Gaming the patent system threatens innovation

At the heart of the technology industry are entrepreneurs who dream up new innovations and create great new companies that redefine how we work, live and play. Congress enacted the patent system to encourage groundbreaking ideas by rewarding such innovators for their creativity and investment of time and money. But America’s innovative capacity is at risk because our patent system is being gamed and abused.

A small but growing group of companies and individuals are exploiting the patent system for un-due financial gain. So-called trolls, who don’t design, make or sell any products, scoop up patents and then file numerous lawsuits, sometimes against multiple defendants, in hopes of hitting the jackpot or forcing many to settle to avoid a costly fight in court.

{mosads}According to one estimate, trolls or patent assertion entities (PAEs) win only 8 percent of the infringement cases they litigate to judgment. PAEs nevertheless impose enormous costs on the economy. It has been estimated that suits brought by PAEs inflict $29 billion in direct costs on defendants and as much as $80 billion in direct and indirect costs annually.

The problem goes beyond trolls. Some large, well-known companies exhibit troll-like behaviors by collecting patents, not to foster innovation, but to impose large licensing costs on competitors and to collect billions of dollars indirectly from consumers. Because these companies often sell some products, they cover their troll-like behavior and licensing businesses in an “inventor’s cloak.” Many of the companies utilizing this tactic are struggling in the marketplace with outdated products and are using patents to prop up their financials.

These business models do not spur innovation or delight customers with new products and features.  In fact, payments to inventors constitute only about 5 percent of the direct costs incurred by defendants as a result of patent infringement suits.  Instead, they hold up products, tax innovators, kill start-ups and drive up prices for consumers.

One of the fundamental problems is large damage awards that are unrelated to the often small contribution of the patent to the products in which it is used. The abusive litigation is a symptom of a patent system that is out of balance, awards excessive damages, and induces wasteful opportunism.

Another problem is abuse of technology standards, which are critical for innovation. Some companies, to enable their technology to be included in industry standards, make commitments to license their patents at reasonable royalty rates to anyone that adopts their technology and then renege on those promises once the technology becomes a standard and companies have no choice but to use it. These companies often threaten injunctions to stop the sale of products and engage in other abuses to extract excessive royalties.

It is estimated that there are 250,000 patents and hundreds of standards associated with a single smartphone. More than 60 smartphone patent lawsuits have been filed across the globe – with legal fees now close to $1 billion – by companies that would like to renege on commitments they made to license their patents on fair, reasonable and non-discriminatory terms.  Publically available data suggest that fewer than 15 percent of the standards patents used in such litigation are valid and infringed.

Yet another problem of the patent system is the sheer number of patents, many of dubious quality, that entice companies to accumulate patent portfolios, not to spur innovation, but to make money. Patent owners recently have sought payment from thousands of businesses and consumers for everyday uses of technologies such as scanning and emailing a document, using a Web site “shopping cart,” and even using a home Wi-Fi connection.  A recent study estimates that trolls alone cost society $30 billion per year and a staggering $500 billion over the last 20 years. 

Fortunately, policymakers are taking notice. The FTC has begun an investigation of patent practices by trolls and other entities in the wireless communications sector.  That effort hopefully will lead to changes that reduce abusive litigation. And in November, the House Judiciary Committee decisively and with bipartisan support approved legislation to curb frivolous patent lawsuits by a 33-5 vote. The full House is scheduled to vote on the measure this week. Among other items, the legislation would make those who file lawsuits detail how disputed patents are being used and require the loser to pay the winner’s expenses unless the loser’s position was reasonably justified.  The federal judiciary also is considering how to interpret existing patent law more flexibly so it can shift fees in more cases to the loser to curb abusive litigation.

These are good steps. But more needs to be done.  Industry and our nation’s judges, regulators and policymakers need to work together to analyze the costs of the patent system and reform it as necessary to bring it into balance. Intel owns almost 40,000 patents. We know by experience that maximizing patent rights is not the same as maximizing innovation or consumer welfare.  

Melamed is senior vice president and general counsel for Intel.