The Magazine

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
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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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