How the current patent system actually hurts innovation (and how patent trolls are being fought)

One of the most common questions I get asked when talking to companies about their issues with innovation is “how do we prevent someone stealing our ideas? Should we get them all patented?”

Unfortunately, the answer to that isn’t so simple.

And that is because the current system for getting patents is in many ways no longer in line with how the world’s businesses work.

And worse than that, in many cases it is being abused by companies in ways which actually discourage innovation completely.

What patents are supposed to do

Originally, patents had a simple purpose: By filing a patent, an inventor or company showed how their new technology worked, in exchange for legal protection for the duration of the patent.

The companies benefited by being able to attack anyone trying to copy their technology exactly (allowing them to exploit it) or by using it as a licensing tool (to benefit from other people using it through a contract).

The public benefited by having the technology available to everyone once the patent during ran out, allowing other people to create generic versions of the technology or product. This is why some companies prefer to not patent some of their most valuable secrets, like Coca-Cola’s recipe.

This spurred many companies to invest heavily in Research & Development (R&D) to make sure that their products were at the cutting edge of technology.

This is still the basis of how patents work today. According to the World Intellectual Property Association, some of the conditions which a new technology need to meet in order be considered for a patent include:

• The invention must show an element of novelty; that is, some new characteristic which is not known in the body of existing knowledge in its technical field. This body of existing knowledge is called “prior art”.
• The invention must involve an “inventive step” or “non-obvious”, which means that it could not be obviously deduced by a person having ordinary skill in the relevant technical field.
• The invention must be capable of industrial application, meaning that it must be capable of being used for an industrial or business purpose beyond a mere theoretical phenomenon, or be useful.
• Its subject matter must be accepted as “patentable” under law. In many countries, scientific theories, aesthetic creations, mathematical methods, plant or animal varieties, discoveries of natural substances, commercial methods, methods for medical treatment (as opposed to medical products) or computer programs are generally not patentable.
  [Editor’s note: Ideas also usually cannot be patented]
• The invention must be disclosed in an application in a manner sufficiently clear and complete to enable it to be replicated by a person with an ordinary level of skill in the relevant technical field.

Many of the world’s most forward-thinking companies still heavily support the patent system. For example, IBM spends more than $6 billion a year on R&D, and has an in-house staff of more than 370 patent lawyers. And many large companies have recently spent billions buying up patent portfolios to protect them from lawsuits by other corporations, like how Google bought Motorola for $12.5 billion, predominantly for the approximately $4 billion worth of patents it possessed around smartphone technology.

And some industries are based almost entirely around the use of patents, such as the pharmaceutical industry, where a single patent for a new drug can lead to a lab being bought for millions by a larger drug company.

But for many more companies, especially innovative startups, the current patent system just doesn’t provide value, and in many ways actually hurts innovation.

Beware the patent trolls

I want to get this out of the way right now.

Because it’s the most depressing part of the patent system, and is actually hurting small companies trying to build innovative new businesses.

The problem is that the system allows companies to get patents to which they are not actually entitled.

And then use those patents to sue other companies who are actually working in that space!

These companies are called “Patent Trolls”.

 

 

They are usually shell corporations, that either file for a whole host of incredibly vague patents under the hope that some of them will be approved, or by buying up other vague patents.

They then use these vague, fraudulent patents to sue companies which are small enough to not be able to defend themselves, or companies who will just want to settle immediately. The troll companies themselves do not produce anything, and so cannot be counter-sued.

And interestingly, a surprisingly large number of these troll companies all seem to be based in a district of East Texas, USA.

If you want to see just crazy the situation is, watch this video by software developer Austin Meyer, in which he describes his experience trying to fight these patent infringement claims with the companies that sued him. I highly recommend you watch it.

 

The issue seems to stem from the fact that the patent office just cannot check whether the people filing for a patent are in fact the original creators of the technology. For example, here is a patent granted to a person in 2002 for his description of “How to swing on a swing“.

Now, I’m no rocket surgeon, but I’m pretty sure I was swinging on a swing before 2002!

The result of this is that having a patent does not give you protection from other people using your idea; it gives you the right to attack anyone who infringes on your patent.

Even if you shouldn’t have been given the patent in the first place.

If you want to prove that the patent was not valid, then the only way to prove that the lawsuit should not have happened in the first place is to have the legal system decide, analyse all the patents and claims, and determine once and for all whether the patent is valid.

This process can take 3+ years, and cost over $3 million.

This is much too expensive for most small companies to pay, so instead they are forced to pay the settlement claim to the patent troll.

Austin Meyer goes into more detail on how the legal procedures work in this follow-up video (about a company which claimed to have invented the iPhone, in 2010, and it’s not Apple), also worth a watch:

 

Usually, the settlement also forces the small company to sign a “Non Disclosure Agreement” (NDA), to prevent them telling anyone they were sued in the first place. This is why you probably have never heard of patent trolls.

The companies have a single business model: produce nothing, and sue other companies which are actually producing useful, valuable new products and technology. This is the opposite of innovation, which is all about adding value.

It discourages companies from trying to develop new technology, and actually punishes those entrepreneurs who do. Just the fear of being sued is enough to stop such progress.

And a large number of these lawsuits come from “companies” which are actually empty offices in a town called Marshall, Texas. I have to say, to me that makes this place Least innovative place in the world.

 

Are there any other problems with patents?

Yes. Even without patent trolls, there are numerous other issues with the patent system with regards to innovation:

International protection:

There is no one single patent which will protect you worldwide. In fact, even according to the WIPA, there are at least six different regional patent offices, and many more country-specific patent offices, each of which only protect the rights in one specific area.

So your patent in the USA, which gives details on how your technology works, may actually be showing someone in another country how to copy the idea without fear of reprimand, as your idea isn’t protected in their country.

If you want worldwide protection, you would need to work with legal firms in each country / region you want protection in.

Cost vs Benefit:

While you can file patents yourself for quite a low cost, it is a very specialised application process that greatly benefits from expertise.

As such, most researchers estimate that an average “utility” patent cost about $20,000 – 30,000 to file, but is only worth about $10,000. And this is a weighted average, in reality most patents are in fact worthless.

“It’s not any secret that on a cash basis, it doesn’t make sense to file patents, and yet companies do it” – R. Polk Wagner, law professor at University of Pennsylvania.

Yes, there are some exceptions, like drug companies where a single patent can be vital to their breakthrough and profit, but in most cases it just isn’t financially worth it.

Reliance on other companies’ patents:

Most technology nowadays is built on versions which came before it. Therefore, it is extremely unlikely that a company will come up with an innovation that itself doesn’t rely on other technology which itself has been patented.

For example, if you are developing a new smartphone, a number of the components within it which your company does not manufacture (chips, memory, boards etc) will have patents associated with them and which your product cannot work without. If you try to patent the whole product, you cannot include the technology from the other companies within that.

As a famous example, Android (Google’s smartphone operating system) may be royalty-free, Android device makers must pay Microsoft patent royalties of between $5 – $15 per device sold, mounting up to more than $2 billion annually.

Can you patent software?:

A lot of the most innovative companies out there are making breakthroughs in the way we work, live and play using new software, whether we use it directly (a game on our phone) or to underpin their service (the vehicle prioritisation and routing within the Uber platform).

However, software is not always something that can be patented.

In some countries you can patent software (such as the USA, although this is often debated) while many other regions including most parts of Europe do not allow it.

As many software-based companies also operate on a global basis, this can make enforcement of patents extremely problematic, especially if software with different code is able to perform the same end-result.

In fact, there is a growing movement in Silicon Valley to open up patent portfolios and let anyone gain access to and build upon some of the most important software technology in the world. Echoing Henry Ford, who openly pined for the abolition of the patent system, Elon Musk has described patents as “intellectual property land mines” that inhibit progress.

Legislation is now in favour of large companies and against trolls (but also inventors)

For years, the US government has known that patent trolls have been a huge issue, with billions of dollars in settlements going to companies producing nothing. So they have been putting in place new legislation to make it harder for trolls to operate.

The changes in the law began in earnest in 2005 with eBay vs MercExchange LLC, which put in place four rules which a patent owner must meet in order to be able to sue, including the fact that they must “practice” (produce or offer) the technology for which the patent pertains.

But the biggest change to the system came in 2011, with the America Invents Act. This legislation put in place special methods to determine the validity of the patents being “infringed” using a process called Inter Partes Reviews, where a tribunal of experts in both patent law and the subject matter of the patent would hear from lawyers of both the patent owner and the company being sued, to determine if the patent was valid and should be enacted, or if it was vague or built on prior art to such as a degree that it was not worthy of a patent (and thereby throwing out the lawsuit). This would be much faster and cheaper than going through a trial for each patent claim.

And the system seems to be quite effective. By July 2014, the tribunals were invalidating 70% of the claims in the patents that went to trial.

This has made it significantly harder for patent trolls to operate, as it has become easier for large companies being sued to prove that the patents being used are not valid.

But the downside is that now legitimate inventors find it significantly more difficult to protect their own ideas and inventions as well. Take the story of Dr Troy Norred, who invented a new design for a heart stent which stayed in place using larger surface area, instead of damaging sutures or glue. He was awarded a patent for his design in 2002, and then spent several years trying to get licensing agreements or investors to monetise his idea. In 2003, he was at a conference and saw that a company called CoreValve had been trying to sell his design, after Norred unsuccessfully discussed a licensing deal with them. In 2009, CoreValve was bought by Medtronic for $775 million.

When Norred tried to have talks with Medtronic around respecting his patent, talks fell apart once the America Invents Act was enacted. Norred tried one more time to assert his patent through the courts in 2013, but over the coming months, Medtronic lawyers brought forward all sorts of previous examples of stents to try and prove that Norred was inspired by prior art, and therefore his patent should be invalidated. Medtronic eventually won the suit this way, and Norred’s patent was revoked.

So even though the system was designed to defeat spurious claims by patent trolls, it has also made it significantly harder for real inventors to benefit from their work.

So what does this all mean for innovation?

If you are wondering how you can benefit from your ideas and inventions, just remember one thing:

It’s all about the value the customer sees it in. And idea without execution is worthless

Yes, there are problems with the patent system that are making it harder to use as a way to make money from your inventions.

But your main objective should always be to find ways to delight the customer anyway.

If you can find ways to make the customer experience better, that is where the real innovations lie.

Sometimes this will involve small improvements to your product or offering. Sometimes much larger changes, or new products which define a market.

But most of the time, it’s a combination of several different ideas in new ways to make the customer see more value overall.

And those sorts of ideas can’t be patented anyway. So go out there and spend your time improving your offering.

That way, you’ll always be several steps ahead of the trolls.