Patent Trolls Take Their Toll On Tech

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Why This Patent Plan May Not Help Obama's Job Creation Plans Much
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Why This Patent Plan May Not Help Obama's Job Creation Plans Much

Patent law and litigation is for better or worse a big part of the business world in the U.S.  So are debates over such lawsuits.

Mark Cuban, who made $6 billion selling Broadcast.com to Yahoo!, and who has since kept himself in the public eye with the aid of the Dallas Mavericks and HDNet, shared his opinion recently.   He believes that legitimate tech firms are constantly on the defensive against lawsuits brought by trolls, “So much so that money that would have gone to new hires to improve and sell the product has to be saved to pay to deal with this bullshit.”

It is an important point, and a recent blog entry by Forbes' Bruce Upbin, links to valuable resources on the subject.

Some days the patent-litigation news just seems to overwhelm the business section of your newspaper.  Consider just one day,  August 5, 2011:

  • A federal judge in Illinois awarded victory to Midtronics over Aurora Performance Products;
  • Segan LLC filed a lawsuit against Zynga Inc., best known for the game "Farmville" on Facebook.
  • Operating Systems Solutions LLC filed a lawsuit of its own, against digital behemoth Apple, alleging that Apple's laptop makes unauthorized use of an OSS-owned quick booting method.

That, again, represents just three headline events from a single day.  Most developments in patent litigation across the land don't get into the headlines, and the effect is cumulative.  So there is an obvious temptation to say, and some "patent doves" do say, that the whole system represents so much deadweight.

Yet there is a simple counter argument.  At least some of these claims have merit.

Consider the Midtronics judgment.  Judge Milton Shadur, as finder of fact, decided in favor of the long-time leader in the field of battery diagnostics, declaring Midtronics entitiled to prevail "on the merits as to both infringement and validity."  The defendants had contended that certain features of plaintiffs' patents were "obvious" and thus invalid.  Shadur was dismissive, describing the claim as a "makeweight."

Most people would probably agree, on reflection, with the so-called "patent hawks," that there are such creatures as good-faith patent holders, who are thus by definition the owners of lawful property, entitled to protect themselves against theft.  So long as that consensus prevails, any plausible reform -- even if aimed with the best of intentions only at the trolliest of trolls -- must be such as to protect private property where it exists, and to allow for compensation in the event of infringement.

The U.S. Congress is, it seems, in no immediate condition to get to work on the complicated questions that would arise in a comprehensive patent reform effort, amidst all the cross-currents of lobbying that would prevail.  I can not be optimistic about a legislative fix.

Some types of patent claim rightly raise dark red flags, though.  Sometimes the flags are red enough to warrant judicial relief.  Business method patents are among these, and it is a pity that the U.S. Supreme Court, in the Bilski case, passed up an opportunity to draw some firm lines.

Important as all of this is to all of us in our capacity as citizens, employees, or legal philosophers-at-large, what does it say to us as investors?

It says, I submit, that sweeping claims to patent protection aren't going to go away any time soon, and that when evaluating almost any company, especially a high-tech company, you have to concern yourself with the size and salience of its intellectual property portfolio.  If a company has a fine portfolio but refuses to use it aggressively, either in the markets or the courts, then this is value it has locked up, that it is keeping from your grasp.

You'll likely find, as investors in Motorola Mobility have found, that some well-heeled outsider, perhaps a well-known takeover artist, will prove willing to help you and the other investors unlock it.

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