken a number of stabs at patent reform. Should our system see the overhaul reformers are pushing for, certain types of abusive business models may be in great danger. Certainly, companies that are merely in the business of charging for “being infringed” by productive U.S. enterprises have much to fear from patent reform.

IV’s desire for influence is telling of their desire to protect their business model – whatever it may be. Some IV revenue comes from licensing deals. Given the fiercely tight-lipped temperament of IV, it is unclear where additional revenue may come, from though IV has long held out the threat of litigation (but, they claim, never acted on it). However, Lohr in his informative blog post that accompanied the initial story, shines some new light on this. Regarding one particular case involving a suit against Eastman Kodak, IV admits involvement:

Donald Merino, senior vice president of licensing for Intellectual Ventures, said that the company did step in, but only after the shell company had started litigation. It bought or licensed a handful of patents from the shell company, and then licensed them back to the shell company, represented by the Niro firm.

Consider: benevolent or litigious? Of course, IV refused to answer who shares in the monetary outcome of the suit.