Business Week: Debunking the ‘Patent Troll’ Myth

Author: Ron Epstein, Business Week

Innovation in the U.S. frequently fails to reward inventors. So-called patent trolls are evening the score.

Utter the term "patent troll" in tech circles and you're likely to elicit a visceral reaction. Said trolls are companies that acquire patents and seek payment from companies they claim are infringing on those patents. They're viewed by many as blights on the tech landscape, looking to make money from patents that shouldn't have been granted in the first place, thereby forcing companies to spend billions of dollars in legal fees and slowing innovation. Even the more polite equivalent—nonpracticing entity (NPE)—suggests a company that fails to produce something of lasting value. Both phrases are [Karl] Rovian in their ability to use emotional appeal to distract from the underlying issues, specifically the reasons why nonpracticing entities exist and may be vital to providing access to innovation. To understand the role played by NPEs, consider a key challenge facing many of the biggest tech companies. Their products are increasingly complex, incorporating many different features and functions. For example, a smartphone serves not only as a phone, but also as an e-mail device, a minicomputer, a camera, a TV, an MP3 player, a Web browser, and more. Yet some of the very companies involved in smartphone manufacture are placing heavy restraints on—if not curtailing—research budgets. So they must look outside for innovation. Sources of external research and development fall into two categories. First, there are "operating companies," which include competitors, suppliers, customers and the like. If one company wants to use a technology covered by an operating company's patent, it can strike what's known as a cross-licensing agreement. Virtually every big tech company has these. Examples include Microsoft (MSFT) and Hewlett-Packard (HPQ) and chipmakers Qualcomm (QCOM) and Broadcom (BRCM)—although the existence of a cross-licensing agreement doesn't mean the companies won't sue each other. Patent reform would help

The other provider of outside R&D is the unfortunately named "failed entrant" group, which includes individual inventors, startups that for whatever reason miss the market, and universities engaged in innovation that don't attempt to enter the market on their own. By acquiring patents and advocating for the inventors behind those patents, NPEs can play a vital role. To explain how, let me address two of the most common criticisms leveled against them. One is that patent trolls/NPEs assert patents that are so broadly defined that they should never have been granted. Most would agree that patent quality needs to be upgraded and that poor patents should be dealt with expeditiously. Efforts are afoot in Washington to improve how patents are granted. At the same time, there are many people who invent fabulous things. A few are fortunate enough to obtain high-quality patents on those innovations. The second major criticism is that NPEs shouldn't ask for money if they're not producing anything. While the suggestion is emotionally appealing, it ignores economic realities. To "produce" a product, an inventor must not only invent something, but also raise capital and hire a team. The inventor must manufacture, market, and distribute the product. Two main kinds of patent trolls/NPEs

The complaint amounts to saying: "If you can't do all of these steps, you deserve nothing." I doubt anyone thinks that's fair. Innovators should have the freedom to profit from their innovations without having to become experts at raising capital and running a company. Patent Trolls/NPEs fall into two main categories: (1) Innovators. Many are individuals and companies who have tried to bring their innovations to market but failed. For example, we work with Fractus, a company founded in 1999 in Barcelona. It invented the technology that lets cell-phone manufacturers build antennas small enough to fit invisibly inside a phone. It's a great innovation; everyone hated bulky and fragile external antennas. Fractus built a business, hired engineers and a sales force, built factories and shipped millions of units. Unfortunately for the company, the innovation was easy to duplicate once seen, so most companies chose to design and manufacture antennas themselves. Fractus holds more than 50 patents worldwide. (2) Patent Investors. These are typically funds or companies that act as classic arbitrageurs, balancing out an unbalanced market. Arbitrageurs—those seeking to profit from price differentials—have existed in just about every marketplace since the dawn of commerce. The logic is compelling. Some patents are clearly worth more than nothing. Many valuable innovations have been well-patented. Unfortunately, companies have commonly paid innovators nothing for their patents. Patent investors offer more than nothing, then use their experience and access to capital to ensure that companies pay something. Before patent investors started showing up in 2004, a patent owners' only choice was to pursue long, expensive legal action. In my experience as a patent broker, patents coming from the individual inventor/failed entrant category are of much greater quality and value than those coming from operating companies. When I tell people this, they are usually incredulous. They forget that U.S. tradition has long featured individual inventors. Perhaps more important, the $25,000 to $50,000 or more that it takes to obtain a patent means a lot more to an individual than it does to a company. As a result, individuals are much more likely to limit filings to innovations they feel passionate about. They spend more time ensuring that they get good patents.

Epstein is Founder and CEO of IPotential, an IP advisory and transaction services firm in Silicon Valley, Calif. He was previously general counsel of Brocade and director of IP licensing at Intel.

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