Thursday, January 3, 2013

The Patentista Drops By

A Chat With The Patentista

Every now and then The Patentista drops by.  The Patentista stops by when the coffee is hot and there is something significant happening.

The Patentista is a knowledgeable sort who knows a great deal about the patent having been involved in all sorts of patent litigation and enforcement actions, hunting for technology to build patent portfolios for some of the major patent shops , doing obscure patent analysis and building classification tools, developing new licenses, finding expert witnesses, prosecuting patents, and helping sell off portfolios of otherwise distressed but one time brilliant companies.

The Patentista likes to opine on matters from the unique vantage point of someone who has made a career in the intellectual property world and who sees both the big picture and the arcane.

Our last conversation took place after the Federal Trade Commission—Department of Justice Patent Assertion Entity Workshop on December 5th, 2013.  It was a far reaching chat on a cold day in Washington — Is the patent system broke (we don't think so), what about non-practicing entities (Thomas Edison was an NPE and no one vilified him), what is with this new classification (Cooperative Patent Classification) System (aren't there enough of these that no one uses or understands - IPC, USPC, ECLA, Derwent), and how patents need to change as we move to a highly digital world (entrepreneurs and investors don't fully get the impact of convergence and patent licensing).  Over the next month or so we thought we'd bring you the highlights of our chat and some of the follow-up we did looking into the issues we discussed.  We hope it's a though provoking series on the patentsphere.

The Patentista's IP World View

The Patentista's world view is that the current state of affairs in the patentsphere guarantees full employment for patent attorneys as long as asymmetry exists between people who understand patents and the rest of the regular joe entrepreneurs, investors, venture capitalists and makers of products that may or may not to be covered by someone else's patents.  This is why non-practicing entities are here to stay and why things are likely to get worse before they get better.  The Patentista was on fire.

A Patent Cultural Aside

The conversation started with a cultural aside.

On the crowd at the Federal Trade Commission workshop on Patent Assertion Entities, a special breed of non-practicing entity and the lack of meaningful news coverage -- Patent attorneys don't Tweet.  They barely use email and are among the last profession in the universe to adopt business casual dress thus explaining the high suits and ties to jeans and blue shirts ratio at the FTC meeting.  As a group of people supposedly steeped in the latest science and technology, the assembled gaggle of patents attorneys are fellows (they were mostly fellows) who operate in a closed society and are perfectly happy to stay that way.  Information disclosure isn't helpful to them.  Dysfunction in the patentsphere is.  It means you need them.

Asymmetric Information

Then we moved on to the gist of the conversation - the asymmetric (one-sided) world of the Non-practicing Entity (NPE).

The Patentista isn't a fan of NPEs finding it difficult when one can't counter sue to keep things even.  The NPE business model is one of the try asymmetric ones.

According to the Patentista, plain old non-practicing entities are not the problem, well not the big problem, the patent hoarders are. (The Patentista said patent trolls but it's too early in the new year for pejoratives.)  The Patentista has had plenty of situations where Big Company #1 calls up Big Company #2 and says, "hey, we think you're infringing our  patented widget and you need a license."  These conversations generally ended with an agreement for an elaborate cross-licensing agreement on the technology and a more important "we'll see you in the marketplace" agreement.  The encounter ends with the business equivalent of let's step outside and fight it out.  The guy with the best product wins.  The Patentista believes in patents but also believes that while monetizing is good and getting the money is better that the best way to see if an invention is worth anything is to fight it out for market share and revenue.  (Well, most of the time.)

The Patentista's point is that what we all need to be worried about is patent hoarders.

On Patent Hoarders

Patent hoarders are extreme NPEs who own lots of patents.  A plain old NPE  has a few patents that are focused on a particular technology, the plain old NPE can make their case, and usually has at least some decent analysis to back up their infringement claim(s), as in, "please sign the enclosed non-disclosure and we'll be happy to send your our nicely formatted analysis of our patents in light of the publicly available information about your products."  Plain old NPEs usually have teamed up with the independent inventor(s) who don't have the money to enforce their patents (or at least they try to make it look that way).

The Patentista still isn't a fan of NPEs but feels it is  generally a more gentlemanly (not gentlewomanly as noted above) affair even though there are some scrappy moments.  The Patentista can figure out what the NPE has, can explain it to a deer-in-the-headlights, freaked out client, and can usually get to something that seems reasonable (maybe to the patentista if not always for the client) and get the client back to business (after reasonable fees of course.)

"But patent hoarders, now they are a big problem."

The Patentista's view is that patent hoarders are just like those people on the Hoarders cable TV show.  The TV hoarders start collecting stuff, what starts out as good stuff morphs into stuff that really isn't useful, piling it up all over the place until eventually you can't get into the house.  You simply can't tell what's good from what's junk.  An intervention is required to clean everything up and return things to some semblance of normal.

The patent intervention is the same kind of behavior when regular patent holding organizations stop paying fees on stuff they don't think they will ever us, usually after an emotional discussion on the topic right before the latest round of fees are due with their General Counsel and Chief Finance Officer as in, "what are we doing with all this stuff".

Patent hoarders assemble all kinds of patents in a particular domain - blocks of patents for wireless, medical devices, "the web", mobile, etc.  Whatever suits their fancy.  Some of the patents may be "standards essential" but a lot are "padding."   Eventually they have these huge patent portfolios full of maybe some good stuff but a lot of junk, marginal patents, patents with hundreds of prior art references and lots of inventors, stuff.  There may be something valuable in there but with all the piles, who can tell.  There tends to be a bad signal to noise ratio in NPE patent portfolios.  The difference between the TV hoarders and the guy with the dumpster and patent hoarders is patent hoarders have printers and offices where they crank out cease and desist letters and file lawsuits.

According to the Patentista, the patent hoarders don't curate, they go for volume and volume is the problem.  Patent hoarders whether they are plain old patent assertion entities or patent aggregators, they operate on volume.  Oh, and their patent attorneys can't do the Big Company #1, Big Company #2 dance because the patent hoarder isn't interested in such a relationship.

The other problem?  Who can analyze 100 patents (or more than 1,000) with an average of 20 claims against a portfolio of products without it taking a lot of time and a lot of money.  It's even better when the hoard of patents are in a domain known for fluid, sales-y (read flakey) vocabulary that is used to describe important elements of the technology.  Does anyone have a one sentence definition of "cloud-computing" "software as a service" "mobile" or web-based anything? - The Patentista points out that mobile computing has been in police cars for quite a while but that the new kids in the space never look there.

And then there's the issue of  patents with overly broad claims. (The Patentista admits to writing quite a few over the years.)  Maximalist on enforcement, minimalist on content.
Patent hoarders benefit from the digital business models and the emerging knowledge-based economy that lives and breathes on the internet.  It's a great formula: -

Lots of patents because filing electronically makes it easier for the patent factory,
Lots of claims,
Lots of emerging products, marketing-esque semi-technical lingo where even the market participants sometimes need a definition or two to advance the conversation, and
Lots of free cash flow from investors.

 But most important -  high margin products.  (58% percent on the iPhone vs. 5 or 6% on a desktop computer? Who can't afford another $0.50 per device?)

The Patentista points out that there aren't many patent hoarders or NPEs that own the patents and operate in the pharma, biotech, or chemistry space.  The domains have a standard vocabulary where everyone speaks the same language and know what a molecule is making buffalo-ing the little guy harder and defending claims of invalidity easier.

The Patentista then went into a long explanation on all the reasons you want this stuff covered by attorney/client privilege and don't want to do it in-house.  (See the note above about patent attorney full employment.)  We'll save the details of that part of the conversation for another post.

Then came the stifling innovation and patent litigation moment.  

When you take a license from a patent hoarder you don't really know what you bought or if you are fully covered as in do you now have a license to all the patents you will need so you can get back to selling your products.  The patent hoarder will sell you a license to their portfolio but can't provide the licensee with any kind of guarantee that another patent hoarder isn't going to come along with their hoard of un-curated stuff and do exactly the same thing.   Generally the patent hoarder can tell you what they own, a lot of stuff, but they can't explain all their holdings in light of the rest of the patents out there.  And you can't figure out their holdings either.  And now you've exposed yourself as a potential sucker who will take a license and go quietly into the night so bring on the lawsuit as a measure of how serious the patent hoarder is and to slow things down to give you some time to figure out what you are going to do or at least make you look like a tough guy.

Patent hoarders just like every other patentista know that explaining a patent to a jury of regular joes is risky business.  It helps the negotiations if the jury selection phase is coming up soon.

Now The Patentista isn't taking a pro or con view on NPEs.  They are part of a robust patentsphere but they operate in new and different ways.  As the FTC-DOJ meeting proves, nothing is simple here.

The Bottom Line

So the bottom line is that NPEs and patent hoarders in particular are the beneficiaries of a very big knowledge gap and the information asymmetry that comes with it. (A view we share.)  They will continue to have an advantage and operate using their current methods until some game changing force levels the playing field.  The Patentista doesn't see such a change  on the horizon or arriving anytime soon.  Neither do we.