PHIL 1120 – Ethics and Moral Problems

The Iron Grips of Patent Laws Affecting our Innovative Freedom

Back when America was young and still growing up, patents were created because they were so fundamental to our country.  In fact they are so foundational to the American way of life that they’re written in the Constitution.  Their purpose is “to promote the useful arts and sciences,” or in other words, to get people to share their ideas and inventions.  Just how important and unique are patents?  In this country, we have a magnitude of laws that restrict monopolization of businesses and industries, these laws are so important they have their own name, the Antitrust Laws.  However, patents spit in the face of all these Antitrust Laws.  They essentially give the owner of the patent a 20 year monopoly on the idea or invention that they patented.  For those 20 years, no one can steal that idea unless they pay the owner a license fee to use the patent.  The idea behind patents was to promote people to share their innovations with the rest of the world because they know that they are protected for 20 years.  If patents never existed, would Alexander Bell have shared his invention of the telephone?  Would Eli Whitney have kept his invention hidden in a dark room and the cotton gin would never have seen commercialization?  Would Nikola Tesla conducted all his research on AC circuits and shared it with the world why AC is far better than DC circuits?  We’ll never know, but back then patents made it safe to share and to innovate.  Sadly that is the past, and the world we live in now is very different.  Patent laws are suffocating our freedom to innovate with its iron grips.  The patent system is doing the exact opposite of what it was implemented to do a long time ago.  It is no longer promoting innovation, but stifling it.  So what is the difference between patents back then and patents now?  The quick answer is patents and inventions are not the same thing, and to understand this better, we need to go through history and analyze the important events that mutated the patent system into the monster it is now.

Since the inception of the patent system, it took 100 years to reach a million patents.  However now, the patent office is granting a million patents every four years now.  The biggest culprit of this is the allowance of software patents.  It used to be that patents could only be on physical inventions that had form and functionality.  You couldn’t put a patent on abstract codes or lines of text.  However people eventually got crafty and found ways to embed software patents into their inventions.  For example, if someone wrote a program that could control and adjust a heating system, they would put that program into a device, such as an electronically controlled oven.  They would then patent the invention of an oven that the user can adjust the temperature digitally, but deep within that patent they would embed some clause to protect the software program that controls the heating system.  Finally in the early 1970’s, the US Supreme Court finally waved their hands up in the air and allowed the Patent Office to officially grant software patents.  This decision opened the floodgates and the amount of patents that were granted shot up astronomically, and the byproduct that was formed by this are entities that are now known as patent trolls.

To understand who and what patent trolls are and do, we can look back at one of the first major cases of a patent attack.  Back in 1999, during the rise of the dot coms and internets, Jeff Kelling and his friends started an internet company called FotoTime, a website that allowed its customers to share and upload photos with people across the country.  All was going well for Jeff Kelling and his friends when they were suddenly hit by a lawsuit by another company called FotoMedia, claiming that Jeff was infringing on three patents.  Along with suing Jeff, FotoMedia also slapped a lawsuit on Yahoo, Flickr, Shutterfly, Photobucket, and other major companies.  Here is where things get strange, FotoMedia wasn’t even a competitor for these companies, they did not offer any of the same services at all.  And even stranger, the 3 patents in question that are being infringed upon are not FotoMedia’s to begin with.  In the mid 1990’s, a man named David Rose was issued those three patents pertaining to photo sharing.  He sold his company and the patents that went along with it in 2000 thinking the company that bought him out would take his ideas and make them prosper.  David Rose thought the people who bought his company would turn it into something great, such as Flickr, but instead they waited for other people to build Flickr, or Photobucket, and sued them instead.  So now we have a situation where the guy (David Rose) who came up with the patents doesn’t want the lawsuit, and the parties that are getting sued doesn’t want the lawsuits, yet the lawsuit is still going through anyways.  The biggest problem however is that going to court to settle the lawsuits was going to cost time and money, a lot of money.  In Jeff’s case, it was going to cost between $2 and $5 million dollars just to go to court, so instead Jeff agreed to pay FotoMedia the money to license the patent and avoid the lawsuit.  Sadly most companies that end up being sued will do what Jeff did, agree to pay the money.  Companies that make no products, but go around suing other companies that do make products over supposed patent infringements are so common these days that they are now referred to as patent trolls.  Trolls in fairy tales are the monsters that live underneath bridges that they did not build, but pop up and make unreasonable demands from travelers that try to cross “their” bridge.

From 2004 to 2009, the number of patent infringement lawsuits jumped by 70%, and licensing fee requests, like what happened with Jeff and FotoTime, went up by 650%.  When asking almost any engineer or programmer in the Silicon Valley why these numbers have shot up so significantly, almost everyone will point at the company known as Intellectual Ventures (or IV).  IV was found back in 2000 by some of the biggest names in tech, Peter Myrhvold and Edward Jung of Microsoft, and Peter Detkin of Intel.  When asked what exactly it is that IV does as a company, Myhrvold says that his company’s job is to encourage invention.  For example, imagine an inventor out there, someone with a brilliant idea, a breakthrough. This inventor has a patent, but still, companies are stealing his idea and he doesn’t have the money or legal savvy to stop them. That’s where Intellectual Ventures comes in. They buy this inventor’s patent and make sure that companies who are using the idea pay for it.  Today, IV has amassed one of the largest patent portfolio’s in existence.  IV’s business model is to focus on developing a large patent portfolio and licensing these patents to companies.  Publicly, it states that a major goal is to assist small inventors against corporations.  In practice, much of their revenue comes from licensing patents from other corporations and then filing lawsuits for infringement of patents, essentially patent trolling.  Peter Myrhvold argues against this though, he says that they are on the side of inventors, they pay inventors for patents, and they are opposed to patent trolls.  They gather these patents together in this huge warehouse of invention that companies can use if they want.  Sort of like a department store for patents, whatever technology you are looking for, Intellectual Ventures has it.  So who has it right in this argument?  Is IV the wonderful candy shop of patents for companies to shop at or is it just a giant patent troll on steroids?

To answer this question, we just need to chronicle the adventures of one of the most widely used patents used today.  Back in 1998, Chris Crawford was granted patent number 5771354.  This patent was essentially for an “online backup system”.  Chris basically suggested a way to upgrade your software on your home computer over the internet.  So in other words, when you turn on your computer and you get a little pop up box that says “click here to upgrade to the newest version of iTunes,” that was Chris’ patent.  Although this is an excellent idea, there is one major problem with this patent.  At the time Chris filed for his patent, 5303 other patents were being pursued that covered the same scope as Chris’ patent.  That’s 5303 other people pursuing the same thing, had the same concept.  An idea being patented is suppose to be non-obvious to a person of ordinary skill in that art.  That means you shouldn’t be able to get a patent for something that is a common sense idea, it should be a breakthrough.  When 5303 people file a patent for the same idea, that should not be qualified as non-obvious.  While Chris was granted his patent for an “online backup system”, multiple other patents were granted for essentially the same thing.  For example, patent number 6003044, for “efficiently backing up files using multiple computer systems.” Patent 5933653, for “mirroring data in a remote data storage system.”  The scary thing is this is not an anomaly.  30% of US patents now are essentially for things that have already been invented.  30% of US patents are basically overlapping each other for the same idea.  A great example of this is looking at patent number 6080436, which was issued in 2000.  This patent is for “a method of refreshening a bread product by heating the bread product to a temperature between 2500 F and 4500 F.   The bread products are maintained at this temperature range for a period of 3 to 90 seconds.”  In other words, this patent that was issued in the year 2000 is for toast.  That’s the reality we are in now, patents are so broad these days that everyone is guilty of infringement.  We are at a point in the state of intellectual property where existing patents probably cover every single behavior that is happening or will happen in our world.

Anyways, back to Chris Crawford’s patent for an “online backup system”.  Chris sold his patent to Intellectual Ventures, and Intellectual Ventures sold that patent to Kwon Holdings and Enhanced Software.  The problem here is upon further investigation, Kwon Holdings and Enhanced Software are just shell companies for IV.  They are just companies that serve as business transactions for IV without having any assets themselves.  In fact, IV has an estimated 1300 shell companies under their umbrella.  Eventually in June of 2010, that patent made its way out of IV’s hands and they sold it to another company called Oasis Research.  Less than a month later, Oasis Research used that patent to sue 16 different tech companies – companies such as Rockspace, Go Daddy, AT&T, and any other companies that use cloud storage.  When this lawsuit was happening, a journalist for This American Life, Laura Sydell, looked into the Oasis Research company.  She travelled out to Marshall, Texas, where Oasis Research is located and visited the company’s headquarter.  During the week she was there, she noticed that the building that Oasis Research is located in is just a long empty corridor of businesses.  Businesses such as Software Rights Archive, Bulletproof technology of Texas, Jelly Fish Technology of Texas, and other businesses that have been involved in major patent lawsuits.  Each and every business in that corridor was unoccupied, with no employees.  In fact none of the residents there have ever seen people come in or out of those offices.  It turns out there are a lot of companies like these out there in East Texas.  Companies that have no employees, produce no products, just corridors of empty offices and lots of lawyers, and just file lawsuits for patent infringement.

Oasis Research is it’s own entity however, they are not a shell company of IV.  But when Oasis Research won it’s lawsuit against those 16 companies, they listed IV as a party that has a financial stake on the outcome of the case.  As it turns out, when IV sold Chris Crawford’s patent to Oasis, they sold the patent for a certain amount of money up front, and then they receive a percentage of royalty that is generated by Oasis from the monetization of that patent, regardless of means.  This means IV is getting a cut of whatever money Oasis is making from their lawsuits – Oasis a company with no operations, no products, no employees, whose only activity is to be taking a very broad patent filed in 1998 and suing countless internet companies today.  When asked how it feels about taking money from a company that is essentially behaving like the patent trolls that they condemn, Intellectual Ventures defended themselves by claiming that those are patents they used to hold.  They no longer hold these patents and have no control over the actions of these third parties they sold their patents to.  They may be making profit in ways that Intellectual Ventures does not agree with, but nevertheless they are still making revenue from it because of the terms they agreed to when they sold their patents.  IV states they simply buy inventions and offer it to other companies in a friendly way.  There is a problem with their argument though, IV is not buying inventions, they are buying patents, and as many engineers are now saying, patents are not the same thing as inventions.  Most patents now cover things in the field that people do not consider inventions at all.  The patents out there now aren’t for something novel anymore, they are so broad that they can cover almost anything, every single one of them can be used to bring lawsuits.  IV’s sales pitch is they help companies defend against lawsuits.  IV has a hoard of 35000 patents, that for a very steep price, companies can access and use to defend themselves.  In other words, IV goes around from company to company and says, “Hey, you want to protect yourself from lawsuits?  We have tons of patents.  Make a deal with us and our patents will not only cover everything you do, but no one will dare sue you.”  Since its founding in 2000, IV has generated nearly $2 billion in revenue without offering any new products to the world.

In July of 2011, the huge company Nortel went bankrupt and put its 6000 patents up for auction as part of liquidation.  A bidding war broke between all the giant tech powerhouses.  Google even announced in a press conference that it wanted those patents purely to defend themselves against lawsuits.  Not a single one of those patents is beneficial to Google or will help Google develop anything new, yet they said they were prepared to spend over $3 billion to get them.  That wasn’t enough however, a consortium of tech companies that included Apple and Microsoft ended up buying that patent portfolio for $4.5 billion.  That’s 5 times the opening bid for the auction, more than double of what people expected the patent portfolio to go for, it was the largest patent auction in history.  Here is the sad news though, that’s $4.5 billion on patents that those companies most certainly do not want for their inventions.  That’s $4.5 billion that won’t be used to build anything new, won’t bring new products to our shelves, won’t open up new factories for people who need jobs.  That’s $4.5 billion that is added to the price tag of every product that these companies sell us, $4.5 billion that is essentially wasted on buying ammunition for the patent war ongoing today.

This is the technological world we live in now, where the freedom of innovation is being suffocated by our patent system.  In polls, as many as 80% of engineers says that the patent system now actually hinders innovation, it does the exact opposite of what it was suppose to do.  There is no doubt that every single start up or medium sized company, no matter how truly innovative they are, they are violating patents that are out there right now.  That is what is so fundamentally broken about the system.  In response, all the big companies have started amassing troves of patents, not to build or develop anything new, but to defend themselves.  If a company’s patent hoard is large enough, they can essentially say you sue me with your patents, I sue you with mine.  It is similar to the powerful countries around the world amassing large amounts of nuclear weapons, not because they want to start a war, but to scare other countries from starting a way with them.  It’s the old notion of mutually assured destruction, however instead of an arsenal of nuclear weapons, it’s an arsenal of patents.  Because of the freedom that the patent office is granting broad patents, the freedom of innovation is being taken away from our inventors.

References:

http://www.thisamericanlife.org/radio-archives/episode/441/when-patents-attack

http://www.npr.org/blogs/money/2012/10/23/163480928/episode-412-how-to-fix-the-patent-mess

http://research.stlouisfed.org/wp/2012/2012-035.pdf