Trolling for Dollars
At times, our intellectual property laws produce results that are patently absurd
Jul 14, 2014, Vol. 19, No. 41 • By JONATHAN V. LAST
One February day in 2012, the U.S. government granted its 8,112,504th patent to a corporation called Personal Audio. The company’s invention was described as a “system for disseminating media content representing episodes in a serialized sequence,” which sounds complicated and impressive. The invention looked even more complicated, and more impressive, if you read through the 31,000-word text describing it. The supporting images looked more complicated still, but less impressive. Accompanying the patent were eight pages of confused flow charts with dozens of boxes and circles and arrows pointing hither, thither, and yon.
...where plaintiffs prosper
The flow charts combine technical-sounding terms, such as “raw program database,” with high levels of abstraction. For instance, one squiggly line connecting two boxes is simply labeled “Internet.” The overall effect is that of a bright middle-school student trying to fake his way through an assignment. Which is more or less what patent number 8,112,504 is: It is an attempt to define and take ownership of the idea of the podcast.
The patent is what allowed Personal Audio to sue podcaster/comedian/celebrity Adam Carolla for a reported $3 million. Carolla started podcasting in 2009 and today runs America’s largest podcasting network, yet neither he nor any other podcaster has ever paid Personal Audio for the right to use the medium. Carolla is fighting the suit. If he loses the case or decides to settle, then Personal Audio will have leverage to sue other podcasters, a list including everyone from amateur hobbyists to entertainment conglomerates such as Comcast/NBC, Time Warner, Viacom, and NPR.
The Personal Audio podcast patent isn’t a special case. Rather, it’s emblematic of how America’s legal and financial systems, which were designed to foster innovation and encourage the efficient allocation of capital, have evolved into a system which often does the opposite.
But before we move on to the larger questions about intellectual property, let’s dispense with the specific question of Personal Audio and its podcast patent, with which there are a few problems.
The first problem is that neither Personal Audio nor its founder, James Logan, seems to have ever created a podcast. This isn’t fatal to their patent claim, of course. But it does mark them as nonpracticing entities, or NPEs, in legal parlance. By Logan’s own account, Personal Audio is a holding company: “We own property, and our main activities relate to earning a return on that property. Now, it just so happens that our property consists of patents.” Which is to say that the company does not make, or use, anything. It simply seeks rents from actual producers. Nothing wrong with that, of course.
The more substantive problem is the nature of the podcasting patent itself. It is difficult to say when, exactly, the first podcasts were made, but they seem to have dribbled out in 2003, possibly a bit earlier. By 2005 podcasts had become popular enough that Apple added explicit support for managing these audio files to its popular iTunes software. Personal Audio applied for its patent in 2009. In the byzantine world of patent law, the term for this problem is “prior art.” The plain-English version: If something already exists out in the world, you cannot swoop in and patent it yourself, because your invention is not original. The prior art of the podcast existed long before Personal Audio asked to be given credit for its invention.
But the company was not unsophisticated, so when Logan and his colleagues made their bid in 2009, they tied it to a 1996 application for another patent. The 1996 filing sought to patent an interesting idea: a handheld audio device that would allow listeners to skip around within the source material. Mind you, Logan was never able to build this device—the technical challenges proved so formidable that when he tried to implement the idea, he wound up going decidedly low-tech: He took existing articles from magazines, read them aloud, and recorded these readings onto audiotapes. People would, in theory, come to him over the Internet and place orders for the tapes. At which point Logan would physically mail them to the customer, via the Postal Service. The business didn’t work out for him, and he abandoned it in short order.
But in 2009, Logan took advantage of a rule that allows patent seekers to amend the claims of their previous inventions. He filed an amended claim, which contended that his invention of the personal, handheld audio device also encompassed the serving of serialized content from the Internet, which he asserted was the essential element of his tapes-by-mail system. The implication being that the real origin of the podcast lay in his 1996 “invention” that never actually existed.
It’s difficult to say which is crazier: the assertion itself or the fact that the U.S. Patent Office bought it.
Logan is unashamed to be seeking restitution for his idea. “I spent $1.6 million of my own money trying to realize our vision of a custom listening experience,” he explained in a question and answer session with the tech site Slashdot. And besides, this isn’t his first rodeo.
Logan is old money, by tech standards: In 1982, he founded a touchscreen company called MicroTouch Systems, which was sold to 3M in 2000 for $160 million. He founded Personal Audio in 1996, and when the tapes-by-mail business failed, he turned to patents. Even though he lives in New Hampshire, he incorporated the company in Beaumont, Texas. Why Beaumont? Because it sits comfortably within the boundaries of Texas’s Eastern District court.
The Eastern District courthouse in Marshall has become the destination of choice for a disproportionately large number of America’s patent infringement suits. The Manhattan Institute’s Ted Frank explains that there are four reasons patent holders seek out the Marshall courthouse: (1) There are only two judges there who handle patent cases. They are known to rarely grant summary judgment, instead pushing parties to jury trials. These judges hear a great many patent cases. For example, last year one of those judges, the Honorable Rodney Gilstrap, presided over nearly 900 patent cases, which was roughly one-sixth of all the cases heard nationally. (2) Local jurors are perceived by attorneys to be particularly friendly toward plaintiffs. (3) The remoteness of the venue—150 miles from Dallas—adds greatly to the costs of litigation. Frank estimates that the location alone adds $10,000, per lawyer, per trip, while the BBC reports that a full legal team, in trial, might have the meter ticking at close to $2 million per day. All of which encourages defendants to settle. And then there’s: (4) The Marshall courthouse has a “rocket docket,” meaning there are local rules that expedite cases, providing another advantage for plaintiffs looking to move swiftly into the expensive, trial phase of litigation.
All of which, incidentally, has made Marshall—population 23,523—something of a boom town, with patent suits being the wellspring of prosperity. For example, in the winter, the Korean electronics giant Samsung—which is often involved in patent disputes as both plaintiff and defendant—sponsors an ice rink in Marshall, across the street from the courthouse. Without impugning the character of the good citizens of Marshall, it’s nonetheless true that they now face a moral hazard when serving as jurors: The wellbeing of the local economy is tied inextricably to the community’s friendliness to plaintiffs in patent litigation.
The Eastern District is where James Logan and Personal Audio fought mighty Apple in 2009, getting an $8 million verdict from the jury. In that case, Personal Audio insisted it had invented the “audio program player including a dynamic program selection controller” and the “audio program distribution and playback system.” The jury agreed. Personal Audio has sued Apple twice more since. And not just Apple. Personal Audio has also sued Amazon, Samsung, XM Radio, and others. As James Logan said, such suits aren’t an ancillary cost of doing business. They’re his entire business model. Which is why people call him a “patent troll.”
"Patent troll” is the vernacular term for what the legal world blandly refers to as a “patent assertion entity.” Trolls are the individuals (or corporations) who seek to use patents purely as revenue-generating mechanisms. For instance, patent trolls will frequently purchase patents from dying corporations during bankruptcy proceedings, and then use them to instigate litigation. Patent trolls are almost always nonpracticing entities—that is to say, they rarely produce or use technology. Rather, they control ideas on which the government has conferred special protections, and these special protections allow them to seek rent from people who do produce and generate economic activity in the real—which is to say, nonlegal—world.
Logan is one of the more visible members of what has become a minor army of patent trolls waging an intifada in the tech world. Last year the Government Accountability Office tried to get a sense of the magnitude of the patent-trolling business. They found that as the Internet age progressed, the amount of patent infringement litigation grew. From 2007 to 2011, the overall number of defendants in patent cases increased by 129 percent. A change in the law in 2011 made it harder to pursue multiple defendants in the same suit, so from 2010 to 2011, the total number of lawsuits filed jumped by only a third, to just shy of 3,200. The GAO reports that about 89 percent of the increase in litigation since 2000 has involved software and computing. About a fifth of all the patent infringement suits were brought by nonpracticing entities. The GAO went on to say that many of these suits are based on “low-quality patents, that is, patents with unclear property rights, overly broad claims, or both.” People who hold these “low-quality patents” have essentially been given license to claim “that their patent covers (1) an entire technology when it may only cover a small improvement, or (2) future technologies that their patent did not originally intend to cover.”
You might say that patent trolls are to intellectual property law what ambulance-chasing lawyers are to torts. Except that with patent trolls, it’s the government that arranged the slip-and-fall when it granted the bad patent.
The government, at various levels, has tried to clean up this mess. Vermont and Wisconsin have taken up legislation to curb patent litigation abuse, though it’s not clear how effective their laws will be. In 2013, the House passed a bill that would delay discovery and force losing plaintiffs to pay the cost of the lawsuits in patent litigation—both ideas intended to strengthen the hand of defendants. President Obama issued five executive orders last summer designed to make the patent-granting process more rigorous and open to dispute before patents are granted. Two weeks ago, the Supreme Court issued a decision, in Alice Corporation v. CLS Bank, which sought to narrow the sort of ideas that can be patented going forward.
All of these measures seem grounded in common sense. Yet reforms quickly bump into a deeper issue: Patents are part of a legal regime that is nearly sacrosanct. There is only one right established in the original text of the Constitution. That’s the copyright. The Founders put it right up top, in Article I: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Protection of intellectual property is baked into our system, and once the law begins to devalue intellectual property, you face the potential for creating a dampening effect on our innovation-based economy.
You can see the pitfalls at the opposite end of the spectrum in China, where the government is blasé about industrial-grade intellectual theft, which includes everything from pirated DVDs to unlicensed software. And more: In 2006, the Chinese automaker Huanghai began selling an SUV that was a near-copy of a Hyundai model. In 2011, an American expat living in Yunnan Province discovered an entire knock-off Apple store, which took infringement to such ludicrous heights that the employees all believed that they worked for the real Apple.
Clamping down on the behavior of patent trolls necessarily means diminishing protections for intellectual property. Take, for example, the problems presented by nonpracticing entities. It seems manifestly unfair to allow Personal Audio to take ownership of an idea without ever having been able to implement the idea. After all, ideas are cheap; engineering is hard. But it’s not clear that the alternative is attractive, either. As Personal Audio’s Logan pointed out in his Slashdot interview, nonpracticing entities exist because the current patent system separates invention from production. Would we really want a system that joined the two and refused to grant a patent unless the inventor could produce a working prototype? This might curtail innovation, too. What’s more, such a system would further concentrate the control of intellectual property within the realm of big business, rather than small entrepreneurs, because only big businesses could afford to employ both inventors and the engineers to build out the ideas.
All of which is reason to be wary of reforms designed to target patent trolls.
The deeper problem patent trolls represent, however, isn’t about inefficiency or innovation. It’s that they demonstrate how easily systems—in this case, economic and legal—can be perverted. A regime designed to fan innovation is now used to stifle it. Where patents were supposed to level the playing field between inventors and big business, the secondary effect of patent trolls is to encourage consolidation: Patent litigation becomes a tax on big businesses, to be sure, but also an effective barrier to entry for smaller competitors. (One recent development has seen large companies, such as Facebook and Microsoft, purchasing patents in bulk from failing businesses to wage patent wars of their own.) Then there’s the unpleasant fact that a protection designed to incubate “Progress of Science and useful Arts” has become just another tool for collecting rents. And finally, there’s the extent to which the patent regime has transformed the legal system itself from a mechanism for resolving occasional disputes into a state-run collection agency.
The analogy between patent litigation and personal-injury torts may be superficial. So let’s try a different one. You might say that patent trolling is to intellectual property protection as flash trading is to capital allocation in the stock market. Over the last decade, Wall Street has seen the emergence of an entirely new class of financial players known as “flash traders.” These firms rely not on financial expertise, but on elaborate computer algorithms, which execute thousands of trades per second. Flash trading is not value investing, or even traditional trading. It’s simply the harvesting of arbitrage opportunities created by technology: The flash trader algorithms can “see” microscopic ripples in prices, then trade on them instantaneously, and turn a profit. They add no value to the system of capital allocation; they merely skim off the pool of available capital using a novel technical approach to the mechanics of trading.
No one particularly likes the flash traders, any more than the patent trolls. But it’s difficult to know what to do with them. Because in both cases, the bug in the system, which has allowed them to flourish, is also one of the system’s primary features.
Jonathan V. Last is a senior writer at The Weekly Standard.
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