Google and Apple vs. the Patent Trolls

With Apple and Google settling their patent disputes, some have noted that the two companies are now teaming up to urge legal reforms directed at patent trolls. In simple terms, a patent troll is a company that does not produce anything, but instead builds a library of patents that it uses to make demands for compensation or to launch lawsuits, often strategically timed to coerce a quick settlement, against companies that they allege are violating their patents. Many start-ups end up having to choose between settlement or burning through hundreds of thousands of dollars in legal fees, often significantly more than the patent troll demands to settle the claim, instead of investing that money in their business. The patent troll may wait to file a lawsuit until a company is in merger or acquisition talks or announces an IPO, knowing that in those contexts companies will often want to quickly settle any litigation.

At the same time, large companies are notorious for being unwilling to license outside technology and, upon learning of an innovation, of trying to find a way to replicate its best features without running afoul of the existing patent. Also, absent a huge bankroll, it is a rare private inventor who can afford to litigate even an egregious patent violation. Although I am not claiming it to be at all typical, or at all common, it's not difficult to see why an inventor who lacks the resources to directly capitalize on a patent, who can't find a manufacturer willing to license or buy the patent, and who sees what appear to be violations of his patent by existing companies, might choose to license or sell a patent to a company that could reasonably be described as a "patent troll".

One reform that is sometimes proposed as a way to greatly reduce patent trolling is to eliminate software patents. However, we're now in an era in which traditionally patentable devices covered with switches, buttons and knobs can be replicated on a touch screen, purely through software. We're in an era in which the patentable elements of a breakthrough computer innovation may be entirely software-based, and where product development could involve the investment of millions, even tens or hundreds of millions of dollars, but where replication of the idea is comparatively cheap and easy. That's the context of the Samsung-Apple litigation, with Apple having spent $150 billion or more developing the iPhone and Samsung, displeased with its own efforts, choosing the much easier path of imitation.

If you deprive the innovator of any patent protection, it's highly unlikely that they're going to make the necessary investment to produce that type of innovative product as they would be concerned that immediate imitators would prevent them from obtaining a return on their investment -- or might turn that investment into a gargantuan loss. Also, given the $billions that major companies have spent building their patent portfolios, even if it would make sense in the long-term to narrow the protection available through software patents, it's difficult to imagine that those companies will support reforms that would significantly reduce the value of their patents. At the same time, it should be possible to get broad support to narrow eligibility for software patents, and perhaps even to significantly shorten their duration, reforms that would help keep dubious patents from being used coercively against manufacturers and service providers, and allow companies to recover their investments while limiting the amount of time in which competitors are reluctant to build upon a patent holder's breakthrough or essential technology.

Another reform that is often suggested, and which seems quite reasonable, is to provide that a patent holder can only obtain injunctive relief is if it actually manufactures a product covered by its patent. A reform along that line seems reasonable, although I think it would be appropriate to provide for injunctions if the patent holder can demonstrate that it is in the process of developing products or that the alleged violation is intentional. Otherwise, the coercive impact of an injunction could cause a company to settle a frivolous claim in order to keep a key product on the market or to reassure investors or its distribution network.

I've also seen it suggested that, if sued, a company should be permitted to ask a court to declare that the patent holder is a patent troll and, if the court agrees, that the company should be required to post a bond to cover the alleged violator's legal fees if its patent litigation is not successful. While the most noteworthy example I've seen, the proposed Shield Act, attempts to define "patent troll", its definitions remain problematic. For example, the requirement that a company seeking to protect an acquired patent "provide documentation to the court of substantial investment made by such party in the exploitation of the patent through production or sale of an item covered by the patent" would put a significant hurdle in front of a patent holder trying to sell a patent that is already being infringed, or in front of a company that acquires a patent that is infringed prior to its commencement of production and sale of a covered product.

The bond requirement imposed on a company determined to fall under the act would be oppressive to a company bringing a legitimate patent claim, but there's no reciprocal requirement -- either for a bond requirement or for an award of legal fees against a defendant company that loses its defense of a patent case -- that would discourage a company from defending a patent that it believes is, or probably is, valid. While there's something to be said for reducing a patent troll's ability to coerce a settlement from a company that might prevail if the case were litigated, the Shield Act seems to substitute one problem for another -- now a willful infringer can create a litigation environment in which a company that has acquired a valid patent could come under intense financial pressure to settle for far less than the claim is worth.

A more modest reform bill is pending in Congress, and it does include a reciprocal attorney fee provision, but it is not widely viewed as having a large chance of passing. The bill includes some interesting elements that attempt to limit the ability of a patent holder to coerce another company based upon nebulous claims of patent infringement, and potentially create a cause of action against a patent holder who violates those provisions.

Google and Apple are in a powerful position to push for meaningful patent reform. Let's hope that they push for balanced reforms, even at risk of devaluing their patent portfolios, and that more tech companies join their effort.

The Top Issues That Romney Should (But Won't) Address

If Mitt Romney wants to move the campaign from the non-serious to the serious, to move from fabricated attacks to substantive discussion, ere are some issues I would like to see him address:

1. Climate Change: Let's skip past the B.S. and acknowledge the facts. The world is getting hotter and all of the world's nations are going to be affected, some far more seriously than others. What policy should the U.S. take in response to climate change, and if you propose anything but inaction how will you lead the world on the issue?

2. Trade Deficits: If our nation runs a trade deficit, that deficit must be "paid for" with some combination of government debt or private debt. Do you believe that foreign nations will, in effect, subsidize our consumers forever, or do you believe that the trade deficit matters and should be reduced? If you want to reduce trade deficits, what steps will you take to bring about a reduction? If not, how do you propose that our nation's position in the global marketplace can be sustained over the long-term?

3. Terrorism: Since George W. Bush left office, the approach to the "war on terror" has shifted from starting large, traditional wars in nation states to launching small commando raids and drone strikes around the world. While a good case can be made that the new approach is the better one for combating groups planning terror attacks against the U.S., its interests and allies, the lack of Congressional oversight over the choice of targets and use of drones creates serious questions about the proper scope of executive power, while also raising serious resentment against the U.S. in areas where drone strikes are occurring. What will you do to address those concerns, and what will be your policy on the selection of targets (including U.S. citizens) and whether and when to order commando raids or drone strikes on selected targets?

4. Military Spending: Do you believe that there is any waste, fat or excess in the U.S. military and defense budgets? If not, please make the economic case for our present weapons systems, actual and under development, vast network of military bases, and other expenditures that come under frequent attack, even from within your party? If so, what programs would you modify or cut? What military expenditures do you deem the most crucial to the nation's interest, and which do you deem to be the least? How would you search for efficiencies and, once identified, how would you implement more efficient practices or policies? How will your policies, one way or the other, affect military spending in present and future budgets? How will they affect national defense, as well as overseas military commitments and activities? Are there any world conflicts in which you would increase or decrease a U.S. military role and presence and, if so, which ones, for what purpose, and at what cost?

5. Russia and Eastern Europe: What are your policies on our relations with Russia and Eastern Europe. Over the course of your campaign you have proposed a number of policies that would antagonize Russia, and have criticized Obama Administration policies on U.S.-Russian relations that appear to have significantly improved our nation's relations with Russia. What will be your approach to Russia, issue-by-issue, and what impact do you expect those policies to have on U.S.-Russian relations or Russian cooperation with U.S. political, military and economic goals? For example, allowing former Soviet Bloc nations to join NATO, whether or not such a move might be justified for other reasons, or implementing ballistic missile defense technologies on Russian's border, could cause Russia to cease its cooperation with and facilitation of U.S. military efforts in Afghanistan, to cooperate with sanctions against nations like Iran, or otherwise act in a manner contrary to U.S. goals and interests. What balances will you draw, and why do you believe they will work?

6. Banking Regulation: Even after the near-collapse of the financial industry and the government bailouts of banks, some of the nation's (and world's) largest financial institutions have continued to engage in acts that range from incompetent to reckless to criminal. What regulations would you support to prevent a recurrence of a financial industry collapse? How can you guarantee that the U.S. taxpayer will never again be asked to bail out bankers - let alone before every penny of shareholder and bondholder money has been extracted to try to solve the bank's problem without moral hazard?

7. Health Care: If you truly are of the position that the Affordable Care Act is an atrocity that must be repealed, despite its remarkable similarity to the plan you signed into law as governor of Massachusetts, exactly what do you propose to implement in its place? One would expect a business leader to look at other companies and identify possible ways to increase efficiency or save costs - would you look to other approaches to health insurance in the industrialized world, and bring their best elements to the U.S.? If so, which ones? If not, why not?

   What concrete proposals can you share to address healthcare costs and healthcare inflation? Should the government have a policy on end of life care and, if so, what should that policy be? If not, how do you propose to get health care costs in check without taking a position on the leading contributor to that cost?

8. Employment and Wages: Do you believe that a strong middle class is important to American Society? Are you concerned that middle class wages are stagnant, middle class jobs are disappearing, and middle class workers are feeling enormous financial pressure? If so, what policies do you propose that will help improve the financial well-being of the middle class and expand the pool of middle class jobs? If not, why not?

9. National Debt: As a businessman, you did not shy away from debt. Quite the opposite, one of your tactics was to acquire companies with low debt and then significantly increase their debt load. If you would add debt to a company to invest in infrastructure or extract profits for your investors, aren't you confirming that the problem is not the debt itself but the cost of that money? As head of a private equity firm, if you acquired a business enterprise is able to borrow at extremely low rates, rates that with inflation amount to a break-even or possibly even a negative interest rate, what would you do? Would you apply different principles as President, refusing to borrow what amounts to "free money" in a time of crisis to invest in the nation's infrastructure at a time when such an investment could significantly boost employment and future competitiveness? If so, why?

10. Deficit Spending: You have argued against deficit spending, even in a time of severe economic crisis, but you have not proposed a credible plan for balancing the budget. You have instead endorsed a budget that cuts unspecified domestic spending, cuts taxes for the wealthy and for corporations, and as a result increases the budget. If you in fact are concerned about deficit spending, exactly what cuts will you made to reduce domestic spending? Will you make any cuts to military spending and if so, exactly what will you cut? If it is necessary to raise taxes to balance the budget, what taxes will you raise and by what amounts?

11. Infrastructure Improvement: On a related note, our nation has a lot of looming problems - decaying roads, bridges and water distribution systems, an archaic power grid, and the like. We are even lagging other nations in telecommunications and high speed Internet services. What policies will you enact to address those issues? How much money will you allocate to those issues and, if none, how would you justify a continued neglect of infrastructure for an additional four to eight years under your leadership?

12. Iran and North Korea: As you know, our nation and our allies have employed sanctions against "rogue regimes" for many decades. Until a few years ago, proponents of sanctions could point to Libya as "the exception that proves the rule," with Gadhafi's abandonment of certain weapons programs offered as proof that sanctions and international isolation can work. If the goal is merely to slow the development of weapons programs sanctions may have an impact, but there's no evidence that sanctions will stop the development of such programs.

    You have expressed that it is important to address North Korea's military posturing and nuclear arsenal, as well as the possibility that Iran might develop nuclear weapons, but to achieve those goals you focus on new, stronger sanctions. Exactly what new sanctions do you propose, and what evidence can you offer that they will work? What will be the measure of success or failure for your sanctions, and what additional steps will you take if your sanctions fail? Under what circumstances would you find that war with Iran or North Korea was in the best interest of the United States and, for each nation, describe what you believe the war would look like, the anticipated cost of the war, both economic and human, and your plan for the post-war period.

13. Campaign Finance Reform and Transparency: Do you believe that it is important to reduce the influence of wealthy corporations and individuals on elections, or at least to slow or stop the trend by which election costs are skyrocketing and politicians start fundraising for the next election the day after they win the current election? If so, what concrete measures do you support to address the issues of campaign funding and donor transparency? If not, why not?

14. The Middle East: What policies do you favor to produce politically stable, politically friendly governments in the Middle East, and how will those policies be implemented by your administration?

15. China: You have expressed that China doesn't play fair in the global marketplace. At the same time, China has emerged as a very important economic partner, providing labor for many U.S. and international corporations while also investing heavily in U.S. Treasury Bonds. What are the exact issues you hope to resolve between the U.S. and China, what steps will you take to address those issues, what will you do when China inevitably pushes back, and what do you believe will be the consequences of your policies and action on relations and trade between the U.S. and China?

16. Immigration: Unlike most Americans, your family has directly benefited from the immigration policies of one of our neighbors, Mexico, and your grandparents were able to take up residence in Mexico in response to what they perceived as religious persecution in the United States. As a business leader you are familiar with companies that bring workers into the U.S. on various types of employment visas. As a homeowner, you have used immigrant labor to maintain the grounds of your home. How have your experiences influenced your perspective on immigration? What is your preferred immigration policy for the United States, including for family reunification, asylum, for skilled workers, for unskilled workers, and for international students and scholars?

17. Pakistan and Afghanistan: What are your proposals for creating and sustaining stable regimes in Pakistan and Afghanistan that, even if not friendly to the U.S., are at least not unfriendly and are unwilling to host groups that are hostile to U.S. interests? What will you do to address the possibility that Pakistan might export nuclear technology, or that a collapse of its government might cause nuclear weapons to fall into unfriendly hands?

18. Poverty: Speaking in broad terms, we have two populations of people in poverty. The first group will emerge from poverty over time. The second group will not, and is at risk of becoming part of a generational cycle of poverty. What help can and should the government offer to each group? How can we help ensure that people in the first group do successfully emerge from poverty, rather than potentially falling into the second group? What policies do you propose that will help us break the cycle of poverty, first by helping impoverished adults find their way into jobs and careers, and second to minimize the risk that their children will become part of a cycle of poverty?

19. Intellectual Property: As you know, intellectual property law is very important to inventors and businesses. If you cannot protect your inventions and your creativity you operated under a severely reduced incentive, perhaps even a disincentive, to make serious investments of time and money in new technology and new ideas. At the same time we have created a byzantine system of patents that makes it virtually impossible to produce a new technology that doesn't violate somebody's patent, and literally impossible for a company to be certain that its new invention is not going to be subject to a claim that it violates a competitor's patent, or one held by a "patent troll". We have allowed copyrights to be extended well beyond the life of the creator, stifling derivative works even long after the creator's death.

    What policies do you propose to protect inventors on both sides of the equation - those whose inventions merit protection, and those who become the targets of demands or litigation despite their having no knowledge or awareness of the patent they have allegedly infringed and having made a good faith effort to respect the intellectual property rights of others? How will you balance those interests? What measures do you propose to protect companies from international or domestic piracy, and how will you balance the rights of intellectual property owners against the privacy rights of consumers, their right to use or control their own legitimately purchased or licensed products, and their legitimate fair use of copyrighted material? Would you support or oppose a new SOPA/PIPA-type law? If the former, under what terms? If the latter, on what basis, and would you veto any such law that came across your desk?

20. Federal Criminal Law: Do you agree that federal criminal laws extend too far into the realm of state and local concerns, and criminalize a lot of conduct that should at most be the subject of a civil legal action? If so, please share some examples of criminal laws that you believe represent federal government overreach, and what steps you will take to roll back or at least prevent additional overreach.

21. The Economy: We have been experiencing slow economic growth and slow job growth for far too long. As you know, the President's role in both boosting the economy and affecting job growth are overrated, but the President is in a position to advocate for economic policies and to influence the decisions made by the Federal Reserve. Assuming that the sluggish recovery continues, what policies do you propose to speed up the recovery and why do you believe they will be effective? If the recovery slows or stops, or we fall back into recession, what policies do you propose to respond to those problems and why do you believe they will be effective? If another catastrophe occurs, be it an economic bubble, a collapse of the Euro, or some other factor or catastrophe we may not have even considered, what measures will you take to insulate the U.S. economy from catastrophe and why do you believe those measures will be effective? What steps, if any, would you take to help stabilize the economic situation in Europe, or an economic problem that develops elsewhere in the world that might affect the U.S. economy? As you know, there was ample warning of both the Internet bubble and the housing bubble, yet concerns were dismissed. What steps will you take to identify growing problems, including economic bubbles, and how will you react if a potential problem is identified?

22. Subsidies: When, if ever, should the government subsidize private enterprise? If you support subsidies, when should subsidies be given? What form should they take - cash grants, conditional loans, loan guarantees, tax credits, tax exemptions, etc. - and under what circumstances? How should the amounts of any subsidies be determined? What form or forms of government subsidy should never be extended to private enterprise, and why?

Note, I'm not offering these as questions for a debate between the candidates - as questions that can be avoided or evaded. If I want to see somebody talk around the issues, I can turn on the television and listen to the pablum that the mainstream media deems to be sufficient - assuming I'm lucky enough that somebody in the mainstream media is even asking about the big issues - or look at the candidates' websites. I would like to hear substantive commentary on these issues.

Please note also, by implication these are issues that have not been adequately addressed by the Obama Administration. In some cases, through its action or inaction, we know where the Obama Administration stands, and where its rhetoric departs from its actions. I would welcome the Obama Administration to specifically address these issues, the extent to which its present policies have failed, and its plans to resolve any shortcomings or improve how it handles these issues in the future.

Time to Change or Eliminate Software Patents

Fred Wilson on patent trolls:

The whole thing is nuts. I can't understand why our goverment allows this shit to go on. It's wrong and its bad for society to have this cancer growing inside our economy. Every time I get a meeting with a legislator or goverment employee working in and around the innovation sector, I bring up the patent system and in particular software patents. We need to change the laws. We need to eliminate software patents. This ridiculous Lodsys situation is the perfect example of why. We need to say "enough is enough."

I've commented on this issue before; it's one that affects most people but few know about and fewer care about, hence the status quo. Once big companies build a portfolio of patents and have sufficient revenue to pay off trolls as necessary, they mostly seem to become complacent about the current system as it serves as a barrier to entry for potential competitors.

Patents As Both Sword and Shield

Yesterday I suggested,

Although for many years, large companies often seem to ignore each other's intellectual property rights until one or another sues, followed by either a huge settlement and licensing deal or a mutual settlement that allows the companies to use each other's technology without actually testing the viability of the underlying patents.

That reality is not lost on Google.

The tech world has recently seen an explosion in patent litigation, often involving low-quality software patents, which threatens to stifle innovation. Some of these lawsuits have been filed by people or companies that have never actually created anything; others are motivated by a desire to block competing products or profit from the success of a rival’s new technology.

In some cases, a declining company may find its portfolio of patents to be far more lucrative than what remains of its traditional operations. Given the proliferation of patents it's difficult to produce anything without potentially running afoul of somebody else's (often dubious) patent, but sometimes the patents are known and (under current law) defensible and the infringement is deliberate. Apple knew that it had a game changer with the iPhone and likely viewed the inevitable accusations of patent infringement as a cost of business. With the release of the iPhone, every other handset manufacturer made the same business decision.

Google has advocated for patent reform and against patent trolls,¹ but its decision to bid for Nortel's patents is, in a sense, an "If you can't beat 'em, join 'em" response to the problem. Yes, Google can leverage its patents to protect open source software, but the success of open source software represents a significant part of Google's long-term business strategy. Although acquiring Nortel's patents potentially gives Google more even footing when it goes head-to-head with companies that accuse it of violating their patents, it will do nothing to stop patent trolls.

It will be interesting to see who, if anybody, attempts to outbid Google.

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1. Google provides a reasonable definition of the patent troll, "people or companies that have never actually created anything" - they generate or acquire patents then seek out violators, with the hope of demanding settlements or royalties from companies that are producing actual value. But it's important to remember that the system is stacked against "the little guy" - an inventor who comes up with an idea and obtains a patent, with the idea of marketing it to companies that can put it into productive use, shouldn't be denied a return on his invention by large companies that steal the idea, knowing that patent litigation is extraordinarily expensive and beyond the reach of most inventors, while dismissing the inventor as a "troll who never produced anything" even as they profit from his ideas.